Printing more money won't help
The Bank of England is going to create a further £75 billion in fresh money to try and boost our sluggish economy.
The boffins at the Bank of England are clearly very worried about the outlook for the UK economy.
In fact, they’re so worried they’ve decided to create £75 billion in fresh money to try and boost the economy. This is known as ‘Quantitative Easing’ (QE). This move is on top of the £200 billion the Bank had already created – or ‘printed’ – in 2009.
I share the Bank’s concern about the economic outlook, but sadly, I’m not convinced that this latest round of money creation is going to help.
The Bank of England first resorted to QE in spring 2009, and I think the move probably did help at that point. You could almost feel a boost to business confidence as soon as the policy was announced. Share prices rose and it became easier for large companies to raise cash.
However, after that initial boost to confidence, QE’s impact seems to have lessened. A lot of the extra money has stayed in the vaults of the big banks and not spread out into the wider economy. So QE has helped to strengthen bank balance sheets, but it hasn’t prompted banks to lend more aggressively.
Given that background, is there anything else that can be done?
Well, I must stress there is no easy solution to our problems. Recovering from a major financial crash was always going to take a long time.
That said, I do think that policymakers could do one thing that would improve the situation.
The government needs to boost demand in the economy. If consumers spent a little more, some businesses would expand and recruit more staff. Those new staff would then spend more and some further businesses would expand. You’d then get a nice virtual circle of economic expansion – often known as the ‘multiplier.’
Critics of this approach normally say that it’s inflationary, but when you look at how sluggish the economy currently is, I doubt that a modest rise in spending is going to push up prices.
The government could either boost the economy by cutting taxes or increasing spending. One measure that would make a quick impact would be a temporary rise in the state pension. I like this measure because I suspect that most pensioners would quickly spend their extra cash and not stick it in a savings account. So a pension increase would make the biggest impact on the economy.
You could argue that higher government spending/tax cuts aren’t appropriate when the government’s deficit is already so high. That’s an understandable argument, but, in reality, the best way to cut the deficit is to boost economic growth. If the economy grows at a decent rate, the government will automatically receive more tax revenue and the deficit will start to fall.
Don’t get me wrong, I’m not saying that a modest fiscal stimulus would solve all our problems, but I do think it would make a difference. It's just a shame that George Osborne didn't take this approach when he first became Chancellor in summer 2010.
Anyway, it's all rather depressing. Whatever they do, there's no way that policymakers can cure the patient's disease in the short term. At best, they can reduce the fever, and if they make the wrong moves, the fever will only get worse.