In this column on 21st June Inflation -3 (desmondswaynemp.com) I expressed my concerns that that the Bank of England was in danger of causing a recession by driving interest rates too high.
I have always believed that the real source of inflation was disproportionate growth in the quantity of money relative to the goods and services available for it to buy. Money, like any commodity, has a value inversely proportional to the quantity available of it. It was for precisely for this reason that primitive societies quickly abandoned experiments using seashells as a form of money.
Since the banking crisis of 2008 we have increased the quantity of money by 50%, with half of that increase taking place in response to the Covid pandemic since 2020.
It is quite technical, but the increase was almost exclusively engineered by the Bank of England’s policy of quantitative easing, euphemistically referred to as ‘printing money’ but, in reality, buying up debt in the form of corporate bonds to make credit readily available.
It was almost as if we had become addicted to it: it went on for years
The purpose of the policy was to prevent the economy going into recession following the banking crisis and then the pandemic, but it just kept being extended.
Many companies which, in ordinary circumstances, would have folded when their business models no longer responded effectively to changing consumer demand, remained afloat and were kept alive on cheap credit. In a properly functioning market they would have been liquidated and their resources would have gone into more productive enterprise.
Though, I quite understand the Bank of England’s motive in seeking to avoid recession, the task that it was primarily charged with was the control of inflation. My belief is that, on the contrary, its monetary expansion was the principal driver of inflation.
Now however, after putting the policy into reverse with a bout of ‘quantitative tightening’ -selling so many of the bonds it had earlier purchased – the money supply growth is firmly back under control. This should, after a time lag, bring inflation down. After all, it took a considerable time for inflation to result from the earlier monetary expansion.
The danger now is that, by continuing to raise interest rates, the Bank of England, is making mortgage holders and debtors so much poorer, which will drive the economy into recession quite unnecessarily, instead of waiting for the monetary contraction that it has lately engineered, to take effect.
It is very frustrating to watch, but politicians gave up control of monetary policy to the Bank of England with Gordon Brown’s reforms in 1997. Perhaps it’s time to take back control