Opinion: 29 Days to save the UK

We are lucky it is a leap year. It gives us an extra day to save the country.

Here are two graphs, both from the Financial Times. This one shows the UK’s Nominal Gross Domestic Product. It shows the development of the double dip recession we are facing.

The figures are up to October 2011. The next will be published in February, but expect the trend lines to continue ‘south’.

Then, here’s a chart of a measure of the supply of money in the economy. It is a broad measure called M4

This is a very revealing chart. First, what you can see is that since mid-2011 it too has gone south in a hurry.

What is also striking about this second diagram is that it shows that the money supply was falling *before* the Northern Rock crisis and obviously before the collapse of Lehman Brothers and the onset of the banking crisis, proper.

With the link between the money supply and prices, you would expect inflation to start falling in late 2008. And so it did. Inflation breakevens fell from 2.85% on 1st September 2008 to -2.77% on 2nd December 2008.

So with money supply figures pointing to inflation falling fast, Lehmans going txxs-up, banks refusing to lend to one another and the prospect of a severe deflation staring us in the face, you would have expected the Monetary Policy Committee (MPC) to slash interest rates. Or at least you would have expected to hear Prime Minister Brown throwing telephones about the place if they hadn’t. They did, surely they did, didn’t they?

No. The Bank of England did not lower short term rates to 0.5% and start quantitative easing until March 2009, six months after Lehman.

The MPC were utterly negligent and a mild recession got a hold on the minds of consumers and producers alike to make it a Great Recession.

Back at the first diagram you will see that things started to improve, but, before it could really make a difference, the voices on the MPC started calling for interest rate rises. At one point three of them wanted increases. Imagine if there had been a majority for that policy!

As you can see from the M4 figures the money supply has been bumping along at 2 or 3%. If you have inflation at 4 or 5% (because of tax hikes and oil price increases) and increase in the money supply of only 2 or 3% is a real reduction of 2 or 3% – keeping the brakes on the economy. No wonder it can’t motor down the road, let alone get up the hill.

And here is the hill. For a long period before 2007 the Bank of England seemed able to keep NGDP rising at around 5%. Roughly 2.5% inflation and 2.5% growth. NGDP today is 10% below where it would have been if there had been the necessary monetary stimulus to get the economy back on trend.

That’s a lot of jobs, a lot of lost tax (the main reason for the deficit increases) and a lot of extra benefits to be paid.

Why 29 days to save the UK?

We need to reduce real interest rates by raising the expected rate of inflation. This means resetting the mandate given to the Bank of England and the MPC by HM Treasury. And that’s done every March.

The thinking behind setting a higher price target is described by Nicholas Craft in a paper commissioned by the Centre Forum entitled, helpfully, Delivering growth while reducing deficits.

The slack this cuts us should be used as part of a great campaign to revive house building. According to Professor Craft, that’s what did the trick in 1932/4.

29 days and counting.

* 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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  • If inflation’s no worry:

    1) Create money
    2) Use for investing directly through a national investment bank; Government spending (possibly home-building); and giving a bonus to all Britons. Giving QE money to banks seems a far from optimal use.
    3) ????
    4) Profit!

  • Simon McGrath 1st Feb '12 - 9:01pm

    Deliberately creating inflation is a way of stealing from people who have fixed incomes – mainly pensioners.

  • Simon – some pensioners have just the basic pension – which rises with inflation. They will not be affected. Others have an annuity or employer pension. These are almost always inflation linked (remember that Nick Crafts is only calling for 4% inflation). Some pensioners will have savings accounts, and will need to shop around. But the days when pensioners were on fixed nominal incomes have long gone. It was once the case – before the govt legislated to make pensions index linked – but it is not the case now.

    Those who don’t want to read the full @CentreForum paper can read a 700 work version here: http://www.ft.com/cms/s/0/f8498e3e-0eb9-11e1-b83c-00144feabdc0.html

  • In the 1930s there were no planning restrictions, however we now have severe controls. The kind of house building programme that raised real GDP in the 1930s is being constrained by planning law not by the cost of borrowing. Raising expectations of inflation to 4% could lead to a wage price spiral. Once this starts it could be difficult to control. It would be safer to deal with the supply side. If properties are needed to stimulate the economy then planning is the best starting point rather than dealing with the risks in inflation, however there are challenges in doing this.

    Alternatively I would have thought cutting back on government spending overseas, in particular spending on overseas military activity, and diverting this to the UK economy would be pretty much guaranteed to boost GDP.

    I would oppose injecting inflation into the economy and prioritise diverting government spending to the UK economy (where legal) and at supply-side issues. Cutting red tape to small businesses by simplifying accounting requirements below the VAT threshold could be a starting point.

    Ed Joyce

  • “They should have raised interest rates earlier and cut them earlier. They were generally far too complacent in both directions. An analysis also shared by John Redwood, the Conservative MP. ”

    Was Redwood calling for interest rate rises in 2006-7?

  • Wage inflation is just about the only realistic hope of re-balancing the economy. Unfortunately, slashing interest rates will just cause further imbalances, inflating asset prices further. The cure to a credit/land price bubble caused by low interest rates isn’t dropping rates further, transferring even more wealth from workers to idle land-owners.

  • Bill le Breton 2nd Feb '12 - 10:44am

    Thank you for your contributions. A couple of general points. This approach is heavily dependent of creating expectations to influence behaviour. At present the expectations are entrenched in a way that discourages spending and investment. Firms are not keen on taking risks on new ventures and, if they are, banks don’t believe the cash flow projections that they are shown.

    Those expectations have to be transformed. This can only be achieved by a concerted communications campaign. “This is what we are going to do … and this is how it will work.”

