Putting the genie to work

The genie is being readied for release. Hedge managers want the Bank of England to create some inflation. The incoming governor of the Bank is known to be sympathetic to a more active central bank stance, and the Chancellor will surely succumb to the printing press as election looms. Prepare for new, bigger doses of money to be injected into a moribund economy.

Result? Maybe some recovery, perhaps some relief for the indebted. But those benefits come with the inevitable downside: higher inflation, especially for essentials; rising housing costs; a depreceation of the currency. Oh – and rising asset prices, as the new money creates a one-way bet on rising equity prices. The bubble economy was created by loose money, so we use it again to get out of the resulting crash?

For sure, the case for some sort of short-term demand stimulus is becoming undeniable. But the differences between fiscal and monetary policy have not been rendered completely meaningless. Monetary policy = central bank creates money and gives it to the banks; fiscal policy = government borrows money to spend itself. The latter must be less likely to return us to the madhouse casino economy of the last decade.

At the very least we need a mix of long-term public/private infrastructure investments coupled with some immediate demand stimulation. The question is what should the ‘shovel ready’ projects be? Why not make them in cultural venues, urban renovations and environmental schemes as well as – even instead of – the usual suspects of road and rail?

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