Let’s make the most of financial repression

It is increasingly something of a consensus view that “doing nothing is not an option”. We should “demand growth” by forcing everyone to borrow and spend more, mainly on welfare and infrastructure. Just look at Ed Miliband in the Weekend FT. He says we need a “plan for putting right what has gone so disastrously wrong”.

His plan is simple, and Tim Price of PFP sums it up the best: “Mr Ed calls for firm, coordinated action. Action, he repeats, is long overdue. Germany, for example, must support demand. Mr Ed demands that Germany supports demand. He demands demand, and he supports it, too. And yes, uncertainty around the world’s banks should be resolved. Action! Demand! Support! Certainty!”

Price feels a little as I do about this call to arms from Miliband. “If I were even remotely associated with the Labour Party,” he says, “an entity which whilst in office oversaw government spending rising from 37% to 52% of gross national product, and which left the incoming coalition to deal with the largest level of peacetime indebtedness in our country’s history, I would not dare raise my head above the economic parapet for fear of having it shot off, by any number of forcibly embezzled taxpayers, pensioners, investors or savers.” Quite. 

But the real problem here is not just that the endless calls for action are irritating but that the vast majority of the demands Miliband and the something-must-be-doners are more likely to make things worse than make them better. Fortunately, there is a good letter in this morning’s FT that balances out the argument a little. It comes from Mark Burgess Watson of the Hong Kong-based Japan Invest Group.

  

“I have spent 20 years watching expansionary fiscal policies in operation in Japan,” he says, “and they do not work.” In the UK, they are also mostly unnecessary. “With perhaps the single exception of Heathrow, the UK has a perfectly adequate existing infrastructure. By contrast, crisis-hit Spain gleams with trophy rail and motorway projects.”

The fact is that “the UK’s overwhelming challenge is a debt mountain caused by several years of aggressively pro-cyclical government spending increases allied to excessively low interest rates. An element of stagnation is unavoidable because the consumption adjustment required accounts for too high a percentage of GDP to be offset by an improved export performance.”

That means that what we need – and pretty much the only thing we can have – is what we have now. That’s “fiscal rectitude” alongside an expansionary monetary policy which “aims to restore risk-taking behaviour in the private sector, via an inflation tax”. 

I was asked at the Moneyweek conference last week what I would do if I was a benign dictator of the West. I wish I could have said something dramatic but the sad truth is that a long period of exactly this – financial repression – is probably the least painful way out.

However, there is still something we must do alongside it – make the supply-side changes that we need in the fog of inflation and global devaluation that money printing is giving us. That’s the bit that our government doesn’t seem to be on top of yet.

Let’s hope it gets a grip soon: the period of inflation and below-inflation returns required to get us out of the mess we are in is both unpleasant and unfair. It should at least be used to make things less so when it is over.