Growth is the antidote to stagnation – but it requires knowledge and leadership


Emile Woolf, Going Postal
HM Treasury
Carlos Delgado, CC BY-SA 3.0, via Wikimedia Commons

By now even Treasury officials and central banks recognise that their practice of Quantitative Easing has run its course. In its contemporary form, QE began a dozen years ago as a temporary emergency measure enacted by the US Federal Reserve to salvage its banking system from the devastating consequences of bailing out banks trading in worthless debts – and known by them to be worthless at the outset. As I have explained many times, these junk-debts were dressed up as “collateralised” loans, then fraudulently shuffled, sliced and wrapped in parcels of double-and-triple ‘A’ investment-grade securities, ripe for onward sale to any financial institution whose eminent auditors were paid not to look inside those parcels.

Counterfeit rules

Whenever demands on state coffers exceed what’s in them governments resort to counterfeit – whether by substituting alloys in place of silver; clipping the edges of gold coins; or simply printing money tokens that have no backing – and QE is no exception. It’s a little more sophisticated than alloy-substitution, and relies on the technology of financial engineering. But because government always spends beyond its means, it’s just plain old debt-creation: as proof, just read what it says (in barely legible print) on a £20 note: “I promise to pay the bearer on demand the sum of twenty pounds” followed by “London, for the Governor and Company of the Bank of England (signed) Sarah John, Chief Cashier”.

The economy’s entire money supply consists of debt in one form or another and, as Alasdair Macleod points out in a recent essay, that’s the mere tip of the iceberg: the flood of easy money increases risk appetite throughout the banking sector, generating repayment obligations with questionable collateral, ushering in credit conditions not reflected in money supply statistics.

Is the spending-addiction incurable?

The government’s inability to say “No” to any plea for more money – whether for higher public sector pay; inner-city projects dreamed up by local government bureaucrats; launching new “levelling-up” or “diversity” quangos; increasing foreign aid; or persisting with unwanted white elephants like HS2 – makes Rishi Sunak’s claim to be a fiscal conservative a sick joke. It’s far too easy for Ministers to go with the flow, and use the smoke and mirrors of QE to “monetise” the proliferation of extra debt. In plain language: the Bank of England “buys” that debt  with new money, created out of thin air.

Prof. Pat Barron has warned that the currency’s purchasing power is weakened every time the Treasury borrows more money than internal taxes and the bond markets will absorb. Therefore the PM’s aspiration for a balanced budget is fatally undermined by his own Ministers’ behaviour – their vote-seeking largesse will guarantee the onset of a money-market induced devaluation, not to mention the taxpayers’ revolt that always follows it.

Idleness stymies growth – result is stagnation

There are desperate labour shortages in every sector, demonstrating the futility of the government’s misdirected spending addiction. Brexit may have facilitated control of our borders, but all that has happened is the repatriation of thousands of willing and competent foreign workers – unmatched by any intelligent deployment of asylum-seeking immigrants. Instead, Home Office halfwits are installing them in hotels.

The number of people not working increases every month, and while this persists any serious move towards economic growth remains pie-in-the-sky. This year’s “virus” is the readiness of workers and unions to resort to strike action (despite feigning a will to “negotiate”), combined with post-Covid welfarism. Even the obvious fact that welfare must have been provided by someone else’s production – whether through taxation or charity – is a mental leap too far. Its predictable victim, of course, is the “will to work”. Even those theoretically “in work” may be only semi-employed, notably in the public services – a syndrome that follows entrenchment of the “working-from-home” malaise.

Civil service threatening to strike? Will the public actually notice?

If, for instance, the government doesn’t come up with more money, members of the militant Civil Services’ trade union are threatening to go on strike next month. Threatening strike action merely forces the public to re-evaluate the worth of these wasters. The Border Force strike over Christmas did not result in lengthy queues – just a better service when the army stepped in. These outcomes should be noted. Can’t politicians see that much of the work of border staff at airports could be dealt with by e-gates? But you can anticipate the outcry: allowing technology to supplant “our” jobs? That’s grounds for yet another strike. And no one in government has the guts to refer them to Schumpeter’s doctrine of “creative destruction”, which demonstrates that the jobs were never “yours” to begin with.

There are thousands of essential jobs that can only be done by human beings. Nursing and careworking requires personal dedication, discipline and emotional intelligence. Even mechanised  road-sweeping requires watchful supervision. Yet it is predictable that their union representatives will compare a 4.5% independently-calculated pay-increase recommendation with a cost-of-living rise of double that, and then yell about unfairness. Neither they nor their union representatives ever consider the spiralling impact of granting them an “inflation-matching” award – and the award that necessarily follows that one, and so on. The very idea of economic calculation is simply beyond their mental horizon.

The perennial remedy is always the opposite of what’s needed

It’s terribly simple – far too simple for academic eggheads in government. My advice to them would be this: “(i) When you think you need to raise more money, break the habit of a lifetime and don’t put up taxes; (ii) remove the obstacles that inhibit growth in the private sector and watch the tax base grow; (iii) now lower tax rates and watch the tax haul rise.

The Treasury’s approach is the exact opposite – and the result is the exact opposite too. Harbour Energy Plc, Britain’s largest North Sea producer, has just announced that last year’s windfall tax hike from 40 pc to 75 pc has forced it to consider axing hundreds of jobs to align itself with lower activity levels in the wake of the government’s tax regime. Another industry chief puts it simply : “these tax increases, and the threat of more to come, have made the UK a much riskier place to invest.” James Dyson, one of Britain’s most outstanding entrepreneurs, complains that his company now has to engage full-time staff just to deal with regulators. “This is as short-sighted as it is stupid” is his pithy comment.

There’s still hope

Despite the best efforts of our government to strangle growth with high taxes and still more regulation, the new generation of young innovators is proving indomitable. They are still creating real new businesses – 32,000 last year – and the FTSE 250 index of second-tier industrial, retail and financial public companies has outperformed its big brother, the FTSE 100, by a substantial margin. If you had invested £100 in this sector 20 years ago your stake would now be worth £550.

A glimmer of light may penetrate the gloom. The accompaniment to QE’s debt creation madness was the central bank’s policy of deliberately suppressing interest rates. Even this has at last been abandoned,  once again allowing capital to seek out lending opportunities at rates based on both risk and time-preference – rather than the Bank of England’s meaningless 2 pc target.

© Emile Woolf January 2023 (website)