UK: Deloitte Monday Briefing: The Helicopter Money Question

Last Updated: 29 October 2012
Article by Ian Stewart

Most Read Contributor in UK, August 2017

* Last week's GDP figures show that the UK economy has emerged from recession. It grew by 1.0% in the third quarter, the fastest quarterly pace in almost five years and a stronger reading than expected.

* However, stripping out the effects of one-off factors such as the Olympics, growth was closer to 0.3% - still positive, but hardly strong.

* Immediate prospects for the UK economy are mixed. The consumer sector is showing signs of growth. But the economy faces strong headwinds - from the euro crisis, the squeeze on public spending and a fragile financial sector.

* Earlier this month, Lord Adair Turner, chairman of the UK's Financial Services Authority and a leading candidate to be the next governor of the Bank of England, raised doubts over growth the pace of the UK recovery. He warned that the process of debt reduction for businesses, households, banks and the government could depress growth for many more years.

* The question that policymakers continue to grapple with is what, if anything, can be done to boost growth?

* Lord Turner's believes that the stimulative effects of quantitative easing (QE), may already be waning. He advocates more radical monetary policy and hinted that the government should consider cancelling government debt acquired by the Bank through QE.

* This is a very radical step, one which blurs the line between monetary and fiscal policy. The eminent monetarist economist, Milton Friedman, likened such a policy to dropping freshly-minted money from a helicopter.

* In a speech last week Sir Mervyn King, the outgoing governor of the Bank of England, acknowledged that the beneficial effects of QE have probably diminished.

* However, Sir Mervyn rejected the notion that the Bank of England should write off government debt. He warned that such policy would prevent the Bank from reversing the current expansionary policy when the need arose – and by doing so it would damage the Bank's credibility and risk higher inflation down the line.

* There is an even more fundamental difference of opinion at work here. For Sir Mervyn advanced economies may have to accept more subdued economic growth as the price to be paid for a necessary adjustment in asset prices and private sector debt. Lord Turner, by contrast, believes that more radical monetary policy could help boost growth.

* Keynesian economists, such as the Nobel laureate, Paul Krugman, also subscribe to the idea that more can be done to support growth. For Keynesians debt-financed government spending holds the key. Most Western governments, by contrast, are focussed on reducing debts and trimming public spending. Yet it is a sign of the times that even the fiscally orthodox IMF has recently suggested that the UK government could slow the pace of spending cuts in order to bolster activity.

* Outright cancellation of government debt or a shift to growth through public spending are very radical options. The current policy consensus rules out such options out and believes that UK growth is likely to be slow and choppy for quite some time to come. As Sir Mervyn King noted last week, "there are no short-cuts to the necessary adjustment in our economy".


The FTSE ended the week down 1.5%, partly as a result of concerns about slower growth in corporate earnings.

The following news stories caught our eye. We think they reflect noteworthy themes:


* The UK economy emerged from recession in Q3 growing by 1% over the previous quarter – recovery

* University College London has won initial approval for a £1bn development of a 23-acre complex in east London next to the Olympic Park. The site will double the space occupied by the elite higher education institution – growth sector

* Manganese Bronze, maker of London's black cabs since 1948, went into administration after continued losses and a safety recall of its TX4 model – black day for cabs

* The European Commission shelved a proposal to force companies to ensure that at least 40% of their board members were women by 2020 – regulation

* Bertelsmann and Pearson are in talks to merge their publishing businesses, Penguin and Random House, in a strategic response to the fast-growing ebook business – digital revolution

* Russian oil giant Rosneft made a $55bn offer to buy TNK-BP from BP and its Russian partners in the venture – M&A

* Chinese manufacturing activity rose in October in a sign that the slowdown in China may be bottoming out – soft landing

* The French government announced an aid package for carmaker Peugeot Citroën, providing its financing unit with €7bn in bond guarantees – corporate distress

* Ford decided to close a factory in Belgium as its car sales in western Europe hit a 20-year low – corporate distress

* Samsung, the world's largest technology company by sales, reported record net profit for the third quarter due to strong demand for its smartphones and flat panels – digital revolution

* The US Department of Justice filed a $1bn civil lawsuit against Bank of America for alleged misrepresentation of risk on loans sold to mortgage companies – greater oversight

* Swiss bank UBS is to cut 10,000 jobs in a corporate restructuring designed to effect a further reduction in its risk-weighted assets – new banking

* South Korea's economy grew at its slowest pace in three years in the third quarter as the global economic slowdown hit exports – slowdown

* Standard and Poor's downgraded its credit rating for France's biggest bank BNP Paribas by one notch to A+ citing economic risks – economic uncertainty

* The Palaiopyrgos football club in the Greek city of Trikala have had to sign a deal with a funeral home to keep themselves going as they were unable to secure any other sponsorship since the euro crisis began – crisis league

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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