Hi 

I am grateful to my accountant colleague Richard Murphy for an excellent piece he wrote on his blog this morning in which he said:

"There is, though, another factor to consider. This is the fact that there is an almost inevitable, and entirely human, reaction to crisis, which is that people begin to save quite significantly during and in the aftermath of crises. This is what Keynes called the 'paradox of thrift'. Once we have survived the initial onslaught of a crisis, which the end of lockdown will represent to many people, we then, quite rationally move to a position of trying to protect ourselves from the next attack. Economically this means that we save. Many of those who found themselves exposed to considerable financial risk as a consequence of what has happened, and have a continuing income, will not suddenly begin to spend again: instead they will build reserves to ensure that their chance of surviving another downturn is improved.

I am not in any way condemning anybody who saves in this way: it is an entirely personally logical thing to do. But, as Keynes pointed out, whatever might be logical individually does not necessarily represent the best course of action for society as a whole. And savings always withdraw money from the economy. The consequence is that the money in question is not used to purchase new goods and services. This, then, exacerbates any downtown that we will suffer as a result of unemployment and the loss of capacity within the economy, and produce an increasing downward spiral potential economic difficulty.

Keynes great contribution to economics was to suggest that the only way in which such a downward spiral can be broken is by government intervention. By necessity, government has to spend to stimulate demand in such a situation. Nothing else can begin to reflate the economy when this happens, excepting war."

I am in no doubt that Richard is correct in what he says and that any stimulus must be planned to occur over a very long period if we are to recover from this crisis. We are talking in terms of years, and not months, and of massive amounts. The only way in which this sort of stimulus can be provided is by direct monetary funding (DMF) of government spending by the Bank of England which has just been announced:

This morning the FT has reported that:

“The Bank of England will directly finance the extra spending needs of the UK government on a temporary basis, the government announced on Thursday, allowing the Treasury to bypass the bond market. The move highlights the extraordinary demands on cash the government has experienced in recent weeks, which it feels it cannot finance immediately in the gilts market.

In a statement to financial markets, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility,” which normally stands at just £400m. This will rise to an undisclosed amount, allowing ministers to spend more in the short term without having to tap the gilts market. In 2008, a similar move saw the Ways and Means Facility rise briefly to £20bn.

This direct monetary financing of government would be “temporary and short-term”, the Treasury said in a statement.”

I wouldn’t worry too much about it being “temporary and short-term”. The national debt was also temporary in 1694 and we have had it ever since.

Stay safe

Noel Guilford