Merryn's Blog

Why 'free money for everyone' wouldn't help anyone

Some commentators have suggested that instead of printing money and giving it to the banks, we should print money and gave it to the people. But that wouldn't do any good at all.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516758/beyond-the-brexit-talk-the-british-economy-isnt-doing-too-badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
Visit/investments/property/house-prices/600638/uk-house-prices-may-be-heading-for-a-boris-bounce
House prices

UK house prices may be heading for a Boris bounce

The latest survey of estate agents and surveyors from the Royal Institution of Chartered Surveyors is "unambiguously positive" – suggesting house pric…
16 Jan 2020
Visit/520591/are-uk-house-prices-really-on-the-rebound
Property

Are UK house prices really on the rebound?

The latest house price data from the Office for National Statistics paint a picture of a housing market that is showing signs of rallying. That's not …
15 Jan 2020

Most Popular

Visit/520525/currency-corner-how-high-can-the-pound-go-against-the-euro-in-2020
Currencies

Currency Corner: how high can the pound go against the euro in 2020?

In the month in which we should finally leave the European Union, Dominic Frisby takes a look at the pound vs the euro and asks just how high sterling…
13 Jan 2020
Visit/520553/money-minute-wednesday-15-january
Economy

Money Minute Wednesday 15 January: UK inflation and house prices

In today’s Money Minute, we look ahead to the latest UK inflation and house price figures, plus we have Germany’s GDP data for 2019.
15 Jan 2020
Visit/520598/money-minute-thursday-16-january-a-batch-of-company-results
Economy

Money Minute Thursday 16 January: a batch of company results

Today's Money Minute looks ahead to results from a host of UK companies, plus the latest unemployment figures from the US.
15 Jan 2020
Visit/economy/600632/money-minute-friday-17-january-uk-weakness-likely-to-continue
Economy

Money Minute Friday 17 January: UK weakness likely to continue

Today's Money Minute previews UK retail sales figures the UK, inflation data from Europe and industrial production from the US.
17 Jan 2020