Sir Mervyn King, whose grasp of the fundamental problems facing the Western economies five years after the credit crunch is far sharper than many less astute economists give him credit for, warns that under-capitalisation of banks which still harbour over valued assets in their balance sheets, which they are in denial about writing down, will inhibit the progress of whatever recovery other measures encourage.
He talks also of the dire risks of the UK Government writing off the one third of its own debt, which it in effect owns via the Bank of England’s purchases with quantitative easing, or the use of further QE to finance direct investment or budget deficits. He suggests that the time is fast approaching when the hard truth, that much borrowed money across the developed economies can never be repaid, will have to be faced and the losses written off to allow a complete economic fresh start. The alternative of acute austerity and ever more borrowing to repay borrowing guarantees only stagnation and decline.
This blog is in agreement with all of this, save for the use of quantitative easing to buy government debt. £375 billion of new money has been pumped into the financial system of the UK. It has been used to buy government bonds. It is not clear whether it is aiding economic recovery, although it has probably driven up the price of shares and better quality property. It has made the rich richer, but the poor are getting poorer. That has the potential for social explosion.
This blog believes that QE should never be used to finance debt in any form. This is because money is a measure, not an intrinsic commodity, and to remain sound, must only be used to measure the creation of wealth. If new money, it must finance new wealth, not old debt. Imagine the effect on the economy if all the £375 billion had gone into infrastructure renewal, industrial expansion and new start ups, school rebuilding, new affordable homes, upgraded rail capacity and so on.
GDP would be growing steadily, tax revenues would be buoyant, every able bodied person wanting a job would be able to find one and the deficit would be shrinking. Demand driven inflation could be suppressed by interest rates and taxation, but would not harbour the fear of hyper-inflation through a debased currency printed to pay down old debt. Essentially that is how China got started and came from nowhere to a financial superpower in a couple of decades.
As stated in previous posts, this blog believes that the strategy to get out of the present crisis is to aim for full employment and industrial and agricultural self sufficiency. It is a big ask, but team GB can do it and every step forward eases the problem and the pain, motivating the nation in its common purpose. Too bad none of our political leaders can think this through.
In this short comment, I will also present gas as an example of an energy resource. The whole market of energy resources is very complex and consists of many different resources: Petroleum, coal, biofuels and atomic energy. Presenting the energy security of Eastern Europe in all those aspects is rather a subject for a whole book than for a seminar comment, therefore I will focus in this comment only on gas, because the discussion about this fuel is recently vivid, and European dependence from Russia is increasing.
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