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The chancellor is sitting on his hands and the Bank of England, given the opportunity to help the economy, does nothing. It is enough to make the jobless despair.
Three of the nine monetary policy committee members voted for an extra £50bn of quantitative easing, and one voted for an extra £25bn. According to today's minutes of the MPC's June meeting, five voted for no change.
There was general agreement that the world economy is slowing and the UK's double dip recession means that thousands of companies and households are struggling to make ends meet.
Banks remain in a parlous state and most people who can pay back their debts are doing so. The same goes for companies.
All that argues strongly for the central bank pumping more money into the economy via QE.
But the gang of five stuck to their guns. They mention inflation and the likelihood it will stay nearer 3% than 1% over the next year. They worry that QE will push up demand so much that it increases inflation. It is the same argument used by the Tea Party in the US – without any evidence.
Inflation comes from rising commodity prices and food at the moment, not an excess of demand.
Their next argument is more plausible. The five say extra QE will be soaked up by the banks, which are still desperate to horde cash to meet regulatory rules.
The solution, according to the MPC, is for the new banking regulator, the Financial Policy Committee (FPC), to relax the rules on banks at its next meeting later this month.
It is possible that a more lenient view of bank capital will free up cash for lending just as much or even more than QE. Who knows, Barclays' boss Bob Diamond might even lend some more to small businesses?
Yet while the buck passing goes on, little happens – except the argument for government action gets ever stronger.
More borrowing for investment in public networks and infrastructure, creating jobs and boosting confidence, is a key part of the answer. More borrowing? I hear you ask. Yes, more borrowing. Because when households and corporates cut up their credit cards, the government must pick up some of the slack. Osborne admitted as much in his last autumn statement when he extended the UK's payback period to 2017.
At least that was his short term answer. In the medium term he wants the consumer to come roaring back, borrowing like crazy to drive a resurgence in consumption.
Under the Treasury's plan the UK only recovers when consumer confidence returns. It's a dishonest tactic that limits government borrowing in favour of private borrowing. When the household sector is already up to its neck in debt, and the UK has the most over-leveraged property market in the world, it would be more honest and transparent if the government carried the burden on its broader shoulders.
Comments
20 June 2012 6:00PM
Before anything else they need to step up and demonstrate they have a modicum of moral worth ,
a shred of decency,
a jot of compassion ,
and the slightest dedication to their role of governance as opposed to an apparent enslaved obeisance to personal greed and self-enrichment.
20 June 2012 6:13PM
The MPC should have expanded QE months ago, it is utterly damning that they have done nothing as inflation has fallen, wages have stagnated and unemployment remains elevated. Particularly given King's advice to the Coalition over fiscal policy in May 2010.
Market expectations of inflation in the UK have been exceptionally low for months. Market expectations of inflation in 3.5 years are currently 1.92% RPI. This is approximately 1.2% CPI. Inflation expectations were never this low prior to 2008.
This strongly suggests monetary policy is far too tight. The MPC have given no explanation of why they refuse to use monetary policy to offset the ongoing fiscal consolidation and Eurozone uncertainty.
The argument "we are waiting to see what happens in the Eurozone before expanding QE" is farcical.
Monetary policy affects the economy with long and variable lag (Friedman 1972 and updated in Batini 2001). If the MPC waits for the Eurozone to completely implode it will be too late.
There is absolutely no reason they could not announce "we will expand QE today, if the Eurozone does not implode we will reverse this decision."
Likewise the argument "inflation is currently high" is ludicrous. Current monetary policy decisions do not determine inflation today, they determine inflation in the future. Therefore, the inflation rate today is much less important than the expectations of inflation in the future The MPC have let inflation expectations collapse, just as they did in September 2008.
I guess 8.2% unemployment is just a little too low for the MPC's liking, maybe Charles Bean, Paul Tucker, Ben Broadbent, Spencer Dale and Martin Weale will vote for more aggressive monetary policy response once unemployment gets into double figures? Great job guys!
Why hasn't the MPC announced, (as the Fed already has), long term guidance on interest rates? Does the MPC expect to raise interest rates before the Fed?
