Being an economist often means telling people things they don’t want to hear. Or, at least, it should. That was what I told a group of smart young sixth-form economists I met last week at Cambridge University. It’s a message that needs renewed emphasis, given the early policy musings of Labour’s newly-elected leader.
This column has a long-held aversion to quantitative easing. I accept, in the immediate aftermath of the 2008 Lehman Brothers collapse, that some “extraordinary monetary measures” were justified. The Western banking system, after years of hubristic and sometimes fraudulent behavior in the City, on Wall Street and elsewhere, was close to collapse. Lax regulation by successive governments on both sides of the Atlantic meant deposits of ordinary firms and households were dangerously exposed to potentially explosive investment strategies.
After years of cosying-up between our financial and political classes, the “too-big-to-fail” banks indeed had the UK over a barrel. Britain faced the prospect of very serious economic and reputational damage – and probably widespread civic unrest. So it made sense for the Bank of England to launch, in March 2009, what was originally unveiled as a £50bn QE programme.
I backed that – on the proviso the money created ex nihilo and used to buy distressed assets from certain banks, would provide time and room for manoeuvre to restructure and stabilize our bombed-out banking sector. The stronger institutions would subsume those too weak to survive, equity- and bondholders who’d made bad bets would lose money, lending would reboot, we’d learn form our mistakes, rebuild and move on. That’s how capitalism is supposed to work.
Except, of course, that it hasn’t. The UK’s QE programme has ballooned to £375bn – over seven-times what was originally advertised. Much of the newly-created money has been used, again contrary to what was said at the outset, to purchase UK government’s debt – albeit on the secondary market, so we can pretend we’re avoiding the banana-republic-style policy of “straight monetization”. The result is the same, though, with QE having effectively funded tens of billions of pounds of government spending and our central bank now holding over a third of all outstanding UK gilts. It’s not clear if these bonds will be repaid or, incredibly, just written off.
This massive monetary expansion, which has seen our base money supply surge from a historically normal 5pc of annual GDP to well over 20pc, has happened with barely any Parliamentary debate and little mainstream media scrutiny. This, despite QE’s visible and rather nasty side effects.
For QE hasn’t unlocked frozen inter-bank markets, as ministers from both main parties said it would, or stimulated lending to creditworthy firms and households, as the bailed-out banks promised. Lending, on the contrary, has consistently contracted under QE and only recently, in the last few months, has that contraction even begun to reverse. “No-one wants to borrow”, the banking lobby tells us – but survey after survey shows good companies failing to grow or even going bust, particularly small and medium-sized firms, for a lack of investment finance or even working capital.
Much of the QE money has instead sat on the balance sheets of busted financial institutions pretending to be solvent – allowing them to avoid takeover or even facing-up to the disastrous realities of their previous investment strategies. Even more has found its way into asset markets, blowing yet another stock market bubble. UK share indices have doubled in recent years despite the background of a relatively unimpressive economic recovery.
We now see an ominous combination, in the UK and elsewhere, of high valuations and low trading volumes – classic crash territory. And once Western bank lending does finally click back into gear, the velocity of circulation (currently at historic lows across the big Western economies) will rise. All that QE money, created from nothing, will eventually send broad monetary measures into orbit, translating into inflation.
While warping stock and bonds markets, years of QE have also generated heightened geopolitical tensions. The big emerging markets of the East have accused the West of engaging in “currency wars”, using monetary expansions deliberately to lower the value of the dollar, pound and euro, “stealing competitive advantage” from the rest of the world, while lowering the value of “hard currency” debts owed by the West.
The emerging markets have been fighting back – in the form of tariffs, export subsidies and other trade barriers. And so, protectionism grows – a major reason global trade has recently slumped, further hindering a proper post-Lehman recovery. The bad blood QE has created between West and East has even wrecked the Doha “round” of trade negotiations, so we’re now witnessing the first outright failure of a multilateral trade negotiation since the 1930s. QE-hungry investment banks don’t care, neither do government ministers determined to sell their central banks ever more debt so they can keep on spending. But be in no doubt -QE has generated deep resentment among the ruling and commercial classes of the populous nations whose markets the West will increasingly need to access to secure our future prosperity.
Then, of course, we’ve seen China attempts at counter-devaluation over the summer months. That resulted in heart-stopping turmoil on equity markets across the globe, including the biggest one-day drops since Lehman in both the US and UK. It may be that stocks in the West and across the emerging markets remain resilient. The QE unwind, and the related rise of Western interest rates, may be smooth. But few people think so. In the US – where the Federal Reserve’s $600m QE programme morphed into a $4,000bn monetary tsunami – policymakers have repeatedly tried to raise rates, only to be scared off by the financial turbulence resulting even from speculation the Fed might make its move.
Finally, of course, QE has hammered our own domestic savers – not least the elderly living on fixed incomes. The flip side of savers’ low interest-rate pain, meanwhile, is a massive wealth transfer to the bailed-out banks. So voters, not least here in the UK, have had to watch the financiers, having trashed our economy, get rich all over again at everyone else’s expense. That tears at the social fabric. It also goes a long way towards explaining the rise of politicians like Jeremy Corbyn.
Having watched QE benefit the financial elite, Corbyn and his acolytes are now arguing for “People’s Quantitative Easing (PQE) – the transmogrification of an emergency bank liquidity measure into a money-printing free-for-all.
Corbynomics remains a vague school of thought – economic policy, so far, written on the back of a fag packet. But from what I can make out, PQE involves yet more government bond-buying by the Bank of England, without retaining even the pretense of eventual repayment. The monetization of deficit-spending would be direct – with Downing Street ordering the central bank to create to balances which the government could spend at will. It sounds too good to be true – because it is.
It’s at times like this that economists need to state, repeatedly and authoritatively, that PQE would send the UK’s sovereign debt market haywire. When stupidity is gaining ground, and a new generation is set to repeat the mistakes of the past, it is for we economists to recount, again and again, that from from Revolutionary France to Weimar Germany, from 1970s Latin America to Mugabe’s Zimbabwe, large-scale money printing has always ended in tears.
Doing this won’t make you popular. You’ll be seen by many as heartless and unimaginative. You could miss out, too, on some pretty cushy jobs. But at least you’ll be right.