Quantitative Unease

The political economy of the crisis moved on significantly both yesterday and today. Yesterday the Commons debated the second reading of the Finance Bill – the Budget in other words.

I had already tabled an Early Day Motion, backed by Vince Cable, calling for a rational debate about public expenditure cuts that are on the way, and for the Commons itself to setup a committee that would recommend how public expenditure – forecast yesterday by the National Institute of Economic and Social Research to come in at 48 per cent of GDP in 2012 – is brought into line with the Government’s optimistic projections for revenue coming in 10 per cent lower at 38 per cent in the same year.

Supposing the market simply can’t digest all the debt the Government intends shovelling out this year, next year, and for many years to come. So in yesterday’s debate I made a plea that the Government and the House should have a plan B.

£25bn in debt has been successfully sold this year – leaving about £200bn to be offloaded. What will happen if the Debt Office tells to the Treasury, then to the Prime Minister that the market is refusing to buy?

The Treasury Select Committee has just reported that the cost of floating this debt will rise i.e. even more of future budgets will be ear marked for interest repayments. 
Please God the day will never come, but if the Government cannot shift its debt even at higher interest rates, it will have to act that evening before the markets open the next day.

Failure to do so will see the value of Sterling plunge through the floor. In attempt to safeguard the currency the Government will be forced into a slash and burn policy with respect to public expenditure. It might also be forced into forming a national Government. It may even have to adopt both approaches.

My plea has always been that in the run up to the election shifting the debt will prove much more difficult than the optimistic souls that run the Government believe and, that we should get a plan B in place now. Hence the plea for the House to act to start planning the new radical politics of achieving key goals while cutting severely the level of public expenditure.

That was the theme of the amendment I tabled to the Finance Bill Second Reading yesterday and I again was joined by Vince Cable and his deputy Jeremy Browne.

This topic is no longer confined to a no-go area of debate. There is now the beginning of movement on the Tory benches. What was noticeable, however, was the totally impassive way Treasury Ministers sat in the debate while MPs, now of all three parties are raising their concerns on whether it is simply possible to raise the levels of debt the Government believes is necessary to balance the book. .

An equally important report was issued today by the shadow monetary policy committee run by the Times and the IEA. At long last this group has begun to expose one of the dangers with the Bank of England’s strategy for printing money, or as it is euphemistically called, ‘quantitative easing’.

There might be a case for such a policy but, given the banks’ failure to lend adequately to businesses, surely this money should have been used to buy corporate bonds and debts, rather than Government gilts.

The result of concentrating on gilts has meant that far from injecting money into the economy, quantitative easing has seen the money go abroad, as it is foreign holders of Government gilts who have been quickest to sell.

Surely there must be a halt to this policy until a careful analysis has been done of the impact so far of a printing money policy. There may well be a case for this strategy if it is targeted on the corporate sector.

But soon, surely, somebody is going to put their good brains to the question of how one withdraws the printed money from the economy. For unlike the bank, I don’t believe the inflation genie is safely secured inside the lamp.


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