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February 6, 2013 12:03 am
Lord Turner, the departing chairman of the Financial Services Authority has defended financing government spending by printing money arguing that, within limits, it “absolutely, definitively [does] not” lead to inflation.
Speaking before a farewell speech in London on Wednesday, Lord Turner, who applied unsuccessfully to be the next Bank of England governor, called for “intellectual clarity” in economic policy, including breaking a taboo that permanently printing money to pay for government services is always bad.
“I accept entirely that this is a very dangerous thing to let out of the bag, that this is a medicine in small quantities but a poison in large quantities but that there exist some circumstances, in which it is appropriate to take that risk,” he told the Financial Times.
The tool should have been used in 1930s Germany and 1990s Japan, he said. It should be considered across the world, he added, at a time when banks, companies and households are trying to pay down debts and seeking to return to growth by borrowing more is seen as perverse.
In a direct challenge to the German authorities who shudder at the memory of the hyperinflation of the Weimar Republic, Lord Turner suggested that the absence of monetary financing in the early 1930s, which led to depression, falling prices and the rise of the Third Reich, had been a greater disaster.
“Is [monetary financing] desperately dangerous because every pound of money financed turns into inflation? Absolutely definitively not. There is no coherent rigorous bit of economics that takes you in that direction,” he said.
He did add, however, that the country where monetary financing was least likely to be needed was the UK. There he accepts that more stimulus might lead to higher inflation as the underlying health of the economy is weak and could not “respond to demand and price signals”.
There exist some circumstances, in which it is appropriate to take that risk
Lord Turner was speaking before Thursday’s appearance of Mark Carney in front of MPs to be questioned on his plans for taking over as governor of the BoE in early July. Monetary financing of deficits involves the central bank creating money to finance a deficit permanently without having to sell government bonds. It goes further than quantitative easing, the favoured central bank tool of recent years, which entails creating money to buy bonds temporarily, and than a standard fiscal stimulus where governments borrow more to finance tax cuts or spending increases funded by additional debt.
The practice contravenes Article 123 of the European Union but Lord Turner believes that if demand continues to fall short, these legal niceties should be set aside. as monetary financing would be more effective than more QE or a fiscal stimulus.
Jens Weidmann, president of the Bundesbank, raised the spectre of the devil when discussing monetary financing, in September, reminding Europeans that in Goethe’s Faust, Mephistopheles persuades the heavily indebted Holy Roman Emperor to print paper money to solve his country’s economic crisis.
Lord Turner believes Germans such as Mr Weidmann should read his Goethe more closely. “This is all a matter of degree,” he said, adding “used in constrained amounts, even this extreme policy could be favourable”.
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