Today three reports have been published into the operations of the Bank of England. None of these pose the killer question: why, when for month after month in 2008 the UK’s Gross Domestic Product in money terms (the NGDP) fell from its stable long term annual growth rate of +5% to -5% a year, did the Monetary Policy Committee stubbornly maintained the Bank’s interest rate at 5%?
This excellent blog by Britmouse details, details the quarterly falls in NGDP and the inertia of the Bank which has the power to set the level of aggregate demand in the economy.
It is regrettable that the Treasury does not give the Bank a level target for NGDP growth, but instead gives it one for inflation. Thus, in 2008, whilst the Bank had its eyes firmly fixed in the rear view mirror on inflation,UKoutput and income plunged in a way not seen since the 1930s, making debts harder to pay and reducing the value of the securities behind them.
In this diagram David Beckworth illustrates the point for Europe, but the case stands for theUK too. Veer from the long term path of NGDP – allow a nominal income gap to establish – and the Debt/GDP ratio worsens, deleveraging gathers pace and the fall in aggregate demand accelerates exponentially.
If you don’t believe that monetary policy can fix the problem of inadequate aggregate demand, that is not the view held in the Bank itself. In recent speeches, The Governor of the Bank of England and his Deputy Governor, Charlie Bean, explained their powers.
Bean said, ‘a highly stimulatory policy stance can encourage households and businesses to bring forward expenditure, boosting demand and mitigating the destruction of the economy’s supply capacity that can result from a prolonged period of weak demand as firms are driven out of business and the skills of unemployed workers atrophy.’
It is worth reading that again: ‘stimulatory policy … boosting demand … mitigating the destruction of the economy’s supply capacity … as firms are driven out of business and the skills of unemployed workers atrophy’
The Bank’s failure to remedy the fall in NGDP growth in 2008 may have been incompetence, but these speeches reveal that the dismal performance in national output since mid 2010 has been a deliberate policy to let the weak go to the wall.
Here’s how the real Mr Bean puts it – ‘such policy (monetary stimulus) can also delay the transition to a new growth path if it slows the process of balance sheet repair and inhibits the process of ‘creative destruction’ as unprofitable firms are closed and the liberated resources shifted to the expanding sectors.’
This is an intervention into industrial policy which should be the province of the Department of Business, Innovation and Skills in conjunction with the Quad.
With the economy well below full potential, with no pressure on wages, with thousands looking for work and extra hours, the gazelles don’t need their neighbours to fail for them to succeed. This is industrial sabotage on a grand scale.
If we really were on a war footing the Old Lady of Threadneedle Street should be due a knock on the door from Special Branch.
* Bill le Breton is a former Chair and President of ALDC and a member of the 1997 and 2001 General Election teams