Enough is enough. In the face of soaring national debt, the Liberal Democrat leader has this week called for the Central Bank to be made less independent to pave the way for more aggressive and unlimited monetary easing, a dramatic relaxation of the inflation target accompanied by a major public works programme and a supplementary budget.
Great news! The tragedy is that the Liberal Democrat leader in question is not Nick Clegg speaking on the eve of the Autumn Spending statement, but Shinzo Abe, Leader of the Japanese Liberal Democrats, launching his general election campaign which he is tipped to win. And the reaction of those dreaded markets? Positive – rising 4-5% as other world markets were falling on the realisation that the ECB would stick to the opposite policy.
And in the UK? At a press conference last week, Bank of England Governor, Mervyn King admitted that, although “there are limits to the ability of domestic policy to stimulate private sector demand as the economy adjusts to a new equilibrium… the (Monetary Policy) Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”
Are there diminishing returns to QE? No. He made that clear when taking questions that his ‘tool box’ is far from empty. We could follow Japan tomorrow. So why not?
“What is limiting our ability to do more is not on the monetary side, it’s on the real side that the economy has to adjust to a new equilibrium. (An export led economy.) That is what I think is going to pose the constraint,” said King. ‘What the UK economy needs is more demand in the rest of the world to buy goods from the United Kingdom. And that is the key bit that’s missing from our attempt to rebalance.’
So, there is a tension in the minds of these central bankers between what monetary policy can achieve to protect existing businesses, social services and welfare, and the political decision to rebalance the economy away from private and public spending towards saving and exporting. This issue is well illuminated by an article By Tim Harford that Stephen Tall points to in his always helpful weekly Reading Review.
In March, the Chief Economist at the Bank set out two issues that rebalancing poses for monetary policy, “the potential short-run costs associated with rebalancing and the implications these may have for the inflation outlook; and the need to manage the delicate balancing act between supporting the economy in the short run without dampening the incentives for structural change.”
The MPC’s decision not to use its ‘toolkit’ to the full reflects its decision, even after two years of failure in growth and rebalancing, to err on the side of not ‘dampening the incentives for structural change’ and holding to a 2% inflation target. These Olympians on the MPC accept as worthwhile the costs of their decision; the redundant domestically focused private capital, the liquidated family businesses, the dismantled social capital, the cuts in health services, the increasing poverty the widening inequality and the hysteresis that stems from the de-skilling and de-motivation of a large part of the workforce for years to come.
With no growth anywhere else in the developed world to buy our exports and the BRICS immovably intent on continuing to run surpluses rather than import from countries like the UK, their policy, meekly accepted by all three main parties, exchanges one set of imbalances for another and, as we have seen from the last twenty years in Japan, delivers years of stagnation, mounting private and public debt and diminished life chances until…
Until, some politician says, “Deliver the aggregate demand now and do the rebalancing when the world has recovered or I shall return that responsibility to Parliament. Enough is Enough!”. On December 16th we shall see if it’s a vote winner as well as a market winner.
* ‘Long live the King’ or with a more modern translation, ‘Bring it on!’
* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams