Economic Supplement 9:

Throwing Money at the Problem

I see that the printing of money which is in no way borrowed is seen as a solution to the slump.
After all is that not what banks do when they create credit? They have so much money, all of which is owed to someone, and so stable are the deposits that they can lend some of the money to a new business setting up, or a business expanding, or a new public works. (They can of course lend money to financial booms in houses or the stock market).
What happens if their investment fails? They have a gap in their books. They owe £x to depositors, and they possess £x-y, where £y is what they lent to the businessman. What if the businessman doubles his money? The bank then has assets of £x-y+2y, or £x+y. Because of creative risk taking the bank has increased not just the money in the economy but the total of enterprises by the successful enterprise the money has financed. The flow of money and goods has increased and with that real achievement, there has been an increase in the quantity of money.
I have suggested that the gold standard we need in bankers is not to finance purely speculative movements, but rather real enterprises with a real chance of success.
There is talk of ‘nationalising’ banks which I hope will be impossible because of the global context of banking, but one can see how a nationalised bank would be operating under political pressure, national and local, and therefore not free to apply a detached economic yardstick. Everyone suffers if new, more efficient industries fail to find finance. The credit crunch came about in some measure because banks came under pressure to lend to certain categories of persons. If banks moved out of speculative into productive loans then the great fall in house prices to perhaps a quarter of their recent levels would help most people over a lifetime to get hold of a house and be free of debt. A substantial, drastic fall in house prices is a boon to be hoped for for nearly everyone. If people have to spend far less on their mortgages they will have far more to spend on the High Street.
I noticed some people saying they would not spend more because VAT was down 2½%. True, they will not greatly notice the difference, but for every £100 spent they would have £2.50 left in their pocket – to buy a bar of chocolate or something.
I rather fear the government getting more and more obligated and paying its debts just by printing money. I don’t suppose the Germans intended a mega inflation in the 1920’s or Robert Mugabe more recently. This though at some stage is where the printing money solution leads.
The commentators fear deflation, for people will delay their purchases of some items. If the crossovers between households and firms are to grow equal so that demand can purchase possible output there probably needs to be a deflation of the order of 10 or 20%. When commentators talk about ‘a fall in the rate of inflation’ they mean continuing inflation of say 2 as opposed to 3%. The need for a fall in prices is nowhere appreciated.