7 Aug 2012

Silver Lining?

The Financial Times is reporting today that the repayments from mis-sold payment protection insurance (PPI) is acting as a fiscal stimulus by putting money into people's hands. The amounts are considerable with £4.8 billion paid out to May 2012, and £9 billion set aside. Since the money, amounting to about 1% of GDP was likely to be spent it amounts to increase in demand that may have an appreciable effect on GDP. Though I would add a note of caution that the economy is actually still shrinking at present, so the effect is not a magic cure.

As the FT says "The government’s own schemes to stimulate demand, meanwhile, have yet to have any demonstrable effect." The obvious problem with the government's plan is that they are giving money to the banks who have used it to deleverage (improve their debt to asset ratios) rather than investing in the real economy. Banks continue to be skittish about lending money in an environment they polluted to the point of toxicity with easy credit. But more than this as Richard Koo says, everyone is busy minimising debt rather than maximising profit, so demand will be low.

I think this helps to make the case for debt relief, for Steve Keen's modern debt jubilee. We need to stimulate demand by putting money into the pockets of people. But we should not do this randomly (as with the PPI pay outs) and we should avoid punishing the prudent who saved money. By giving money to everyone and requiring them to pay off debts first we'd get a lasting stimulus to demand because not only would people spend the handout, but there would be less debt to service and more disposable income over the longer term. There are 50 million adults in the UK.
£1 per person = £50 million
£10 pp = £500 million
£100 pp = £5000 million or £5 billion
£1,000 pp = £50 billion (the most recent round of QE was £50bn)
£10,000 pp = £500 billion (a bit more than all of QE to date)

The more QE we do the higher the risk of inflation, and with interest rates already at 0.5% there is little more the Bank of England can do to deal with inflation. It also hurts import businesses as the money they use to buy overseas goods is worth a little less. This might not be a bad thing for the economy though since we need to stimulate demand for local goods and services. Though on the down side we buy most of our oil abroad and quite a lot of our food and prices of both are high and rising because of factors beyond our control.

I think on balance I'd opt for giving every adult in the UK £2000 with the proviso that it be used to pay off debts if people have debts. Administering it might be a nightmare, and costly, but I'm sure the civil service can come up with something.

No doubt the Chancellor reads the FT. But he's so ideologically blinkered that he's unlikely to see the value in the PPI payout stimulus, or that his own measures have achieved nothing. But maybe members of the next government will be paying attention?

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Keep is seemly & on-topic. Thanks.