End of quantitative easing will stop mad monetary recycling

Allister Heath
IT is time for George Osborne to start worrying. The Chancellor will be the biggest loser from the Bank of England’s right and proper decision to halt quantitative easing, at least for the time being. The biggest problem with QE – apart from its increasing lack of impact and the pain inflicted upon savers and pensioners – is that it has blurred to a dangerous extent monetary and fiscal policy.

The Bank, one branch of the UK state, purchased around £38bn worth of gilts across August, September and October. During that time, the Debt Management Office, another branch of the UK state, issued £46.4bn worth of new gilts. For all intents and purposes, one part of the state was financing another part of the state, in a bizarre, almost Ponzi-style scheme that kept a deluded City happy but has gradually been undermining the integrity of the monetary system.

The private sector had to absorb just £8bn worth of gilts during that three month period, while the Bank, in its new role as the Treasury’s top paymaster, mopped up 82 per cent of the net issuance. Needless to say, Osborne took the credit, patting himself on the back for the lack of a buyers’ strike and for the UK’s low gilt yields – even though the overwhelming majority of the budget deficit was financed by the creation of new money, not by convincing investors to part with their cash. There have even been some periods – such as in August – when the authorities bought more gilts than the Treasury issued. The end of QE means that this mad monetary recycling has ended, at least for now. The £3.5bn raised on 6 November received no support from the Bank.

Suddenly, Osborne is on his own. He is going to have to convince private buyers to hand over real cash from real pools of savings for his IOUs. We shall soon find out how he fares in the brave new world of real budget constraints, economic rationality and accountability – unless, that is, the Bank relents in a month or two and comes running back to his rescue, like the US cavalry in those old black and white movies.

I can’t get excited by the news that Justin Welby is to become the next Archbishop of Canterbury. Welby is a former oil executive who actually understands derivatives and at least some financial products, rather than the usual clueless lifelong theologian, and is a member of Andrew Tyrie’s Banking Commission. But just like Vince Cable, who still dines out on his time at Shell but whose views on the economy are wrong-headed, having spent a few years in the private sector doesn’t mean that Welby is right on economics.

He recently argued that finance is “the cuckoo in the nest that pushed all the other fledgling industries out to die”, which is clearly nonsense empirically and theoretically, and far too imbued with emotionalism. But he did also say that all banks “must be allowed to fail, the process of defining resolution is if anything more important than defining regulation,” which is absolutely right.

This last statement alone suggests that Welby will be at least slightly better than the current Archbishop of Canterbury, who is so wrong, biased and anti-capitalist that it eventually became funny. But Welby’s obsession with corporate sin – he even wrote a thesis on it – risks blinding him to all the wealth and prosperity business creates. People must act ethically, law-breakers must be severely punished, bailouts must be banished and the City reformed – but most people and companies are generally good, not bad. Endless preaching about sin isn’t going to get the economy growing.