Stopping The Recession

07 January 2009 - Stopping the recession

Two leading economists namely Tim Congdon and Gordon Pepper have jointly written a piece in the Daily Telegraph setting forth a theory on how the current recession can be stopped. If they are right of course it would have enormous favourable significance for the businesses about to fail and the perhaps one-and-a-half million workers in the UK alone likely to lose their jobs before 2009 runs its course. Their thesis therefore merits serious attention. The key is money supply and what this diary has referred to frequently as quantitative easing.

The two economists point out that in the years 1929 to 1933, the quantity of money available in the US fell by 40%. The quoted source is A Monetary History of the United States by Milton Friedman and Anna Schwartz. The virtual halving of bank deposits meant that rich people had too little money in their portfolios and so sold stocks and shares to balance out. These sales, it is claimed, merely altered the distribution of money between different investors. Some sort of balance between non-monetary assets and the reduced amount of money was restored only by a crash in the price of shares, real estate, farmland and so on, with catastrophic impacts on demand and output (sounds familiar?). One lesson is that the growth rate of bank deposits must be moderate and steady. However, since 2006 a large and violent fluctuation in growth has occurred, up 15% in 2007 and down 5% in 2008. Congdon and Pepper claim that this lurch from easy monetary conditions to liquidity squeeze has been an important causal influence on the economic downturn.

The answer is not what is being proposed in the UK, that is new credit to the private sector. Rather it is for the Government itself to borrow from the banks and in so doing increasing the quantity of money in the system. "Civil servants can then write cheques to the Government’s suppliers and add to the quantity of money" The amount suggested is between £50bn and £100bn and in early 2009. This diary has warned of the dangers of printing too much money but maybe the two wise men have got their sums right. The big question is, will it happen for the UK? It is certainly being done elsewhere.