Thursday 9 February 2012
It's Thurdsday - QE day - or time for something else?
It's true, our poor banks desperately need to deleverage to try and get them back to health, without it they are not going to help the economy get back on its feet.
Today though I find myself in total agreement with Jeremy Warner of the Telegraph - which is rarely the case. But he is on the money today. The Big Issue in the UK is debt - Government debt, private debt and banking debt. We are awash with debt and the only solution is to reduce it.
Now government austerity to help get the debts down and we have tax rises too and the banks are deleveraging. The net effect of this is to push us into recession. This is going to last for years, at least another three but probably another five.
The Bank of England think they can speed up the process by offering 'free' money to help the banks deleverage quicker. However at some point the issue of free money to the banks is going to create a new bubble. When financing costs are so low for such a long time some terrible investment decisions are going to be made. Worse, when we try to normalise interest rates, lots of people and companies are going to go bust - creating a new recessionary wave. This is known as the Japan experience.
The US is doing a little better, because people on the whole have handed back the keys and walked away from their debts - this means the deleveraging has happened faster. Our policy is not having the same effect, deleveraging is going slowly because house prices and other debt laden assets are not falling in value and banks are not foreclosing - this helps to keep the economy limp along, but not to have the blow out which could lead to recovery.
The answer is not a Labour style government spending splurge - more debt is the last thing we need. If people won't walk away from their debts, then on a national scale we have to force it. We need to devalue the pound by 25% - not to hard to do, let's just monetise the QE we have already done.
Devaluation is harsh but has the fairness of affecting everyone equally so it is pseudo democratic - except savers but they are losing anyway with negative interest rates. Inflation will spike, but at last we will be able to raise rates to fight it.
It's the tough love solution for a hardcore debt addicted Country.