A remarkable article by Gavyn Davies in The Guardian today that advocates printing money. This is to take the current debate between funded and unfunded tax cuts, already entering territory that I perhaps rashly called bonkers, an important stage further. Davies says:
The tax cuts do not have to be financed by selling bonds. They can be financed by asking the Bank of England to offer an overdraft to the government, which is a polite way of saying by printing money. If you think about this as a process in which the central bank prints bank notes (essentially at zero cost) and gives them to the government to hand out in tax reductions, you would not be wrong in any meaningful way. This is a crazy and dangerous procedure when inflation is threatened - but it is the most powerful way of fighting deflation that economists have invented.
Now Davies is one of the most dazzling stars of the economists' firmament. My respect for him is boundless, from when he wrote a weekly column for The Independent and when, as a partner in Goldman Sachs, I interviewed him occasionally for the BBC. He has always been well connected politically, having begun his career in No 10 when James Callaghan was Prime Minister, and he remains so, being married to Sue Nye, Gordon Brown's director of government relations.
What is more, in support of his view he quotes none other than Ben Bernanke, chairman of the US Federal Reserve.
All of this, though, is predicated on a big "if". Printing money (I like Davies's description of this popular shorthand as "not ... wrong in any meaningful way") would be the right response if we really do face the prospect of Deflation with a capital D as opposed to the mere down cycle of an ordinary recession with a lower-case r.
So do we, or not? Davies implies that we are not heading for deflation as things stand: "If economies weaken only a little further than now feared, then we will experience deflation." But the risk is great enough to justify measures that would normally be "crazy". In his first paragraph, he says: "Sometimes, though rarely, deflation is a more serious threat [than inflation], and we need to shelve many of the orthodoxies we have held so dear. Now is such a time."
The judgement of the Pre-Budget Report in 11 days' time on this question may be the most important decision of Gordon Brown's premiership.
It IS bonkers, and you are not wrong in your instincts. The policy is an invitation to foreign holders of sterling to flee the currency as well the foreign investors we NEED to buy the paper the government must issue to pay for its planned spree. Its the economics of the madhouse. Easy for him to say, with a lovely Goldmans pension and his BBC earnings. For the rest of us, imagine Zimbabwe, but with worse weather.
Posted by: Helene Davidson | Thursday, 13 November 2008 at 04:06 PM
I thought that was part of the problem of the present financial crisis, the printing of funny money? At the moment our currency is losing value daily and printing more money based on nothing will only speed its decline in value. Remember what happend in the Weimar Republic and is now happening in Zimbabwe.
If we have neither the gold reserves, nor a national production to support our currency then we shouldn't be printing more money based on WHAT?
Posted by: flipped | Thursday, 13 November 2008 at 04:38 PM
It's all got the Queens head on it. Couldn't we slice up the assets of the monarchy and use them as collataral against this kind of procedure? What's the worst that could happen? We might become a republic & new notes could break out....?
Posted by: Kevin | Thursday, 13 November 2008 at 06:16 PM
Davies is sniffing in the right direction and we need to move much more in this direction. Right now the government has to borrow money and pay interest to the bankers. This is an absurd system that keeps every nation in eternal debt.
As anybody who has thoroughly researched the money system and its history knows the money supply is controlled by a few and the rest of us are debt slaves.
There are many ways the monetary system could be reformed to end the debt based system. here is one:
http://www.themoneymasters.com/
Posted by: Alan | Thursday, 13 November 2008 at 07:29 PM
For Heaven's sake! Give the government more money? One is left utterly speechless ---
Posted by: john problem | Friday, 14 November 2008 at 08:39 AM
My first reaction is that this is a kill-or-cure solution. Having grown up in the 1970's and started my career in the 1980's, I know just how painful can be the austerity measures needed to wean a country off the habit of printing money. My memory is that it was worse than the 1992 and 2001 recessions, and probably too what we face now. So, like many other solutions, it's merely delaying, and possibly amplifying, the inevitable pain. And once a country has started on this "solution" when will it be able to stop? Will it ever be able to stop?
Another thought. A lot of very smart people are wondering aloud which is the greater evil: recession or inflation? I think it is inflation. A recession is like wading though mud - difficult but not impossible. Although many people suffer, it is still possible to prosper - most of the really innovative and successful businesses in my lifetime have been established during recessions. On the other hand, inflation is like swimming up a flooded river - everyone, no matter how strong, is swept inexorably downstream.
Posted by: Ian Kemmish | Friday, 14 November 2008 at 08:46 AM
George Osborne is not scaremongering; he is simply stating what happened when a Labour administration tried to boost the economy in the late sixties through increased borrowing. The question the Prime Minister has to answer is “why does he expect a different outcome this time around”. Those of us who lived through the sixties can recall the feeling of desperation and national humiliation that persisted until a far sighted Lady came on the scene to end the malaise.
Posted by: Graham Goold | Sunday, 16 November 2008 at 08:31 AM
So, we have a large proportion of the population who have been living far beyond their means through easy credit, spending it on holidays, alcohol and other pieces of unnecessary crap. Now the bills have become due and payable, the only way to solve the problem is to punish those who have lived within their means and saved for a secure retirement. Why punish the prudent for the folly of the rest?
Oh, and stop with all this wonderous Thatcherite miracle crap. She was not the one who made the North Sean resources which provided the biggest boost out of the earlier problems, but she was the one who flogged off all the state assets with a raft of privatisations.
The fact is, Britain is broke, the bills are coming in and there's nothing in the bank to pay for them.
Posted by: Duncan1973 | Sunday, 16 November 2008 at 10:00 PM