There is a new policy for growth in town – one that is neither particularly new nor likely to result in growth. Having conceded that contractionary fiscal expansion failed but not yet being ready to go for expansionary fiscal expansion, economic policy makers are trying their luck with ‘inflate and depreciate’. This is the mood music in Tokyo, Washington, London and even in Frankfurt.
Since the autumn of 2008, the Bank of England has pumped £375 billion into the economy – what has become known as ‘quantitative easing’ (QE). QE serves many purposes the chief of which is to guard against deflation. An important side-effect of QE, however, has been depreciation. The pound has lost 13% against its benchmark basket of foreign currencies and a full 25% against the dollar.
While initially thinking that the crisis could be conquered merely by withdrawing government and leaving the playground to the private sector, the Treasury is increasingly relying on exports to pull Britain out of stagnation. By making British goods more competitive abroad, QE-as-depreciator has an important role to play. And seeing that private sector demand is insufficient to grow the economy and thereby shrink the size of government debt as percentage of GDP, QE-as-inflator has the added advantage of reducing the real net debt burden.
So inflate-and-depreciate it is. In fact, unless the government radically changes its course and starts investing in the economy, inflate-and-depreciate is the government’s only policy for growth and debt reduction.