Dominic Lawson: Printing money is again seen as the answer to economic woes. But why?

 

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The Independent Online

A friend of mine was once apprehended by the police for forgery and counterfeiting. He was a boy at the time, which preserved him from a stretch at her Majesty's Pleasure; but he was sent down from an illustrious public school – where he had acquired great popularity by handing out what appeared to be £5 notes to delighted fellow pupils. These notes had been doing sterling work in the shops of the nearest village until the recipients took them to put into their bank account and were told that the fivers were cleverly constructed duds.

He did not repeat the endeavour as an adult, but some people can never rid themselves of the compulsion to create spending power at the press of a button.

Earlier this year Colin Edgar, a Faversham bricklayer, was handed a six-year prison sentence following a raid on his premises by the Serious Organised Crime Agency, accompanied by an official from the Bank of England.

According to the police: "Investigations discovered that thousands of pounds of finished notes had already entered circulation ... This conspiracy began to take shape while Colin Edgar was in prison coming to the end of a previous sentence for similar offences...[He] was at the point of beginning to mass-produce perfected notes. The potential economic harm cannot be overstated."

Indeed not; when vast sums of funny money enter the system, apparently at will, without any new goods or services being created to earn them, then economists tell us that there is a reduction in the value of real money and a general increase in prices due to more money being circulated. This not only causes both relative and actual impoverishment among those not able to print their own money, but also leads to a general and contagious lack of trust in the currency.

I wonder, however, if it occurred to the Bank of England official who took part in the raid on Colin Edgar's premises that this Faversham bricklayer was just doing what the Bank had done on a vast scale, only without political sanction. Last month the Bank of England reactivated its policy of so-called "quantitative easing", creating a further £75bn of money out of thin air to inject into the financial system, mostly by buying government bonds from the banks.

This has two objectives. The first, unstated one is that by acting as a buyer of government debt, it keeps the price artificially high (and therefore the rate of interest on them artificially low). Company directors have been sent to jail for doing the same thing with their shares – that was the fate of Guiness's Ernest Saunders – but as so often, something that is illegal in the private sector is declared as being in the national interest when done by the state. The second and openly declared objective of the quantitative easing is that by flooding the commercial banks with liquidity they will be encouraged to lend more to businesses and thus revive the economy.

To what extent the earlier £200bn of quantitative easing saved the economy from a bigger downturn – as the Bank claims – is impossible to know with certainty. Similarly, we cannot know exactly how much its actions have led to Britain having the highest inflation rate in Europe – but it would be perverse to pretend that these two circumstances are not closely connected.

It is precisely because they don't believe in "buying" economic activity by printing money that the German government has ignored the British Government's urging – most recently in person by David Cameron in his meeting with Angela Merkel at the weekend – to allow the European Central Bank to inject billions of euros into the system with a click of the computer mouse.

When Alistair Darling sanctioned the inauguration of the British central bank's quantitative easing, back in 2009, the then shadow Chancellor George Osborne issued a press release declaring that "printing money is the last resort of desperate governments". Tu quoque, George.

While politicians and pundits now assert that the single most pressing concern is the absence of growth in the economy, the public – at least if the opinion polls are to be trusted – are much more worried and upset about price inflation. This anxiety has fastened most on the issue of fuel costs, especially for pensioners, but by no means just the elderly.

In this context, it is worth remembering that oil and gas are traded internationally in dollars and so the depreciation of the pound (another intended consequence of the Government's policies) has led to additional upward pressure on the price of petrol at the pump.

MPs of all parties have belatedly addressed themselves to the public's concern and have backed a parliamentary motion by the Tory Robert Halfon, itself a response to an e-petition with hundreds of thousands of signatures, calling on the Government to freeze fuel duty. Even Tim Farron, the chairman of the Liberal Democrats – the party which officially regards fossil fuel as the spawn of the devil – now says that cutting the price of petrol and diesel is a matter of "social justice".

Yes, inflation is a matter of social justice: and there will be much more protest along the same lines, to judge from reports that the Government, stunned by the budgetary consequences of September's annualised 5.2 per cent inflation rate, plans to break the link between welfare payments and the consumer price index.

That's the trouble with printing money. It seems to be a pain-free way of getting out of an economic hole – until the bills from everyone else start to come in.

After all, if it were not so very dangerous, why should Colin Edgar have been accused of planning "economic harm [which] cannot be overstated" and locked away for six years? And why should my friend have been sent down from his school, just for a bit of quantitative easing?

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