The latest predictions from the Bank of England will come as a disappointment to many economists, but they should not come as a surprise. When this crisis broke five years ago, I predicted it would take a whole generation to correct. This ultra gloomy view came from my own conviction that the economic model to which the West has been wedded for the last thirty odd years, in which economic activity was driven by consumption, funded by borrowing and regulated by markets, was flawed, with insufficient equilibrium to sustain itself in the long run. Things were made worse by the fact that no economist seemed to know for sure what was happening. All of them could analyse where we were, but the theories of why we got there and where we were headed were both multiple and conflicting.
Nobody seemed worried because the alternative, command socialism, led at best to stagnation and at worst to collapse. Given that the aim is to continue with free markets and wealth creation in private hands, there has yet to emerge a way forward which does not involve borrowing to stimulate activity, which would be the certain way to upgrade the current controlled crisis into an uncontrolled calamity. At the root of the problem is debt, both private and public and until this is brought back to manageable levels it will be good to flat-line rather than shrink. This condemns an entire generation to a long bleak winter of low aspiration and lack of opportunity.
Quantitative Easing is the silver bullet to get out of the mire, but like all bullets, it can kill. For this reason it has thus far been used very cautiously, with little imagination and without much effect. There are two golden rules in its use in the modern global economy with instant electronic and plastic money taking precedence over note and coin. One golden rule is that you use it to reduce debt. The other is you use it to stimulate activity to create wealth building employment. In other words use QE to buy back government debt to reduce the leverage burden, and also use QE directly to finance infrastructure renewal, affordable housing development, school rebuilds etc. No loans or fancy initiatives. Pay the bills with clean new money.
If the economy begins to overheat the Bank of England can raise interest rates or pull excess money out of circulation by calling for special deposits. The government itself can raise taxation levels, so there are more than enough safety valves to prevent the hyper inflation people fear. This method would not only reduce the debt burden, but it would also close the budget deficit, while at the same time put people back into real jobs and stimulate the private sector. It would reduce the cost of housing and all of this could and would be done without borrowing a single extra pound.
At the moment we hover nervously in the economic shadows. QE pumped into the banking system may have stopped things getting any worse, but it has had little effect in making things any better, because it does nothing to deal with the underlying structural problems. Moreover if it does succeed in stimulating lending it takes us down exactly the road we should on no account follow.
The time has surely come to move away from the inertia of uncertain expectations into a positive drive to punch our way back to economic growth. We have to move from a posture of weary acceptance to one of hope and ambition. If our athletes are teaching us anything, it is that if you try, you really try, you really really try, you can do anything.