Comment

Rely on QE and lockdown will never end

It is the most dangerous economic policy of our lifetimes... and it has gone into overdrive

“What I know is support we’re providing will protect millions of jobs,” declared Rishi Sunak in the Commons last week, extending the furlough scheme to March 2021. “What I know,” said the Chancellor, “is that it’s never wrong to convey confidence in our economy.”

Now Britain is back in full lockdown and the Government has extended UK-wide employee support for five more months. Having tapered as lockdown eased over summer, we’re reverting to the more generous scheme announced in March 2020 ­– covering 80pc of gross wages capped at £2,500 per month.

The initial coverage of Sunak’s announcement rightly focussed on what it means for individual workers – and that, had it been announced earlier, thousands of recent redundancies may have been avoided. There’s been political analysis, also, of “cabinet splits” and “U-turns”. And these support measures will cushion fallout from a “No Deal Brexit” in January, should the UK and the EU fail to agree.

There’s been little focus, though, on the absolutely enormous cost of this furlough extension, and lockdown more generally. It’s an issue on many peoples’ minds. “Where is this money coming from?” as the magnificent Maureen from Barnsley put it a couple of weeks ago, quizzed by a TV news reporter while out shopping. “How are we paying for all this?”

From the start of lockdown in March to September, the state borrowed £264bn – taking on debts, over six months, amounting to five times what the government spends on schools in an entire year. Our national debt topped £2,000bn, rising above annual GDP – a first in our peacetime history. And now, with this pledge of five more months of furlough, government borrowing is set to spiral once more.

In the aftermath of the 2008/09 financial crisis, the Bank of England announced £50bn of quantitative easing – a “temporary, emergency measure”, after years of inadequate regulation, to ward off a banking collapse.

But QE boosted share prices and, when the money created ex nihilo was used to buy government bonds, helped the state to borrow cheaply.

Powerful City institutions and ministers liked that – so the programme carried on, ballooning eight-fold. By the end of 2019, QE had reached £425bn, with the Bank of England owning around a third of the UK’s entire stock of government debt.

After lockdown, though, QE surged again to £725bn, expanding more over six months than during the previous eight years.

Without Parliamentary debate and barely any press scrutiny, the UK’s central bank has, throughout this pandemic, been buying gilts twice as fast as during the aftermath of the subprime collapse. And now, with lockdown renewed, QE has expanded even more.

While official estimates are sketchy, this new furloughing scheme will cost around £7bn to £8bn per month. The overall support package “to protect lives and safeguard jobs”, says Sunak, is worth over £200bn.

On cue, the morning after the Chancellor took the plaudits for his new furloughing scheme, the Bank of England announced another £150bn of QE, taking the overall programme to no less than £875bn.

Since March, our central bank has committed to “printing”, creating from nowhere, more than three times what we spend on the NHS in an entire year – with the Bank on course to own almost half the entire stock of UK public debt.

QE is by far the most dangerous and controversial economic policy of our lifetimes. Since lockdown, it has gone into overdrive. The historic precedents of what we are doing are clear and undeniable. And the lack of discussion and transparency surrounding this policy is utterly mad.

Those who criticise QE are routinely dismissed as part of an “awkward squad” – and I should know. As so often in the midst of massive misjudgements, those who speak up are attacked personally, and not for the substance of what they say.

So, no matter that QE has, since 2009, made the asset-rich even richer while related ultra-low interest rates have punished ordinary savers and those living on meagre pensions. No matter that central bank bond-buying has kept capital locked up in over-indebted “zombie companies”, while starving smaller, more dynamic firms of cash ­– driving down productivity.

Who cares if we’re stoking up international tensions, as countries try to “out-QE” one another, sparking “currency wars” for the first time since the 1930s? And so what if financial markets across the Western world have lost their ability to “correct”, with investors becoming more and more reckless amid sky-high valuations – setting us up for collapse?

After all, lots of well-connected financial types are getting very wealthy due to QE. And, as history shows, when markets implode, currencies collapse and interest rates spike, it’s the poor who suffer most.

QE hasn’t led to inflation, its acolytes say. To claim that is either clueless or disingenuous. The first wave of QE was basically an asset-swap, with the new liquidity staying within the banking system, rather than seeping into the real economy. So the inflation has been in stock and bond prices, both deep into global bubble territory – and, to some extent, real estate too.

What’s happening now, under cover of Covid, is different.

The Bank of England is, to all intents and purposes, buying gilts directly from the government – albeit using the secondary market to claim it’s avoiding outright “banana republic” style money-printing.

This new liquidity, though, hundreds of billions of pounds of it, is now being sent directly, via the Government’s furlough scheme, into the bank accounts of the broader population.

This amounts to “Modern Monetary Theory” – the crackpot set of ideas, promoted by advisors to Bernie Sanders and, increasingly, Joe Biden, that claims governments can spend without limit, and only immoral people could possibly object to that. It may be no coincidence this absurd school of thought has the same initials as “Magic Money Tree”.

The Government is clearly in a tough position. But so-called QE-infinity, just because “everyone else is doing it”, is emphatically the wrong answer.

It will end in inflation, a currency collapse and broader financial turmoil. And, what’s more, if we can “just print money”, and lockdown can be endlessly financed, then lockdown will never end. That’s what I know.

Listen to Liam Halligan and Allison Pearson on The Telegraph's weekly Planet Normal podcast on the audio player above, Apple Podcasts, Spotify or on your preferred podcast app.