In his 1832 book ‘Rural Rides’ William Cobbett the radical farmer, journalist and left wing MP describes the beautiful southern English countryside; including the rural poverty he encountered. No change there then – I hear some of you mutter.
He wrote; ‘the most damnable inventions that ever sprang from the minds of man under the influence of the devil namely, the making of bank notes!’ I wonder what he would have thought of life today, when we don’t even bother with bank notes – just wave a plastic credit card above the till to pay the bill.
Talk about quantitative easing would have been confusing to him. No doubt Cobbett would have said the Bank of England printed a shed-load of new money. Which of course is what it did - except it’s not printed as bank notes - but created electronically as central bank reserves.
In 2009, during the aftermath of the financial crisis, the Bank of England created £375 billion of new money. It was seen as a last resort for our economy facing stagnation. The general political consensus is that Gordon Brown and the Bank made the right economic calls as QE (quantitative easing) was desirable and necessary at the time. As an American said "You don't want to be found dead after a shoot-out with unused ammunition."
In 2003 Gordon Brown as Labour Chancellor and Ed Ball’s his assistant, announced the results of the ‘5 economic tests’ which decided whether Britain should join the euro. The decision not to join retained our flexibility to create new money through QE. Mr Brown had set out the Euro questions for the Treasury study (2000 pages long!) in October 1997, shortly after Labour came to power. The second test is worth repeating today. ‘If problems emerge is there sufficient flexibility to deal with them?’ Well, we all know how that worked out ten years later and the need for an independent pound and QE. Good job somebody was ahead of the game – not that Mr Brown and Mr Balls got any thanks for it electorally.
What was the new QE money used for?
It was used to free the credit logjam. The reserves were used to buy assets – mostly government bonds (gilts) - from institutions like pension funds, banks and insurance companies. This freed up the new money for them to invest in businesses and kick-start growth again.
In theory the Bank of England can sell their government bonds back to the market and reverse QE when the economic situation stabilises. That may be some time with the current global financial market instability.
The normal banking tool for encouraging people to borrow and spend to grow the economy – low interest rates – had a limited effect. QE seems to have done the trick, we started growing and longer term interest rates were suppressed, making business investment decisions a bit easier.
So what are the dangers of QE? The jury is still out I’m afraid.
Inflation is seen as a risk, as is the effect on savings and currency exchange rates. Some say it helped to fuel the recent property price surge. Time will tell.
So what’s all this about People’s QE?
The literature states; "quantitative easing for people instead of banks" and "one option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects”
Sounds good. We need all that.
If the Bank of England can print money that easily why not?
Unfortunately the answer is that in a globalised world international currency traders don’t like central banks being influenced by politicians. It was one of the reasons Labour made the Bank of England independent. If the Bank of England started printing money under political direction the pound would soon lose value. They would be questioning why the bank was funding state investment that private investment had failed to finance – and the reasons why.
The reduction in the value of the pound would increase the cost of living as all imported goods, from food to clothes, became more expensive.
One idea to file under 'too difficult'.