My Brilliant Economic Stimulus Plan - Improving Obama
Written by Alex Barrett Saturday, 11 February 2012 16:46
Next week kicks off with a major speech by American president Barack Obama, where he is expected to unofficially launch his own campaign for a second term in office while outlining his fiscal plans for the coming year.
Valentine's day will be marked, here in the UK with the release of January's official inflation figures which are widely expected to continue dropping as last year's price hikes (fuel and VAT) finally drop out of the system.
Average earnings numbers are released on Wednesday and if they remain at the anticipated 1.9% will mean that real earnings, in terms of spending power, for most wage earners will be lower than this time last year.
Mervyn King will, no doubt, do his best to obfuscate things with his quarterly outlook later on Wednesday from the Bank of England which be interesting to contrast with Ben Bernanke's view from the Federal Reserve in the United States where things are looking slightly brighter.
The week ends with January retail sales numbers which are likely to continue to show sluggish growth and the effect of milder weather at the turn of the year.
Political drama will be confined to the House of Lords next week as MPs are off on their half-term break and though a wide variety of subjects are on the schedule to be raised it, it is difficult to know which may grab the attention of the media; even the debates in the European parliament look unlikely to bring forth any major surprises.
Further to last week's blog and the mention that the next tranche of quantitive easing was to come, we learned this week that the Bank of England has "created" another £50,000,000,000 to further help stimulate growth in the UK economy. More and more commentators are becoming sceptical on the effectiveness of this policy.
It is failing quite simply because the money is not actually going anywhere useful. The money is used to buy up assets in the form of Treasury issued gilts. The Treasury is not issuing new certificates to match, which is the conventional method of money creation. Instead these assets are being bought from those willing to sell them, who indeed are becoming willing to sell them because of their deflating value.
The big owners of gilts are the pension funds, banks and insurance companies that are the major investors in the financial markets. They are not restricted to investing in the UK and so there is no reason for them to use the cash released by selling gilts to the Bank for investments in the UK.
For the major investment funds to preserve their value it is perfectly reasonable for them to invest where they are likely to get a better return and though some of it may be in the UK much will be in places where growth is already happening and returns are greater. The markets have no sense of loyalty or patriotism, surely that has been clearly proven in recent times to even the most stubborn economist or politician.
So what might be an effective alternative, could we give a little money to everybody?
Well, according to the electoral commission report on the state of our electoral roles there are 44.7 million people registered to vote in the United Kingdom. By the nature of the register the addresses of those people are also on file. So, theoretically, it would be possible to send each of them a cheque for £1,000. This approach was actually tried in the United States when Obama issued his stimulus checks in the form of tax rebates but sadly it did not turn the US economy around in 2008, nor in 2009 when it was repeated. Not only that but the Bank of England does not issue money for nothing, it requires assets in return.
What about really doing something to help us small business people?
In my opinion, there is an alternative that really could help stimulate the economy. There are (or were at the start of 2011) 4,332,565 enterprises in the UK with fewer than 10 employees. If each of these businesses was given a one-off grant of £10,000 it would total less than £44 billion.
How could such a scheme work?
Quantitve easing could not be used for this scheme, as that relies on the transfer of existing assets from diverse owners to the Bank of England. The Government would issue a new Treasury gilt at a very low yield rate in line with current growth predictions for the money to be created and then placed in Treasury coffers.
Getting the grants to the businesses is the hard part. Unlike the electoral role handout idea, it will be necessary for business owners to claim their grants and prove their eligibility which could be done by checking against HMRC records. Still, with a budget of just over £1,300 to administer each grant I am sure doable and still come in at under £50 billion.
What is more, as in the biblical parable of the talents there would be no quality assessment over how a business spends its money or whether it is viable (after all it will be a grant not a loan). It will not make incompetent business owners capable or foolish ideas anything other than foolish but it is far more likely, in general, that business owners would take it as not only a chance to make improvements in their business but help stimulate the wider economy too.
It could work you know...
Wick IT Services
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