The first horseman of the economic apocalypse

In my blog last week, I promised questions I couldn’t answer. In the blogs over the coming weeks there will be lots of them, and one can only hope that someone, somewhere, has the answers, or we are all in trouble. The central question is how better public services, for which the country now clamours (along with higher personal incomes), can be funded. The available means are more growth, more taxation, more borrowing and more printing of money.  

Before considering these options, there needs to be a general caveat. In this piece (which focuses on the option of printing money) and the others (which each focus on one of the other options), facts and figures will be quoted. I have no idea if they are accurate, or if the conclusions drawn from them are correct. They have been taken from what appear to be reliable online sources. But, as was argued last week, everyone has a bias; most articles are written to promote a viewpoint; all of them are buttressed by ‘facts’ and figures that best appear to support that viewpoint. So what information can we trust?

It should be easy to dispose of printing money as an option. That was what caused the inflation of the 1970s, as any fule know. The first commandment of Thatcherism was “thou shalt not print money”. So we stopped doing it, inflation fell, the economy revived and, with a few bumps and blips, embarked on a sustained period of growth through to the 2008 crash.

Since 2009, the UK government has printed £375 billion more money. This amounts to £6,000 for every man, woman and child in the country, or nearly half the amount of government expenditure for one year. Except that it is not called ‘printing money’. It is called ‘quantitative easing’ – a comforting phrase with just enough hint of complexity to deter one from enquiring into what it means.

The Bank of England defines ‘quantitative easing’ as “an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds.” The theory is that, although printing money is still inflationary, it represents little risk when inflation is low and where the tendency is towards deflation, as it was in the early years of the policy.

Inflation has now started to rise significantly. How much is this due to the higher cost of imports with the weaker pound that has followed Brexit, and how much to the inflationary effect of quantitative easing? Who knows? But given that it is now the best part of a decade since the policy was introduced, and that it seems to have had no calamitous effect in the meantime, and indeed is thought by most economists to have had a positive effect, should we not be revising our attitudes to the printing of money? Might it be the case that, far from being a cardinal economic sin, printing money is – in certain specific circumstances – a thoroughly good idea?

This then raises another question: if money is to be printed, who should get it? The £375 billion printed since 2008 has been used within the financial sector to stimulate economic activity by making borrowing easier. The BBC website explains: “The Central Bank buys assets, usually government bonds, with money it has ‘printed’ – or, more accurately, created electronically. It then uses this money to buy bonds from investors such as banks or pension funds. This increases the overall amount of useable funds in the financial system. Making more money available is supposed to encourage financial institutions to lend more to businesses and individuals.”

There must be other uses to which this extra money could have been put. Why couldn’t I just have been given £6,000? Beats writing novels for a living. What would I have done with it? I would have spent it. Which would also have injected money into the economy and, if we had all done it, significantly boosted economic activity and growth.

This is not an original suggestion. Other people have asked the question and are still asking it. The Green Party, for a start. And Jeremy Corbyn once proposed that quantitative easing should be used for a massive investment in the NHS. He was widely ridiculed for the idea. But if it is admitted that quantitative easing can be a beneficial policy (which Labour, Conservative and LibDem governments have all admitted by pursuing it), it is legitimate to ask to what use the money that is printed should be put.

If it is the case (which it may be, for all I know) that only by retaining the money within the financial sector, and using it to boost lending and investment, can undesirable economic consequences be avoided, that needs to be explained. Preferably in words that even I can understand. Patronising responses from bankers to the effect that “you don’t understand” are inadequate, particularly coming from people who created the 2008 crash and so plainly don’t understand very much either.

Until quite recently, I would not have been asking these questions. I would have proclaimed my ignorance and assumed the expertise of others. Now, I still proclaim my ignorance, but – along with the rest of the western world – no longer assume the expertise of others. It does not matter if the experts are economists, politicians or doctors at Great Ormond Street Hospital, the fact (and in many ways the sad and mistaken fact) is that we are no longer inclined to trust them. Arguably, this is at the root of what are termed the populist revolts of recent years: a preparedness to back our own judgments over those whom once we thought knew more than we did. Unfortunately, there is no reason to think that our judgments have improved.

Despite the questions raised here, I remain sceptical of quantitative easing as a permanent economic remedy. If solving the problem of funding the NHS, or investing in education, or providing pensions, or anything else one cares to name, was as simple as printing more money, it would have been done by now. All evidence is that when a commodity becomes more available, it becomes less valuable. Money is surely no exception. The usual effect of printing money must be rampant inflation.

But the fact that the past few years have been an exception to this rule, if it is a rule, suggests that the printing of money can no longer be dismissed out of hand. It is an option, if only an occasional one. In which case, how that extra money could be spent creates questions that have barely been asked.