Tuesday, 10 March 2009

Could Brown's magic bullets turn into blanks?

I raise this topic as a question that perhaps someone more competent can answer.

My underlying premise – as you will see elsewhere on this blog – is that economic activity (and growth thereof) starts with viable markets represented by customers that have not only wants and needs, but also the willingness and ability to pay for their supply.

In other words, neither banks stuffed with taxpayer funds or freshly printed money, nor businesses perhaps suddenly finding they can borrow again (because certain banks are being instructed to lend), will change the fundamental economic environment in which most of the population find themselves, both as a result of the recession and of the measures the government has taken to try to relieve it.

That economic environment is one of caution, fear and overhanging debt caused by stalking unemployment, contracting asset values and expectation of rising taxes and shrinking public services. As a result, the public at large is presently in no mood to contribute to economic expansion. And without their contribution it just ain't going to happen.

That being said, what of Brown's magic answer to the shortage of money flowing through the economy? The idea that he will simply print it.

So far, his announcement of £75 billion in exchange for gilts and bonds, with another £75 billion in hand, appears to be having the desired impact on the long-term credit market. Quite apart from expanding the cash in our bank's current acounts, the underlying objective is to reduce long-term interest rates – buying up bonds raises their price and thus reduces their yield.

In theory, lower long-term interest rates will give businesses and consumers more certainty and confidence over future economic conditions.

But this is rather like creating a parallel economic universe: born out of electronically invented money (not funds based on actual economic activity), and with a false view of the long-term (again not based on real economic expectations) that could be reversed just by policy decision at any time.

What would happen if Gordon finds that growth in the real economy still fails to pick up? What would happen if he continues to print money, buying up long-term securities, until long-term interest rates drop to mirror the Bank rate at close to zero? What would happen if we get virtually free money, short and long term, but still no customers in the real economy where it actually counts?

Gordon would find that his magic bullets are actually firing blanks. Where could he turn to next?

This sounds similar to the experience of Japan over the last twenty years. Is it possible here?

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