This has not been a good week for the economy. Yesterday, we had the announcement of another bank bailout, only three months after the Prime Minister’s famous boast about saving the financial system (”We now only saved the world”, he announced to amused MPs back in October. “Please not again”, would be my response.) This is bad news and confirms that the last one didn’t work.
The bad news today is potentially much worse. The UK Chancellor, Alistair Darling, has authorised the Monetary Policy Committee of the Bank of England to consider printing money. Mr. Darling prefers not to call it that – he prepares the euphemism ‘quantitative easing’; the difference between the two policies is however trivial, and both amount to debauching the currency. Mr. Darling dare not call it for what it really is, however, for fear that the public might realise what he really doing. They will, in time.
So the Bank of England is now authorise to (in effect) print up to £50 billion to purchase corporate assets. This might not sound much given the other numbers being bandied around these days, but this is in fact a great deal considering that it is the monetary base we are talking about. The most recent figure for the monetary base is about £95 billion, so this amounts to an authorisation to increase the base by over 50%. (I suppose it could be worse – the Federal Reserve in the United States has already increased the base by over 100% since the late Summer, but that doesn’t give any comfort.)
Why does the base matter? As any monetary textbook will matter, increase the monetary base, and in time all the nominal values in the economy – the other monetary aggregates and prices too – should all evenually rise in line. Other things being equal, a rise in the base of 50% means, in time, a rise in prices of 50%. (Unless the increase in the base is reversed before it feeds through the system, and I suspect there is little chance of that.)
The danger, now, is that the MPC will tire of relying merely on interest rates and bailouts, and then take the fatal next step that the Chancellor has authorised them to take.
Just because the frying pan is hot does not make it a good idea to jump into the fire – as the citizens of Zimbabwe will no doubt confirm.
So watch out for rising inflation.
Meanwhile, one shudders what they will come up with tomorrow.