The most recent announcement of "credit easing" has occurred far too late, and has had very little effect on inflation expectations.
It is abundantly clear that flexible inflation targeting has failed in the US, the UK and the Eurozone. This is widely acknowledged by macroeconomists.
The MPC and Coalition need to change the monetary policy target. Cable recently advocated this in a very good speech, and has wide support amongst macroeconomists. They have two options either:
1) Instruct the MPC to target nominal GDP.
2) Raise the inflation target, (and target core inflation or maybe constant taxes CPI.)
Attempts to reflate the economy using fiscal policy and public investment will be completely futile if it is offset by the MPC passively tightening monetary policy. This is been clearly shown in Japan over the last 20 years.
Change the Bank of England's mandate.
All this requires is a single letter from Mr Osborne.
Do it now.
20 June 2012 6:57PM
At risk of going all Inbetweeners...
Look...
a whole team of ...
Briefcase Wankers.
What kind of bastard would have put Alexander and Osborne in the same team.
It really does look like putting all the banjos on the same porch.
20 June 2012 8:45PM
Really, the plan is to get consumers to save the day? I know the Tories like to put people in little boxes, you know, the public sector workers, the unemployed, the single mothers, the disabled, the long term sick, the baby boomers, the young, the old, in order to divide and rule, and be able to attack each group in turn without the others noticing or minding so much. But does Osborne really believe that this is how society is? and that somewhere, there is a category of people called "consumers" and that they have no ties with any other groups, and are not touched by his nasty policies? Sorry Mr O, you've put us all in the s**t, there isn't a single group untouched by your recession, so you'll have to rely on your own actions to get things going again. We are knackered!
20 June 2012 9:01PM
Everybody continuing to borrow and borrow and borrow, regardless of their resources (government or consumer) is not going to help this situation one iota. All it does is say "We aren't willing to suffer a period of retrenchment because we want to continue to have big houses, fast cars, nice clothes and generous social welfare benefits that we can't afford. So we're going to keep living high on the hog and pass the bill on to the kids."
The country had a decade or so of a false boom, fuelled by cheap credit provided by badly run banks against a backdrop of falling productivity. Common sense suggests that a decade or so of consolidation and gradually declining living standards is therefore required to return the country to a more sound financial footing.
There is no easy way out of this. Debt has to be repaid, with interest, at some point in the future. QE, whilst it at least has the benefit of being something that we control rather than leaving us further in hock to the bond markets, is only of finite use: the more you debauch the currency (and maintain near zero interest rates into the bargain) then the more damage it inflicts on pensioners and the poor - by eroding the value of fixed incomes, and by increasing the price of imported basic goods like fuel and many foods.
All this faux-Keynesian nonsense about borrowing to stimulate growth in a recession is so much hot air. A government can only afford to borrow in times of distress if the total stock of government debt is modest. Our government failed to regulate to avoid excessive lending and the overleveraging of the banks in the good times, and indeed joined the party itself - therefore, by the time we found ourselves in recession and saddled with a huge bill for bailing out the nationalised and part-nationalised banks, there was little scope left for further borrowing to finance stimulus spending, on infrastructure or anything else.
Osborne is right not to indulge in the same fashion as the United States or Italy, let alone Japan. If governments borrow indefinitely then one of two things is likely to happen - either markets lose confidence and they are shut out and their debts may become unservicable, at least without massive external help (e.g. Spain). Or, if they are "lucky" enough to be considered a safe haven, sovereign bonds continue to hoover up capital which could otherwise be usefully deployed in the economy, and lock it away in an unproductive asset (e.g. Japan). The UK already has most of its net worth tied up in property, we could well do without having much of the rest of it tied up in useless paper that does nothing but give the government the excuse to continue spending at a level we can no longer afford, putting off critical decisions indefinitely as the economy continues to stagnate.
The way I see it, we pay the price for our bad behaviour as a nation now in the form of slow-to-zero growth, whilst deleveraging follows its natural course, or we try to pump the economy back up with borrowed money and then suffer either slow Japanese-style deflation, or a more painful correction 10 or 20 years down the line. Take your pick.