an opportunity for governments in the recession
The recession is well and truly with us, and I am looking for a job.
The authorities, however, are making a proper hash of things. The decision to cut interest rates, which everyone seems to think was inevitable, is frankly perverse. The fundamental problem is a shortage of credit. So what does the Bank of England do? It cuts the price of credit. Why would anyone lend at such low rates? Well, guess what: they don’t.
The banks have been lending at stupid multiples, gearing up their balance sheets (by the way, in English, the word for financial leverage is “gearing”; leverage is an Americanism), and they need to correct things. They need mor retail deposits, so they need to be able to offer higher interest rates to savers. Cutting rates encourages spending and discourages saving.
The reason we are in such a mess is that we have already borrowed too much. Our homes and landfill sites are full of cheap Chinese merchandise, bought on tick. But the whole economy depends on this cycle, so the authorities are trying to poke it back to life with more of the toxic medicine that made it sick in the first place.
So what medicine would I prescribe for this sick economy? Firstly through old-fashioned New Deal projects, funded by the state by printing money. We need to spend money restructuring our economy, away from the debt-funded cheap imports that we have come to rely on. There is an impending power crunch in the UK, and we desperately need new power stations. The Government should spend money on big new power installations, and stop fannying about waiting for the private sector to do it. Like the private sector is going to be able to raise the capital in current market conditions. This basically means offshore wind: we’ve got the wind, and the offshore engineering expertise gained in the North Sea oil industry. High speed rail is another capital-intensive venture that the government should be funding.
With what will it be funded, seeing as the cupboard is bare? Now is the time to print money. Printing money is usually inflationary, but with the threat of recession and even deflation, some inflationary upside risk is not such a bad thing. In fact, printing money on the scale already undertaken by governments worldwide to shore up the banking sector is likely to add to inflationary pressure further down the line; doing the same to help the real economy is necessary so that the banks have something to do with their new capital.
It is not all straightforward though. Roosevelt’s Keynesian New Deal created jobs, which is what I suggest we should do. However, technology and the labour market mean that the capital-intensive projects I am suggesting won’t be quite so effective as similar projects might have been in the 1930s. Then, building a dam would have drawn in thousands of unskilled labourers. Now, it needs a few skilled digger drivers. Then, the pool of unemployed labour which needed rescuing was looking for the sort of work that construction projects generated. Now, we like working with our hands less: we are a service economy. But the projects will still boost the economy, if not so directly. And they are needed. Perversely, the recession is actually an opportunity for governments to make the big investments that climate change demands.
These big capital projects are just the start, though. They need to be matched with targeted tax cuts, which empower citizens to invest themselves – and help them save more, and repay their toxic debts.
The result is to transfer the total burden of debt from the private to the public sector. Public sector debt is secure, and governments cheat on the repayments by inflating the currency in which it is denominated. This pushes up interest rates, all of which encourages saving/debt repayment.