Leading article: There is no map for this perilous economic journey

Easing the money supply must be handled with scrupulous care

Share
Related Topics

Like a sword blunted by hammering for too long on tough armour, the Bank of England's conventional monetary measures for stimulating our foundering economy are no longer cutting it. Interest rates cannot usefully go any lower. In the view of the Bank's Monetary Policy Committee, the time has come for unconventional measures: a direct increase in the money supply.

This is a grave moment in the history of the Bank, and indeed the country. Increasing the money supply to stamp out deflation – or quantitative easing, to give it its technical name – has never been attempted before in Britain and is a deeply contentious subject among professional economists. It is also a large step into the unknown. No economist, even those who strongly believe it is necessary, would dare to predict with any precision how much of this medicine it will take to eradicate deflation, nor when the process will need to be thrown into reverse (as it inevitably will) to stop rampant inflation taking hold.

There is no road map for this journey. And yet to refuse to embark on it would be just as dangerous. Asset prices are collapsing, unemployment is spiralling and confidence is evaporating. Moreover, the inflationary pressures that have bedevilled our economy for so long are nowhere to be seen. These are the classic conditions that preceed a deflationary slump.

And our national overhang of private debt, accrued irresponsibly during the boom years, makes the prospect of falling prices doubly ominous. In a deflationary environment, the real burden of debts gets bigger, further sapping confidence. The danger of Britain entering a Japanese-style period of negligible growth and stagnant living standards is a very real one. Our fiscal and monetary authorities would be failing in their responsibilities if they did not attempt to head off that threat.

However, we should not assume that the action announced by the Bank of England yesterday will be enough, in itself, to restore health to our economy. The theory of quantitative easing is that a central bank, by buying up government bonds in the private credit markets, increases the overall amount of cash in the economy. And, because people generally store their cash in banks, the reserves of retail banks will then increase, giving them an incentive to lend more money to other customers. This process should get money circulating through the economy at a quicker rate, resurrecting confidence and boosting prices.

Yet the balance sheets of several of our large retail banks are in such a bad state that it is possible that they could simply hoard the new cash that flows to them as a result of the Bank of England's intervention, rather than lend to the UK businesses that so urgently need it.

The Bank of England and the Treasury must supervise this process extremely closely. If there is evidence of cash hoarding, full public control of the guilty banks must be swiftly imposed. And if credit still does not reach those businesses that need it, direct lending from the Bank of England might be necessary.

Just as importantly, the public needs to be kept fully informed by the Bank of what action is being taken to support the money supply. These decisions will directly affect the savings and livelihoods of us all, perhaps even those of future generations. If we must enter this perilous new world, we should at least do it with our eyes open and our wits about us.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Business Analyst - Surrey - Permanent - Up to £50k DOE

£40000 - £50000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

***ASP.NET Developer - Cheshire - £35k - Permanent***

£30000 - £35000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

***Solutions Architect*** - Brighton - £40k - Permanent

£35000 - £40000 Per Annum Excellent benefits: Clearwater People Solutions Ltd:...

Senior Research Fellow in Gender, Food and Resilient Communities

£47,334 - £59,058 per annum: Coventry University: The Centre for Agroecology, ...

Day In a Page

Read Next
 

Taking on Ukip requires a delicate balancing act for both main parties

Andrew Grice
Today is a bigger Shabbes than usual in the Jewish world because it has been chosen to launch the Shabbos Project  

Shabbes exerts a pull on all Jews, and today is bigger than ever

Howard Jacobson
Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

Wilko Johnson, now the bad news

Former Dr Feelgood splits with manager after police investigate assault claims
Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

Mark Udall: The Democrat Senator with a fight on his hands

The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
New discoveries show more contact between far-flung prehistoric humans than had been thought

New discoveries show more contact between far-flung prehistoric humans than had been thought

Evidence found of contact between Easter Islanders and South America
Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

Cerys Matthews on Dylan Thomas

The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
DIY is not fun and we've finally realised this as a nation

Homebase closures: 'DIY is not fun'

Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

Air New Zealand's wizard in-flight video

The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

Pumpkin spice is the flavour of the month

The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
11 best sonic skincare brushes

11 best sonic skincare brushes

Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

Paul Scholes column

I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

While other sports are stalked by corruption, we are an easy target for the critics
Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker