Last week brought a call from Simon Jenkins writing in the Guardian for ‘proper’ money printing. He reckons that the best way to cope with the lack of demand in the UK economy is simply to give people money and set them free to spend it.
Under his plan we would print £14bn of bank notes and scatter them over shopping streets “the length and breadth of the land.” Those who picked them up would have six months to spend them before they disintegrated and became unusable. Or, if scattering was deemed to messy, we could just hand the cash out in post offices to anyone with ID, ration-book style. Or we could skip the whole cash thing and hand out vouchers instead.
Either way, people would suddenly have free cash and they would spend it. Demand would rise and all would be well: “the remedy for depressed demand is to increase demand, it is as simple as that.”
Might it work? I think you can guess our answer. It might give GDP a little short-term consumption-based blip as people move spending forward, although even that is only a given if people would normally have spent less than the full value of the voucher.
It is also unlikely in a deleveraging economy (such as ours) that it would even increase total consumption over a full year: people worried about the future are likely to use the voucher to bring forward spending – offsetting it by bringing down future spending.
The Japanese tried this in 1999 when I was living in Tokyo (the same year they lowered the target interest rate to zero). The government printed and posted 31 million shopping coupons worth
¥20,000 each to families with children and to the elderly. The coupons had to be used within six months and could only be used in each recipient’s local community.
The idea at the time was that the ‘use it or lose it’ nature of the coupons would do more to stimulate consumption than a straightforward tax cut, the proceeds of which most people were likely to save. In 2009 they did the same – sending out another ¥12,000 to every single resident of Japan (with an extra ¥8,000 for everyone under 18 or over 65).
Various studies have looked at the results. They appear to be pretty marginal. This one concludes that there was no effect at all on the consumption of non-durable goods or on services, and a very small positive effect on the consumption of durable goods.
This one might have a better answer, but my kanji comprehension has deteriorated to the extent that I have no idea what it is.
Either way, a quick ring round of my old Japanese colleagues reveals that none of them remember the policy having any effect at all, and Japan still suffers from what economists consider to be under-consumption.
And what of the other risks? Jenkins thinks that the “the traditional objection to printing money, that it might lead to Zimbabwe-style inflation, is no threat to Britain at present.”
He is right in that it doesn’t look much like we are at risk of very high inflation right now, what with the endless deleveraging of both our public and private sectors. But very fast inflation isn’t so much a function of the amount of money you print, as of how fast it moves around an economy (its velocity). The current velocity of money is slow – people aren’t lending, borrowing or spending. But that can change very quickly indeed.
If people lose faith in their currency it starts to burn a hole in their pocket. They want to spend it quickly – to get goods that might hold some value instead.
The Greeks have lost faith in their currency – there has been a real run on all their banks to the extent that if they were not protected by the euro they would be in hyperinflation. If they default and leave the euro, they will be; as, for that matter, will Portugal.
Money is about confidence. Mostly, people have confidence in sterling (be that right or wrong). But if they actually see money or money equivalents being printed and dumped on their doorsteps, how happy will they feel about the value of the money they already hold?
It is a big risk to take for a very marginal and gimmicky gain – and one that if it helped at all would only help one small part of the economy.
This isn’t the first time Jenkins has suggested the free money for everyone argument as the solution to all our problems – he said the same here in 2008. It would be nice if it were the last.