At home, the chancellor,
George Osborne, tweaked the Bank of England's remit to give it clearer scope to
overlook short term upward pressures on inflation. But in the phoney war that is raging prior to
Mark Carney’s arrival, the central bank said it would not add to its QE spend
this month. The government has purchased
£375bn government bonds between March 2009 and October 2012, something of a
global record.
Britain aggressive monetary easing started
earlier than other economies. Gordon
Brown started in 2009 and Osborne continued the jamboree until October
2012. The important questions are:
1.
How good was our timing, will it prove to be
beneficial to be the trail blazers in what may become a global reflationary
cycle? (The US, Japan and EU are all
setting off down this road)
2.
Will our stubbornly high inflation put us at a
disadvantage in this cycle - along with emerging economies like Brazil, India
and Russia who still have structurally high inflation?
3. How will low
inflation economies like Japan fare (where deflation has been strangling the
economy for two decades)?
4.
What will Mark
Carney have up his sleeve?
Commentators are expecting
Mark Carney, the current governor of the Bank of Canada, to trigger a broad
review of the central bank's policy framework.
But he may have his work cut out as the charts below show how little
effect monetary policy seems to have on the actual money in circulation! Despite Gordon and George’s best efforts
the UK’s M2 (cash in circulation and short term deposits) number has grown at a
consistent rate over the last 10 years, excepting the downward blip in the 2008
credit crisis. Where has they have “spent” £375bn gone?
UK M2 growth |
It seems to me that the UK QE
has merely allowed the banks to take on more and more UK government debt, helping to keep bond prices high but having no
impact on the real economy, other than to keep interest rates artificially low. Maybe the Japanese version of QE combined
with a massive supply side push will have a more profound effect.
What surprises me is that more
governments haven’t looked to the demand side (lower taxes on spending and
income) to drive growth and inflation.
Perhaps the best and boldest policy decision since 2007 in the UK was
Brown’s temporary cut in VAT (sales tax) in 2009 this got the money supply
moving again and should probably been kept in place. The £15bn annual cost of this tax cut cost
could have been covered in lower welfare payments and deeper government
spending cuts.
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