I got an email from my fellow blogger Anson Burlingame today, and I want to thank him for inspiring this post. He drew my attention to a new development in the U.K.’s part of the global financial crisis.
Calling this “. . . the most serious financial crisis we’ve seen, at least since the 1930s, if not ever”, Bank of England head Sir Mervyn King appears to be sounding the alarm as the Bank’s Monetary Policy Committee, in their own Quantitative Easing 2, decided to add 75 Billion pounds of new money to the British economy. Anson believes that the U.K., like the U.S., is ignoring the real problem, which he says is the debt itself. He calls it the “cliff”. His solution? He said,
It is the DEBT, stupid and we all know how to get out of debt. Work harder, live frugally and pay the damn debt down or even “off”.
While I agree that Anson’s “cliff” is a serious problem, I do not agree with his solution. I wish it were that simple, but it’s not. Economics is not simple. If the national debt were like family finances, that would be a proper approach, but again, it’s not. I don’t know how many times I can point it out without it penetrating, but a national economy is a feedback loop. If we were to take the “hunker down, work hard and pay it off” approach, we would be sure to slide into another deep recession and maybe even depression. Jobs are indeed the key, Anson’s denial not withstanding. Jobs generate more jobs, and so on.
Now why is it that nobody on either side of the pond is dealing with this by simply hunkering down to pay it off? I searched for other articles on Sir Mervyn’s comments because the link wasn’t clear to me as to what he meant. Was he complaining about the QE2 decision or saying it was the wrong approach? It turns out that it is he himself who is pushing the U.K.’s QE2, and that amounts to “priming the pump” with money. That’s what Bush II did after the housing crisis and that’s what Obama was forced to do when Bush’s efforts were seen to be failing. They were following the advice of the experts because hunkering down would just make the problem worse – that’s the Herbert Hoover approach. Been there, done that.
Should the budget be balanced and the debt paid down? Absolutely. But as Sir Mervyn said,
“We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”
Hunkering down and ignoring jobs would be panic and not doing the right thing. And we should also remember that paying off a national debt of some 15 Trillion dollars is not a short-term exercise. Even with a good economy, that could take decades. So, how do we begin? We do it like Confucius said:
“A journey of a thousand miles begins with one step.”
But in the meantime, we need to worry about jobs. Without jobs an economy is simply circling the drain into financial oblivion.
The U.K., by the way, is worse off than we are. Their inflation is running at 4.5% whereas ours is a little lower at 3.7% as of last August. (The difference is attributed to energy costs.) Inflation is the principal concern when infusing money into the economy. For more on this and for a balanced, non-panicky review of the effects of Quantitative Easing in the U.K., please consider the purple box at the bottom of the article in this link.