Quantitive Easing causes concern in Ipswich

The announcement by the Bank of England of £75billion of Quantitive Easing today was greeted with caution by local Ipswich Tory, Ben Gummer MP. Commenting on his twitter feed, Mr Gummer said that he was concerned about the inflationary risks of QE, reminding a local journalist that it was not a policy that could be followed forever, as the Bank treads a fine line between putting liquidity into the market and not stoking inflation.

Mr Gummer was supported by former councillor and one time Chairman of Ipswich Tories, Gavin Maclure, who recently attacked George Osbourne’s new policy of ‘Credit Easing’ on the same grounds; that a loose monetary policy will lead to inflation.

Mr Gummer and Mr Maclure are both right, in normal circumstances. Inflation is caused by a loose monetary policy and QE was responsible for the rampant inflation in Weirmar Germany and Zanu-PF Zimbabwe. In the current circumstances however, with a large Franco-Belgian bank falling apart today, inflation is not the biggest risk in the economy.

Mr Maclure might no longer be an evangelist for the Cameron cause, but the Prime Minister had it absolutely spot on yesterday when he told the Tory conference in Manchester that the UK is in a debt crisis; he was also right when he said that you don’t get out of a debt crisis by increasing the speed you build your debt.

One of the most damaging things that could happen to the UK right now would be either a downgrade of our credit rating, or an increase in commercial interest rates, which would result from a downgrade. The Government and the Bank of England are doing everything they can to avoid that happening.

UK growth has been 0% over the last 9 months, now we’re back to QE and all the levers of the economy have been pulled hard. Will it work? Well Paul Geater had an interesting article last week which implied that our politicians might not really have much effect on the economy in a globalised world. Ipswich Spy think he is exaggerating the case, but is not entirely wrong. The Bank of England, however, is entirely right to take this action.

One option we would like to see though, if the Government wanted to boost consumer spending and economic growth, why not send us all a check for £1000 instead, everyone would immediately deposit their cheque with the bank, which adds capital to the banks, as well as then boosting the economy as people spend their money. It would be inflationary, but it might be worth it for the benefit it would give.

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8 Responses

  1. The problem with QE is that the banks will soak up an awful lot of it just in deleveraging their credit positions, before they start to think about loaning any of it out. It’s a good mechanism for helping banks, but a poor one for generating growth.

    The IMF have recently indicated that they believe UK govt debt could double before it adversely affected our credit rating. I guess we’ll find out soon enough, as Osborne’s zero-growth policies are rapidly increasing that debt.

    With your £1000 cheque, you would have to make sure people weren’t allowed to use it to pay off their credit cards, as the PM confusingly suggested the other day… a voucher, which could only be spent, would be more effective. But really it would be better for the govt to spend that money directly on projects which would be useful to the country and also employ people.

    • Of course if people used the money to pay off their credit cards (as the Prime Minister DIDN’T say the other day, read the speech here) then their monthly repayments will be less and they would have more money to be able to spend every month. To use the national economic analogy, if we could slow down the pace at which our debt is increasing, (the structural defecit) then we wouldn’t be spending more on repayments than we spend on Education.

      The voucher scheme, whilst eerily reminiscent of Keith Joseph, is actually quite socialist in its approach. Its the big government approach which is why it won’t lend itself to this government. By giving the money directly to people, by cheque, it will increase the number of people with a bank account, improve people’s personal financial situation, reduce the number of people using legal loan sharks at usurious interest rates, as well as allowing people to spend their own money the way they want to. Giving the money to people will help everyone, but will make more of a difference to the poorest in society. It would also boost employment (because more consumer spending does that) as well as encourage growth.

    • Missed the second para of Mo’s post, yes Osbourne is facing 0% growth, but what is increasing our debt faster than anything is the structural defecit. Still think its disgusting that 1.1bn can be found for tax cuts and rubbish collection, announced on the same day as 1200 sailors were made redundant. Great Britain? Royal Navy? Britain rules the waves? Doubt we could defend the Thames, let alone rule the waves.

  2. If we were all given £1000 aren’t we meant to go and pay off our debts rather than spend it?

    • If you paid off your debts you’d be spending a smaller percentage of your income financing credit. That has to be a good thing, as well as providing a longer term boost to your finances.

      • I think most adults understand the benefit of paying off debts, but thanks for the David Cameron like advice :-)

        The point of QE is to get the economy active, which means spending the money.

        For me there’s a problem with the whole Tory approach. This idea that you pay off your debts in hard times is completely misconceived. You cut your outgoings, including your debt repayments, because you have less income and things cost more. The economy flatlines. Forgoing any growth at all is self-defeating.

        If we’re going to run a debt free society businesses are going to have to start paying properly, or the cost of living will have to come down. Which also means affordable homes. I don’t see any of these things happening.

      • Agreed you shouldn’t pay off your debts as a priority when you’re in hard times – indeed you shouldn’t pay down debt during a debt crisis! Cutting the defecit isn’t about paying off debts of course, its about slowing down the rate at which the debt increases. But then you know that!

        Don’t think a debt free society is something anyone would strive for. The Credit Easing concept (although extremely woolly) announced by Osbourne appears to show that even this Government agrees that businesses need to be able to borrow more easily. Credit IS a problem for small businesses and the lack of availability of affordable credit IS one of the reasons we have had 0% growth in the last nine months.

        If QE manages to free up some of the credit jam up, thats great, but it won’t. All it will do, as Mo says, is go to the banks who need capitalisation. Whilst that will help the banks, won’t help the public much.

  3. If you are going to do Quantitative Easing as it seems is an inevitable consequence of this recession then I agree with your points.

    The banks merely hoard the capital that they receive and therefore it doesn’t actually help.

    Personal debt is a problem, if the consumers of the country were given £1000 they would be able to deleverage some of their debt which eases personal debt and hands the money to the banks. There would not be a lot saved, it would either pay debt or be consumed on the high street. It is hard to argue against it but no one in government is actively discussing this.

    Perhaps part of the problem is that this would have to be initiated by the executive branch but quantitative easing is a tool of the BoE which is mostly independent and as such can’t be called on for this task.

    The fact that things that make sense aren’t even considered let alone discussed is what has made me a political nihilist.

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