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Sir Mervyn King Rules Out Printing Money to Fund Spending

by Dave

The governor of the Bank of England, Sir Mervyn King, has completely ruled out the idea that the Bank should begin printing money in order to fund public spending. He said that doing so was not only impossible to reverse, but was akin to throwing money from a helicopter and hoping it fixes the economy.

The Bank has instead been following a program of quantitative easing (QE), wherein it buys government debts from banks, who then use the extra capital to fund their own lending programs. This policy is not without its critics, however, who believe that the banks are failing to increase their lending and are just sitting on the cash instead.

Another suggestion was to cancel the government debt from the loans which the Bank now holds, effectively allowing repayments for that to go to public spending instead. Both of these propositions seem enticing to some quarters, as direct public spending has proved an effective way of kickstarting the economy in the past.

The suggestion of giving the cash directly to public spending came from Lord Turner, a regulator in the City who has accused the bank of having too much influence, and Sir King seemed to reference this directly in his put down speech: “‘It is peculiar, to say the least, that some of the same people who believe that the governor of the Bank is too powerful also believe that he should stand on the steps of Threadneedle Street distributing £50 notes – a policy which you appreciate is rather hard to reverse. For the same reason, the Bank could not countenance any suggestion that we cancel our holdings of gilts.”

The other reason that Sir King gives is that creating money like this would massively increase inflation. However, QE also has a big effect on inflation, and some are pointing out that it might be time for the Bank to try something new after all.

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