    Phil, inflation can be a worry, but not now. It’s deflation that is the worry. I suppose that your point 3) ???? is – firms and banks sense opportunities as they become convinced that demand is recovering. Consumers and producers who have been delaying action get out into the market. Banks see value in lending.

    Simon, Tim has provided some helpful points in answer to you. Those with savings are already seeing negative interest rates. Those pensioners with property are seeing an erosion in their wealth. The trade off would be three years of increased negative interest rates followed by many more years of real interest rates, and the preservation of the value and an increase in the liquidity of their main asset. My recollection of the 70s and 80s was that pensioners felt they had a considerable stake through children and grand children in getting the economy going.

    Ed, planning is restrictive, but the land banks are enormous. Firms don’t want to use these assets at present values. If we really were determined to kick-start the economy through housing, a tax on such assets would immediately change the economics of holding on to land.
    The economy is also being damaged by the immobility caused by a non functioning ‘used homes’ market. Government can increase the stock of housing not only by new build but by purchasing empty properties (at a set discount to market peak value) either for rent or for shared ownership, rent to buy etc, with a time limit to the offer. A similar one-off offer to banks sitting on securities in which there is negative equity with an undertaking to let the property to the former ‘owner’, could get people and the market moving. It would also provide an impetus to mixed tenure communities.

    Stephen W, sure, deleveraging destroys money. It’s a consequence of fear, a reaction to expectations. This policy would change expectations. At the 2% inflation target, as consumers and producers re-entered the markets the hawks on the MPC would start talking up interest rates and invite fear/deleveraging back. It is expectations such as this which are delaying recovery. Slack on the target for three years would let everyone know that this was not going to happen.

    You can raise the money supply by buying any assets or services with cheques drawn on the Government’s account at the Bank of England. Start with housing. You may not have to do very much. The important thing is to say and make people think you mean to do it until you have reached your target and most importantly that you won’t reverse it.

    Hywel, one of the interesting things from Prof Nash is that in the 1930s responsibility for monetary policy was taken back from the Bank of England to the Treasury.

    Nicola, As Stephen W says, the graph is of percentage change but otherwise you are right. Real GDP is thought to have been -2% in last quarter (-8% annualized). We shall be told what that is in nominal terms later this month. For example 3.5 inflation would give us a figure of +1.5% to set against the pre 2007 trend of 5%.

    The view of our situation from some Amercian economists is one of incredulity, “Do they actually want a recession over there?” and “”Why aren’t the politicians putting more pressure on the B of E?”

  • “and the preservation of the value and an increase in the liquidity of their main asset.”


    They own land, give them money! – on top of the massive unearned windfall they’ve received over the last decade at the expense of those that work!

    I’ve always suspected that policy-makers are busy trying to keep house prices propped up – they obviously never admit to it publically, but you’ve actually got the nerve to express it explicitly. I am genuinely astonished that anyone can think that increasing house prices is the answer to getting the economy going.

  • Sorry to get all Austrian, but LET THEM FALL!

    It’s almost liek you think that the property malinvestment of the last decade didn’t happen.

  • @Bill le Breton

    Out of interest, are you a young person looking to buy a house, or a young person looking for a job dependent on people spending their money in the economy rather than on servicing debt? I think we need to know.

  • LondonLiberal 2nd Feb '12 - 2:02pm

    @ Ed Joyce

    “The kind of house building programme that raised real GDP in the 1930s is being constrained by planning law not by the cost of borrowing.”

    Can we agree to put to bed this canard, put about by the Government and the housebuilding industry in their rush to smear opponents of their ripping up of planning policy through the NPPF ? As Bill points out, developers’ landbanks are huge. In London alone planners have granted permissions for 170,000 homes that developers have decided not to build. No doubt this is partly because they can’t access finance, indeed nor can potential buyers, but they are also in no hurry to build when margins are low. In fact, in their mid-year business statements last year, three of the big five developers said that they weren’t interested in building volume, but wanted to focus on margin, ie executive homes on green field sites, rather than first time buyer flats and houses.

    The planning system is not to blame. It is a development industry that is increasingly uncompetitive and oligopolistic and a finance system that has all but stalled.

  • Re the ambiguous comment

    ‘If we really were determined to kick-start the economy through housing, a tax on such assets would immediately change the economics of holding on to land’

    If there was a tax on empty plots of building land (land banks) that would be expected to speculators selling the land to builders to avoid the tax. You state that the land banks are ‘enormous’ (I question this but there is some land available). If we assume that this is the case then a tax on the land would have the effect of leading to a large amount of building occurring. Your argument is that this would be a good thing and yet are lukewarm on supporting a policy that would lead to it happening.

    This policy could be effective but is unrelated to the issue of inflation. The basic problem with this is that you risk a wage price spiral. It is not clear that once this has momentum that it could be easily reversed.

  • Londonliberal states that planning law is not the problem but then states that lack of planning permission on greenfield sites is causing lack of building to take place. The problem with the brownfield sites is lack of tax on the land. If a tax was introduced this land would be built on


    There is a dual problem. Firstly there is no land tax, secondly there is a planning issue for greenfield development. The problem with greenfield development is that it reduces the property prices of other properties. This loss needs to be reimbursed through the payment of a dividend from a land tax to those who lose out. If this does not occur then planning will not be granted for the types of property that builders wish to build. There are strong arguments against simply building on greenfield land if there is no land tax.

  • LondonLiberal 3rd Feb '12 - 12:02pm

    @ Ed Joyce
    “Londonliberal states that planning law is not the problem but then states that lack of planning permission on greenfield sites is causing lack of building to take place. ”

    Yes to the first part of that sentence, but the second half is sheer fantasy. i said no such thing. sorry to disappoint you, Ed.

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