That’s meant to be the sound of a printing press, by the way. Former Treasury adviser Gavyn Davies ponders the possibility of Britain turning on the money taps in a piece in the Guardian today.
It’s called “We must start thinking like South American dictators.” Really.
The tax cuts do not have to be financed by selling bonds. They can be financed by asking the Bank of England to offer an overdraft to the government, which is a polite way of saying by printing money. If you think about this as a process in which the central bank prints bank notes (essentially at zero cost) and gives them to the government to hand out in tax reductions, you would not be wrong in any meaningful way. This is a crazy and dangerous procedure when inflation is threatened - but it is the most powerful way of fighting deflation that economists have invented. Perhaps it will become necessary.
I recognise that this seems dangerously profligate. Surely the very same tactic, so beloved of countless South American dictators, cannot be the right solution for a sophisticated and stable western democracy in 2008? If you are sceptical about this, I refer you to the work of a sober, mainstream economist who has gone on to greater things.
In an uncannily prescient speech in 2002 (Deflation: Making Sure It Doesn’t Happen Here), he laid out a detailed plan for avoiding deflation in a western economy. This involved printing money to bail out failing banks, and buying troubled assets such as mortgage-backed securities. If necessary (and we are not quite there yet, in my opinion), he advocates printing more money to finance an increase in the budget deficit and pay directly for tax cuts. That man was Ben Bernanke, now the chairman of the US Federal Reserve. Read his speech on the Fed’s website. So far, about two-thirds of the plan has been implemented, and he clearly stands ready to complete the job if needed.
Anyway, Davies’ opinion may be significant for future policymaking. Political blogger Guido Fawkes notes the following:
Gavyn Davies, a former Goldman Sachs managing director and MPC wise man is close to the Brownies - his wife Sue Nye was Gordon’s diary secretary and is now the Director of Government Relations in Downing Street. So when he advocates, as he does this morning, turning on the printing presses at the Bank of England and just printing more money to solve our woes, you can believe this is being discussed in Downing Street.
It certainly would be discussing it. Especially as its US counterpart is already pursuing a form of quantitative easing. Quantitative easing being (very, very basically) a way of inflating one’s way out of a banking crisis. It does have supporters other than Davies, as above, including the FT’s Martin Wolf and Econbrowser, but it also has consequences and risks — namely massive inflation (duh) and the prospect of a Japan-style lost decade.
Related links:
Did quantitative easing by the bank of Japan ‘work’? - Federal Reserve Bank of San Francisco
The unthinkable has happened - FT Alphaville
Fed capitulates: central bank is broken - FT Alphaville
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