The Cost of Printing Money

(Photo: Flickr – Images Geroge Rex)

By Conrad White – Regular Contributor

I told you so. At long last, serious interest rate rises are on the cards. If only the Bank of England had invited me to lunch after the publishing of my first article on this topic, then perhaps we could have sorted this whole mess out before it got as ugly as it has. Lockdowns, and now a war, have accelerated our already dangerous practice of money printing to levels that would make Weimar Germany blush. Given the almost countless cost that the Bank’s low interest rates and the government’s profligacy have caused – an informative chat over wine and cheese with a 2020-era Conrad would have been much cheaper for the Exchequer (just).

Rather than just say ‘I told you so’ I have had time to reflect on the longevity of our loose monetary policy and its persistence since 2008. Over this period a succession of Conservative governments pursued disastrous policy choices aimed at short-term appeal to voters and filling the pockets of the already wealthy. Last Friday’s mini-budget giveaway to the richest was just the culmination of their economic cynicism.

How poetic that the Tories entered office in 2010 with a 5% tax cut for the richest and now they close their grip on power with exactly the same move – slashing the rate paid by those on £150k from 45% to 40%. I’d call it Shakespearean if the criminals responsible for this injustice would get anything like their comeuppance instead of receiving well-paid jobs in the companies that they have just donated the country’s last pennies to.

The Bank has supported these poor decisions from the beginning to the end by keeping the money flowing whilst the government siphoned it away. The slow recovery up until the end of the Coalition government may have been justified their low interest rates but it certainly shouldn’t have stayed at rock-bottom 0.5% for the entire time. Inflation spiked at over 5% in 2011 and didn’t fall below the target rate of 2% until nearly 2014. Surely circumstances such as these would have required some monetary tightening but there was never any. The Bank was too nervous about austerity to even think about normalising the market’s supply of credit.

Indeed, the Bank didn’t stop at keeping rates at 0.5%. In the aftermath of the Brexit vote (and a collapse of the pound) they went even lower to 0.25% even in the face of inflation slipping back above 3%. They froze at the best of times, and they exacerbated the problem at their worst. I sometimes wonder what it would have been like to have a significant rate rise at any point in the 2010s. A higher return offered on the pound would have brought investment and opportunity to the UK in a world that had nowt but low rates. Saving would have been encouraged and inflation reined in.

I have covered the monetary mess of Covid in my last article and predicted the ‘troika-style’ bailout that the Bank of England has had to undertake as bond prices collapsed post-budget. I should have bought a lottery ticket that day – or maybe just shorted the pound.

Putting aside my crystal ball, in the aftermath of the pandemic we are seeing interesting, yet predictable economic trends emerge. The prevalence of ‘quiet quitting’ and early retirement is intrinsically linked to the Pandemic – nothing like an existential threat to make you realise that you might be wasting your life in an office job. The Bank’s policy during and after the Pandemic failed to account for these important economic consequences of the crisis. Interest rates should have reflected a much tighter labour market which pushes up wages as well as our aging population who are more reliant on savings. Yet interest rates stayed pinned to the floor for a perishingly long time as job vacancies and retirements grew, adding fuel to the fire of a wage-price spark. The spark has now become an inferno which has brought us a wave of industrial unrest and strained employer/employee relations.

Which brings us, dear reader, to the here and now. The last hurrah of economic conservatism is still echoing around the hallowed halls of Westminster as the country scrambles to make sense of handing £45bn that we don’t have to the richest people in the country. Like going into your overdraft to become a member of Jeff Bezos’ Patreon. In this confusing time, it is nice to see some consistency – the Bank has once again been caught completely off-guard.

The Bank has played a pathetic game of catch-up for a year, trying to stop the inflation that they themselves let out of the bottle. Ironically, the recent ‘toughness’ of the bank raising interest rates has been touted as a complimentary partner to a Liz Truss premiership – let the Bank worry about inflation and the government can use fiscal policy to ease the burden on the public. An idea that was thrown out of the window the Wednesday after the budget when the Bank stepped in to restart quantitative easing for long-term bonds as pension funds faced yet another crisis. Low rates created a bubble in government bonds which is now inevitably being burst by high inflation and rate hikes.

Time after time, when given the chance to shut off the taps and normalise the economy the Bank opted for the easy option of printing yet more money – a child’s idea of financial policy. Again, the Bank hadn’t the imagination, political will or frankly the backbone to seize this opportunity or even think outside the box when it comes to rate rises. When the Bank of England so slavishly acquiesces to government whims and public opinion, one wonders what the point of its independence was at all.

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