UK Bubble UK Economy

Simple question; if quantitative easing is working then why are UK companies paying back their bank loans?

Since 2009, the growth of bank lending to the UK corporate sector has been "negative".  Loan repayments are greater than new credits.

If quantitative easing is supposed to support the private economy, then we should expect companies to be investing in new plant and equipment.  The idea that was used to sell QE was that commercial banks would sell the Bank of England bonds, receive newly minted cash and then extent that liquidity as new loans to the private sector.

The chart above tells us that isn't happening. Instead, the corporate sector is being starved of new credit and the UK economy is stagnating.

Why are firms repaying their loans?  I will take a wild guess and suggest that it is complex mix of demand and supply factors.  Firms aren't demanding loans because they fear for the future.  When central banks print money, inflation is sure to follow, and interest rate policies are likely to be more erratic.  Anticipating a chaotic future, firms prefer to pay down their loans to minimize their exposure to higher interest rates and macroeconomic instability.

Banks are wary of lending to firms.  They, too, see the same future private sector firms do.  They are reluctant to extend credit to a private sector that will struggle when the full consequences of QE are brought to bear upon the beleaguered UK economy.

If supporting the private sector was the objective of quantitative easing, then it has manifestly failed.  It is time to put a stop to this ridiculous policy.

It doesn't matter what statistic one cares to look at, the story is the same; over the last four decades, the traditional family as an institution has imploded in spectacular fashion. Take, for example, the snapshot illustrated in the chart above. In 2011, single-parent families now account for one in four households with dependent children. The structure of UK households has changed in other radical ways. Female fertility has declined sharply since the early 1970s. Family size has fallen. Many adults have foregone the joys and tribulations of procreation. Increasingly, people are living alone. The family is no longer the cornerstone upon which modern Britain is built.

Nevertheless, modern Britain seems remarkably relaxed about the destruction of an institution that existed since our forebears jumped from the trees and started the long journey out of the African Savannah. These days, people prefer to avoid making any firm connection between family breakdown and a plethora of other indicators of social disintegration. For example, it would be a brave politician that linked the four decades of rising crime rates with family breakdown.

Modern Britain is also reluctant to acknowledge a more obvious cost of family breakdown; the one that appears in our wage packets and can be found in the government accounts. The vast majority of single-parent families depend on welfare payments. Likewise, a huge proportion of pensioners depend upon the state pensions rather than their families or past savings.

To put it more bluntly, as the family as an institution was being flushed down the toilet of history, the government became mummy and daddy, dutiful son and devoted daughter to an increasing number of people.  Welfare payments, as any tax payer knows,  are a claim on resources created by people who work and pay taxes.   In the past, the young and the old would have depended upon family-based social safety nets. The cost of rearing children and taking care of the old would have been internalised within families.

Let us put some cold hard numbers to the cost of family breakdown. Social Security payments are currently running at about 12 percent of GDP. Total government revenues are about 36 percent of GDP.  So, one in every three pounds paid in tax goes to welfare payments.

Absent any significant welfare reform, this number can only increase as the population rapidly ages. We might save a little on lower education expenditures. Fewer kids mean less teachers. However, pensioners are more expensive than kids. Apart from the occasional sniffle and cracked head, children tend to be quite healthy. Pensioners are exceptionally expensive.  Furthermore, child-rearing has not yet been fully nationalized. Some kids are still found in two parent working families, defraying at least part of the cost of producing the next generation of tax payers.

For some time, Britain has been trying to wriggle out of paying for ever increasing welfare payments. Rather than demand higher taxes, the government has borrowed to cover the rising cost of welfare.  For virtually every year since the early 1970s, government expenditure has been higher than tax revenues received. There is now a large unpaid debt stock sitting in the UK treasury.  The message from this generation to the next is a cheeky one. We expect the declining cohort of future tax payers to cover the tab for our liberal experimentation.

The really frightening thing is the future. The children of today may wonder why they should provide taxes for people they do not know, for whom care nothing, and who left them with a debt to GDP ratio of at least 100 percent. They might think that the time for fundamental welfare reform is long overdue. When that happens, who knows; Britain might need to invent a social institution where fathers and mothers live together and earn money to provide for their children and when those children grow up, they take care of their parents.

In today's FT, Gavyn Davies confidently predicted that the Bank of England would again turn on the printing presses:

The Bank of England meets on Thursday with expectations running high that the MPC will announce a further large dose of quantitative easing. Even if they pass this month, which seems possible, this is likely to be only a temporary postponement. Whenever it comes, the next move will be another bout of “plain vanilla” QE, involving the purchase of £50-75bn of government bonds, and taking the overall Bank of England holdings to over one third of the total stock of gilts in issue.

Moreover, the former Goldman Sachs Chief Economist thinks QE has worked:

(T)the growing consensus among central bankers is that their experiment with QE is still working. It was a shot in the dark, and a rather desperate one at that. But up to now it has had the desired effect, which is certainly a far better outcome than the alternative.

We are four years into this crisis and UK real GDP is about 15 percent below trend. The recovery from the downturn has been the slowest in over 100 years. That appalling record might extend further into the past, but economic data beyond 1900 becomes too unreliable to say. Nevertheless, the Bank of England and dubious former investment banker types like Davies think that printing money is the road to economic prosperity.