Friday, 16 December 2011
Corporate borrowing continues to contract
Quantitative easing was always sold as a strategy for supporting the UK economy. Bond purchases by the Bank of England would lower interest rates, and encourage credit growth and ultimately investment.
Quantitative easing has been an utter failure. Corporate sector bank lending slowed sharply with the onset of the crisis. Since 2009, private sector credit growth has been negative, which is equivalent to saying that firms have been paying their loans back. Furthermore, recent data provides no support whatever for the view that the corporate sector will again begin to borrow.
In a recent financial stability report, the Bank of England addressed this issue with some rather cute language.
"In the United Kingdom, bank lending to companies remained weak in 2011 Q3. In the case of larger companies, this contraction seemed to reflect weak demand for credit rather than credit constraints."
The Bank of England didn't address the question why firms were not keen to take out new loans. Well, I can provide an explanation. Rather than stabilise the economy, quantitative easing creates enormous uncertainty about the future. Firms understand the relationship between monetary growth and inflation. They see negative real interest rates, and expect massive macroeconomic instability in the future. This discourages them from investing, which in turn depresses growth.
Quantitative easing is not about promoting economic growth, it is about providing cheap credit to the government to fund its deficit. It is about providing subsidised liquidity to the banking sector. It is about penalising savers in order to subsidise borrowers.
The issue is not whether quantitative easing works. The last two years of economic data has decisively resolved that question. The real issues are how much longer the Bank of England will continue with this insane policy and how much long-term damage quantitative easing will do to the UK economy.