Thursday, 8 September 2011


Simon Jenkins in The Guardian pleads for the government to target newly printed money at consumers in a bid to boost what he calls stagnant demand in the economy; Sam Bowman on the Adam Smith blog argues that there is no demand deficit, just a structural adjustment, and that distorting this natural process will prolong recession. Both agree that apart from the very first wave of QE, giving newly minted money to the banks is a very bad idea; all they do is to hoard it. In an odd sort of way, I agree with both of them. 

Increased consumer spending is just consumption - wasted. We should be recovering our money from the banks, not giving them more. And if there's a need to boost 'consumer confidence' in the UK, it's obvious locus is the value of housing. We're peculiar amongst developed nations in the extent to which we rely on equity in our homes. It determines our willingness to borrow and spend, buy furniture, white goods and textiles and even vehicles. So if new money does anything, we should target it at maintaining aggregate property values in line with inflation, whether through bonds or some other mechanism. 


formertory said...

Crikey. So because inflated property prices and the consequent massive mortgage debt have got us in the mess we're in, we should maintain property prices artificially if they show any signs of going lower?

If we're suffering "adjustments" let's suffer the one that would come from a continuing decline in property prices, getting back to housing being more generally affordable for those who want it, and regarded as something that keeps the winter weather out, rather than as a means of buying "white goods, furniture, textiles and even vehicles".

Enough has been stolen from the next generation already, so current homeowners can carry on deluding themselves that they're well off.

Wildgoose said...

I agree with formertory.

The only sensible use for QE would be for direct infrastructure spending that would thereby boost the economy indirectly.

Of course, that would also show QE up as what it is - the Government printing money to spend, but without the smoke and mirrors of playing with the bond markets.

The deficit simply isn't going to reduce any time soon and I'd rather a short, savage stop to spending that forces people to innovate to survive, rather than a long drawn out process that just prolongs the agony.

FrankS said...

No, No, no!
The delusion that you become wealthier if the selling price of your home rises - and the eagerness of the banks to fund that delusion - played a large part in getting us into the current mess.
I don't know how to get of the mess, but keeping the bubble inflated isn't it!

Demetrius said...

If you try to up consumer spending in our present economy a high proportion will go out of our economy, much more so than a generation or two ago. Keynes Theory goes back to the 1930's. The problem is keeping the spending benefit in circulation in the UK rather than just exporting it. Under present conditions this is far from easy and some would argue impossible. If so, then it needs a whole new strategy and set of economic ideas.

Anonymous said...

Dammit, this is a re-run of the early 70's . When won't people learn that when fuel costs are too high and taxes too high, people stop spending, register recession.... duh!!

Coney Island