Rolf Englund IntCom internetional
founder of International Monetary Research Ltd
The bear market started yesterday
How to stop the recession
Tim Congdon was a member of the Treasury Panel (the so-called 'wise men'), which advised the last Conservative government on economic policy.
Nearly all major fluctuations in economic activity are the man-made result of serious errors in economic policy. They can be halted if the right decisions are taken.
Policy must at all times keep the growth rate of money – which means the growth rate of bank deposits, in practice – steady at a moderate rate.
In the 14 years from 1992, in which the UK enjoyed unusual macroeconomic stability, the annual rate of money growth was in fact similar to that of national income at about 6pc or 7 pc.
But in 2006 the Bank of England lost the plot. A large and violent fluctuation in money growth has occurred in the last three years, and the predictable outcome has been a large and violent boom-bust cycle. In early 2007 the bank deposits of British companies were 15pc higher than a year earlier, but in the last year they have fallen by almost 5pc.
When a bank extends a new loan, it adds the same amount to its assets (the loan) and to its liabilities (the deposit).
In recent speeches the Governor, Mervyn King, and the Deputy Governor, Charles Bean, have warned that – unless banks lend more to the private sector – the economy will not recover in 2009.
This credit-determines-spending doctrine is false and dangerous.
The correct answer is for the government to replace the private sector in the credit process, and so to create new deposits by itself borrowing from the banks and increasing the quantity of money. Since the government has the power of taxation, its own credit-worthiness is not in doubt and it can borrow almost without limit from the banks.
We are of course opposed to an excessive rate of monetary growth, because that causes inflation, and favour sound public finances over the medium term. But....
We are of course opposed to an excessive rate of monetary growth, because that causes inflation, and favour sound public finances over the medium term. But large-scale government borrowing from the banks in early 2009 – of between, say, £50bn and £100bn – would be simple to organize given the enormous budget deficit now being incurred. That would quickly boost the quantity of money, easing the financial squeeze on British companies, and helping them to maintain jobs and investment.
Typically, the part of the banks' assets that belongs to shareholders - the capital - is less than 5 per cent of the total.