One of the features of the credit crunch era is the way that policies which seem extraordinary have a way of coming to fruition. We have seen many examples of this in the world of monetary policy. The two headliners would be negative interest-rates and Quantitative Easing or QE bond buying. The latter had previously only been a feature of the response to the “lost decade” in Japan but is now widespread. If it had worked we would not be discussing the “lost decades” but that seems to bother only me. Also these moves are invariably badged as temporary but so far none of them have gone away. Indeed in my home country the Bank of England is currently making QE look about as permanent as it can be.
As set out in the minutes of the MPC meeting ending on 31 July 2019, the MPC has agreed to make £15.2bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 September 2019 of a gilt owned by the Asset Purchase Facility (APF).
It will reinvest another £1.27 billion today but it is tomorrow that will be the real example of “To Infinity! And Beyond!” when it buys long and ultra-long dated Gilts.
These themes were on my mind when I noted this in the Daily Telegraph.
A radical world of “helicopter money” – where central banks fund government spending – is “inevitable” as policymakers run out of ammunition ahead of the next recession, top economists have warned.
Central banks are likely to “explore more unconventional policies” in the next downturn and blur the lines between fiscal and monetary policy with radical new tools, such as monetary financing, Deutsche Bank argued.
Let us just mark the issue that Deutsche Bank are top economists and move on. As to the details here is the original suggestion from Milton Friedman.
Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.
Those of you who follow me on social media will know that I note the daily RAF Chinook flights over Battersea as they could carry a lot of notes. Perhaps they could name them “Carney’s Cash” and “Broadbent’s Bonanza” for the occasion.
The one time this sort of thing was tried it was in fact via a tax rebate in Japan and amounted to £142 if my memory serves me correctly. However being Japanese they mostly saved it so it was not repeated. So any UK repetition of this would be different as if you look at out habits we would be likely to spend it which starts well but then of course would be likely to make our current account deficit worse. Here from this morning is a reminder of it.
The UK current account deficit narrowed by £7.9 billion to £25.2 billion in Quarter 2 (Apr to June) 2019, or 4.6% of gross domestic product (GDP).
Whilst it is welcome we did better the overall picture is this.
The UK has run a current account deficit in each quarter since Quarter 3 (July to Sept) 1998 or, when considering annual totals, 1983.
So there is an issue although I have many doubts about the accuracy of the numbers especially when we get to investment flows. Let me give an example from the savings numbers released this morning.
The most notable recent revision was in 2017, when the previously published lowest annual saving ratio on record was revised upwards from 3.9% to 5.3%, meaning that the lowest annual saving ratio on record is now observed in 1971 where it stood at 4.8%.
If you remember the media furore at the time that is quite a big deal. Also it gets worse.
The annual households’ saving ratio in 2018 was revised upwards 1.9 percentage points to 6.1%.
Let’s us move on by noting how an emergency measure is being presented as almost normal which of course is more than familiar. We will know when they intend to begin it because we will see a phase of official denials as they get their PR spinning in first.
This morning’s UK release was rather inconvenient for the monetary expansion apologists as we saw this.
UK gross domestic product (GDP) contracted by an unrevised 0.2% in Quarter 2 (Apr to June) 2019, having grown by an upwardly revised 0.6% in the first quarter of the year.
This meant that the annual rate of growth rose to 1.3% which is better than the Euro area’s 1.2%. I point this out because Michael Saunders of the Bank of England was telling us on Friday that we were in a weaker position. Also there was this.
Annual GDP growth in 2017 is now estimated at 1.9%, revised up from 1.8%,
So we move on knowing that the past was better than we thought. or if you prefer that economic growth has slowed by less than we thought.
There has been an improvement in recent months and here is this morning’s release from the Bank of England.
Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFCs) and NIOFCs. In August, money holdings rose by £10.4 billion, with positive contributions from all sectors.
The total amount of money held by households rose by £4.6 billion in August. This was primarily due to a large increase in non-interest bearing deposits. The total amount of money held by NIOFCs rose by £3.3 billion, while the amount held by PNFCs rose by £2.5 billion.
Sorry for their love of acronyms and NIOFCs are non intermediating financial companies.
This means that the annual rate of growth for broad money is 3.3% as opposed to the 1.8% registered in May. The main changes have come in July and now August.
If we switch to M4 lending which is sometimes a useful guide then things have improved considerably as the rate of annual growth has pushed up to 5.5%. As mortgage lending remained pretty similar it has been driven by this.
Borrowing by financial companies that do not act as intermediaries, such as pension funds or insurance companies (NIOFCs), rose to £16.6 billion in August, the largest amount since monthly figures were first collected in 2009. Fund managers were the largest contributor to this strength.
Thus as so often with this sort of data ( bank lending) we are left wondering what the economic impact will be?
This continues on its merry way.
The extra amount borrowed by consumers in order to buy goods and services fell to £0.9 billion in August, slightly below the £1.0 billion average since July 2018.
The Bank of England are keen to point out this.
The annual growth rate of consumer credit continued to slow in August, falling to 5.4%. This remains considerably lower than its peak of 10.9% in November 2016, and is the lowest level since February 2014.
There are several elements of context to this. Firstly the rate of growth has been so fast it has raised the total to £218.6 billion so percentages would naturally fall. Also the weakening of the car market has contributed. Next the numbers are still much higher than anything else in the economy.
Small Business Loans
Remember when the monetary easing was supposedly for smaller businesses? Well there is a reason why that went quiet.
In contrast, the growth rate of borrowing by SMEs weakened slightly to 0.7%.
If we consider the overall situation we find several problems with helicopter money. The first is that it is supposed to be an emergency response when we keep being told we are not in an emergency but rather a recovery. It is a bit like putting an electric shock on a heart which is still beating. The next is that it would be an extraordinary move and yet again a big change would be made by unelected technocrats. This reminds me that some years ago I made the case for Bank of England policymakers to be elected. Finally it is just another way of the establishment making things easier for itself at the expense of the wider population.
This is because the wider population would be at risk of inflation and maybe much more inflation. This need not be consumer inflation as so far in the credit crunch era we have seen moves in asset prices such as bonds, equities and house prices. The latter of course allows the establishment to claim people are better off when first-time buyers are clearly worse off. Putting it another way this is why they are so resistant to putting house prices in the inflation indices and the new push to use fantasy rents suggests they fear helicopter money and negative interest-rates are on the horizon.