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| From aground to awash |
| Ian Campbell / Sep 12, 2009, 00:00 IST |
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Bank of England: For once the Bank of England has avoided raising eyebrows. It could have announced two unconventional measures in this month’s statement: yet more money-printing, or cutting the rate paid to banks on reserves held at Threadneedle Street. Fortunately neither appeared.
Such measures would, in theory, have encouraged banks to put more their piles of cash to work instead of hoarding it. But the UK’s problem isn’t that the cash isn’t there. It’s that the cash is flowing into the financial markets more than into the real economy.
The BoE’s statement did not move policy on much from August. Back then, three members of the Monetary Policy Committee — including the governor Mervyn King and Tim Besley, who wanted rates raised in 2008 even as the economy was stalling — unsuccessfully called for £25 billion more money printing than the £175 billion to which their colleagues agreed. This time, such calls were even less likely to succeed. The UK appears to be recovering somewhat. After huge falls taking manufacturing output back to 1993 levels, there is some growth. Manufacturing output rose by 0.9 per cent from June to July, and goods exports by 5 per cent.
The worry is the extent of the stimulus that has been required to generate the meagre turn. The £175 billion the BoE will have printed and spent by November is equivalent to about 13 per cent of GDP, dispensed in less than one year. The government’s fiscal deficit is of similar size. The total injection into the UK economy can therefore be said to approach one-quarter of GDP. Yet this extreme dosage is achieving only weak growth.
There are limits to what policymakers can achieve. Economies, like people, have a healing process. Doctors may help. But time, too, is needed. Right now, banks don’t want to lend. Corporations and consumers, faced with reduced demand for their produce and labour, mostly prefer to save rather than borrow. The BoE would only be pushing further on a string if it expanded its unconventional money-printing policy. Economist John Maynard Keynes’ remedy was fiscal stimulus. The UK already has that — big time.
The freshly printed cash is going somewhere. Global stock markets are up about 40 per cent since March. But the cries of joy from hedge funds are not ones most of the country can share. The healing process in consumer spending and the housing and labour markets still seems fragile. The year ahead may yet hold more unpleasant surprises — from the economy and the BoE.
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