For nine years I have been arguing for a re-balancing of the economy from one which borrows and inflates assets to one which invests and creates new wealth. I am not going to argue this again here; refer to old blog posts or click on my dissertations below for the detail.
What is now needed is a massive stimulus of the UK economy designed to reboot the wealth creating base to match the asset inflating summit, to bring the economy back into balance and inaugurate a period of sustained growth of around 5% per annum over several years. Only then will we resolve the productivity crisis and increase the revenue stream sufficient to fund public services and in so doing increase the standard of living for all generations and the opportunities for the young. There are two ways of doing it. Borrow or print. There is nothing else.
When the summit of the economy, the banking and financial sector was under threat, first in 2008 crash and again but less after the Brexit vote, the Bank of England printed a total of £435 billion of new money to pump into the system and keep it afloat. The Bank bought in government bonds and certain high quality corporate debentures to inject liquidity into cash strapped banks. These assets are now owned by the Bank, which is owned by the Government. This means the government in effect owns a good deal of its own debt. This can either be written off or resold back into the market to reduce liquidity at some future point.
The problem is that with relatively little oil production, low manufacturing as a percentage of GDP and almost no coal or mineral mining, next to no new wealth is coming into the base of the economy (a ton of coal mined or a thousand barrels of oil pumped are converted to new cash at the base within days). Any money coming into the base to fund infrastructure and investment in new technology, plant and machinery has to be mostly borrowed from the top.
What is required is for the Treasury to print new money, £435 billion of it, which goes straight into the government’s bank account. This is then used over five years to pay directly, without borrowing, for the development of major infrastructure modernisation and renewal, massive affordable public house building and state of the art info technology (it takes me an hour to download onto my tablet and episode of a TV documentary, in South Korea it takes 3 seconds to download an HD feature film) all of which become national assets. This in turn fuels growth overall, boosts employment in jobs which pay good incomes, deals with the productivity problem without increasing unemployment, and re-balances the economy in favour of wealth creation, rather than consumer borrowing and asset inflation.
This is the only way forward that makes the numbers work. Ten years of austerity, flatlining growth and shopping on borrowed money simply has not. We can all see that now. So can the government but it is at a loss what to do. That is why we are where we are and going nowhere fast, because all the policies announced yesterday were either too little, too late, wrong headed or gimmicks and will keep us in the slow lane for keeps.
Finally a word of warning. Money is a measure. That is all it is. If it is printed to measure the creation of new wealth, it is real money and the currency remains sound. If it is printed to pay bills and fund extravagance, it ceases to have value and the currency debases. That is the difference between the Greenbacks of Lincoln’s United States Of America or the UK’s introduction of Treasury bank notes in 1914, and Mugabe’s Zimbabwe.