“Banzai! Banzai! Banzai!”*

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

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15 Comments

  • Sounds like great news for the economy of Japan! If only someone had tried it in say, 1998.

  • Richard Dean 23rd Nov '12 - 1:42pm

    In what way is Japan sufficiently similar to the UK to make their politicians’ opinions relevant here?

  • Joseph Donnelly 23rd Nov '12 - 2:48pm

    I’m fairly sure you’re a Keynesian Bill Le Breton, as in you actually propose Keynesian views purposefully and not by accident (correct me if you dont identify as such).

    If so you should be aware that complete independence for central banks is one of the chief developments in New Keynesian thought post 80s.

  • Well argued article, Bill.

    Kate Barker (former MPC member) has raised concerns about the delegation of too much autonomy to non-elected bodies including unorthodox monetary policy measures in her Centre Forum report Macroeconomic policy:too much autonomy and too little coordination. She argues that “the government’s current approach to monetary policy pays too little attention to what went wrong in the lead up to the financial crisis. It says that the MPC should be required to look harder at longer term underlying imbalances in the economy, which would imply a move from a point target for inflation to a range of 1% to 3% with a near-term committment to the upper level of the range.”

    She goes on to note “As economic weakness has persisted, it has become evident that monetary policy, as normally understood, is not capable alone of bringing the economy back to a satisfactory growth rate. The Treasury has had to be prepared to authorise the Bank’s Quantitative Easing programme, and the Bank and Treasury have been obliged to work together on policies to boost bank lending.

    I have previously argued that growth of the monetary base in the private banking sector alone without complementary fiscal expansion will not address the underlying weakness of demand in the economy in an equitable manner. Stimulus measures such as giving housing associations the ability to issue government backed bonds for the construction of new homes need to be urgently pressed forward.

  • it is an odd article indeed which proposes foreign countries determine economic policy according how much it will help or harm the British economy.

    And it is simply bizarre to criticise policy as failing whilst simultaneously quoting sources saying our success/failure is dependant on the decisions of foreign countries relating to their domestic situation, that is, unless the author is trying to build a case for a new round of concerted action by the international community.

    More loosening? While business is stockpiling cash and continuing to avoid taxes?

    A new government-led stimulus at this time in Britain is economically wrong and politically unsupportable.

  • Joe,
    raising taxes encourages tax avoidance, it doesn’t discourage it.

    So you’re saying monetary loosening is a waste of time unless avoidance levels drop.

  • Bill le Breton 24th Nov '12 - 8:24am

    Thanks everyone for reading and commenting. I wrote this 8 days ago now and am travelling, so using phone to make contact. Forgive limited responses and text errors.

    Mike, I agree than it is a pity Japan did not implement this kind of monetary policy a l’outrance in the 90s, but the US, Europe and the UK are now exactly where Japan was then and the politicians are allowing their central bankers to make the sake errors.

    Richard, when I return home I will post like to graph showing this and suggesting why Japan is a warning to us.

    Joseph, Low interest rates and sluggish aggregate demand indicate that monetary policy ti too tight not loose.
    Keynes and Friedman wd both agree on this. So, I am not a K or a NK in the sense you wd give to it. The Bank of England cd loosen further and work with fiscal authorities to boost aggregate demand even within the medium term inflation forecasted. They are not doing so as the Bankers quoted above because the think this will keep zombie firms alive and delay rebalancing of economy to exports.

    I don’t believe in Zombies when there is this much capacity available . I believe all these firms need is more demand in the economy. What is wrong with saying to the Governor create that demand or be sacked.

  • Bill le Breton 24th Nov '12 - 8:34am

    Orangepan, if these people get elected, and I know they are not Lib Dems in out sense, and if it turns things round, then there will be a new Bretton Woods type conference and a new monetary orthodoxy. We should be campaigning for that now.

    Liberal Eye, did you end up saying we were like Japan. There are more similarities than differences. If we go on as at present we shall entrench low growth, rising debt:gdp problems and the tensions that will raise will damage social cohesion and destroy social capital…

  • Bill le Breton 26th Nov '12 - 8:37am

    Smart phone Adrian – worth every penny ???

  • Bill le Breton 26th Nov '12 - 8:48am
  • Bill le Breton 26th Nov '12 - 10:49am

    Richard, as promised an interesting graph plotting changes in money supply Japan 1984 to today and for Eurozone 2001 – today … tales of monetary incompetence that produced booms, busts and restricted growth 17 years apart. http://marketmonetarist.files.wordpress.com/2012/11/boj-ecb.jpg . We are lucky to have Japan to learn from on the ‘not what to do’ front … but if the LDs win there in December and introduced their market monetarist policies we shall also see its effects.

  • Bill le Breton 26th Nov '12 - 7:30pm

    Why are we waiting? This is what the New Governor of the Bank of England said about NGDP level targeting: http://www.bankofcanada.ca/2012/02/speeches/monetary-policy-framework-all-seasons/ ?

    “All of that said, when stuck at the zero lower bound, there could be a more favourable case for NGDP targeting in providing additional stimulus and better facilitating the deleveraging process in the aftermath of a financial crisis. The exceptional nature of the situation, and the magnitude of the gaps involved, might make such a policy more credible and easier to understand. Depending on the depth and duration of the ZLB episode, our calculations suggest that the adoption of a (temporary) price-level target, if well understood and credible, could eliminate more than half of the losses associated with the impossibility of providing additional monetary stimulus through a lower policy rate.

    “NGDP-level targeting may thus merit consideration as a temporary unconventional monetary policy tool.”

    Twenty years into the Zero Lower Bound and the next Prime Minister of Japan (see above) clearly believes its time for NGDP level targeting. So, nearly four years into the Zero Lower Bound here, isn’t it time we followed suit?

  • Bill,
    a ‘campaign for a new monetary orthodoxy’ has no snappy popular appeal, nor does it make sense in any reasonable political terms, so I’ll pass on that if you don’t mind.

    Forgive me for being confused, Bretton Woods wasn’t where specific monetary policies were agreed, rather it was where the rules for the management of individual states monetary policy were laid out. So, rather than providing a global doctrine for financial regulation it provided a system. In other words, not a new orthodoxy, but a new heterodoxy.

    I’m quite happy for Japan to loosen its monetary policy, but Japan didn’t experience the same massive collapse in its national revenue base after 2008 – it’s economic conditions are completely different, and I’ve yet to hear one word from you why this would, could or should give a lead to UK monetary policy… other than that’s what you want anyway.

    Japan’s choice has no relevance for ours.

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