The QE billions should go direct to consumers

October 12, 2011

By Mark Hillary. The opinions expressed are his own.

In 1998, the Japanese government was ridiculed for giving away almost $6bn (at 1998 value) of shopping vouchers. The plan was that consumers would spend more of this ‘free money’ and help lift Japan out of the seemingly endless malaise it suffered in the nineties – as many other developed economies were enjoying a roaring decade.

One of the major faults in the Japanese plan was that the vouchers could easily replace the need to spend actual money. If my groceries cost me $100 then why would I still spend $100 of cash on groceries and buy a nice meal in a restaurant with my voucher, when I could just use the voucher for those groceries?

But the Japanese may have been onto something by focusing on demand rather than monetary supply, contrary to most received wisdom at present.

The Bank of England’s Monetary Policy Committee has restarted quantitative easing (QE) in the past week, much to the surprise of the markets and leading some commentators to ask what they might know that the media and financial analysts don’t.

Former MPC member David Blanchflower even used his column in the Guardian to say: “The MPC argued that tensions in the world economy ‘threaten’ the UK recovery. I am unaware of the MPC ever using this word before. Given that a lot of care goes into the exact wording of such a statement all nine members would have had to sign off on this, then things must be pretty bad.”

Perhaps I am over-simplifying the complexity of the British economy, but if the man on the street senses that the economy is not improving then he will reduce spending, luxuries are forsaken, and unsecured credit is paid down.

This is all rational behaviour. If you are not sure about the stability of your present job, or the likelihood of finding a similar job if this one disappears, then you are not going to be making major purchases or commitments. Millions of people are battening down the hatches and hoping the storm blows over in a few years – as we have all done when recession has struck in the past.

For the man on the street, whether the central bank is purchasing gilts or selling groats really doesn’t matter. A lack of confidence in having a job tomorrow is what matters.

Professor Steve Keen of the University of Western Sydney believes that a Great Depression is all but inevitable because of this mismatch between classic monetary policy and public behaviour.

After listening to a lecture by Keen at Oxford University last week the writer George Monbiot commented: “If Keen is right, the crippling sums spent on both sides of the Atlantic on refinancing the banks are a complete waste of money. They have not and they will not kickstart the economy, because M0 [base money] money supply is not the determining factor.”

Keen proposes a write-off of private debt, regardless of what that does to the banks that lent to consumers. This will be music to the ears of consumers struggling to service credit card debt, but will any government really propose such radical measures?

I doubt it. We will see a depression and more civil unrest before anyone listens to ideas like this. But Keen does have a track record of predicting major economic events. He sounded the alarm predicting the 2008 crash a full three years before it happened.

This brings us back to the Japanese solution. If quantitative easing is to be continued then why not deliver some of those billions direct to consumers, avoiding the need for money to trickle through the banking system? If even just this most recent QE effort went straight to consumers, that would be a bonus of over £1,000 for every man, woman, and child in the UK.

If lessons can be learned from what Japan attempted back in 1998 – conditions to ensure the vouchers are spent – then why can’t a similar plan be applied to Britain on a much grander scale?

Image — A woman poses with a Bank of England twenty pound note bearing the image of Edward Elgar in Edinburgh, Scotland June 29, 2010. REUTERS/David Moir


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