Peter Warburton – May 6, 2021

In Russia, and elsewhere, profits are earned (and more often, not) strictly by state permission. Since the global financial crisis, this has also become true for many financial institutions in the West.  The pickup in private credit demand, the widening of net interest margins and the release of loan loss provisions that we associate with economic upturns have proved patchy and weak, while the legacy costs from the crisis – write-offs, penalties, fines, restitution and legal costs – have expanded in scope, scale and duration. Banks have largely abstained from mainstream credit intermediation, with respect to households and enterprises. Recognising that banks would not voluntarily provide the assistance needed to survive lockdowns, the state has taken the matter of credit creation into its own hands, guaranteeing bank loans and borrowing on its own account. Rapid broad money growth is a manifestation of the de facto nationalisation of new credit.

Recently, I added my name to a Shadow Monetary Policy Committee letter (figure 1) that was published in the Financial Times on 20 April. The letter stressed the significance of double-digit monetary growth for the inflationary outlook and the role of the Bank of England in bringing this about, via the expansion of its asset purchase programme.  The letter could be read as a reassertion of the monetarist proposition, but this is clearly not my position. So why did I sign up to it? 

Quite simply, because the Bank of England has endorsed a massive increase in public spending and borrowing. The headline story is the re-emergence of the state as the dominant economic actor. The acquiescence of the central bank to the expansion of state credit creation is a secondary issue, but a highly significant one at that. Acting in collusion, the US administration and Federal Reserve, the UK government and the Bank of England, the Canadian government and the Bank of Canada – among others – have subverted the monetary framework to their own ends, declaring force majeure in the face of the pandemic. 

If the source of rapid monetary growth had been an expansion of credit to households, for mortgages and consumer credit, and to businesses, for working capital and investment, then the central banks would have moved quickly to tighten credit conditions. Because the source of credit creation is the public sector, then central banks have been compromised in their response. If they are seen to tighten too much or too soon, they will be vulnerable to political abuse and general indignation. In March, the Bank of Canada announced its plans to taper asset purchases but how long will it be before the Fed and the Bank of England dare to follow suit? 

Bank stocks – and financials in general – have begun to reverse their long sequence of market underperformance (figure 2) as the vaccine has started to get ahead of the virus in US, UK and Canada. But, please be in no doubt:  the financial sector will grow its profits in 2021-22 only by state permission.  Rest assured, the state will be ready with a windfall profits tax should things start to get out of hand.

Figure 1

Letter to FT: BoE must end its asset purchases to avoid stoking inflation

We are a group of economists shadowing the Bank of England’s monetary policy committee and we write to express our concern about the rapid growth of the quantity of money. We believe that above-target inflation is to be expected in 2022 and perhaps 2023. In our view, the Bank of England will be to blame for this setback, as it took the measures that have pushed money growth to its current excessive level (Opinion,, April 1).

Bank of England researchers deserve praise for preparing a money aggregate (the so-called “M4x”) which measures money held by genuine non-banks and cuts out the often-distorting influence of quasi-banks or “intermediate other financial corporations”. However, the MPC’s key decisionmakers appear to pay insufficient attention to their excellent data. In the year to February, M4x increased by 15.2 per cent, much the highest figure since the start of the M4x series in 1998. Other money series have been prepared on a consistent basis since 1963. One such series shows that companies’ increase in money balances in the year to February was no less than 29.2 per cent. Numbers as high as this have been previously recorded only in the inflationary 1970s and 1980s. The last time an annual growth rate of company money reached 30 per cent was in late 1986, ahead of the boom years of 1987 and 1988.
We fear that inflation above 5 per cent is likely at some point in the next few years. We judge that the MPC’s decision in November 2020 to embark on another round of quantitative easing, to the tune of £150bn, has proved particularly responsible for the current excessive money growth. The November decision was misguided and unnecessary and should be reconsidered. The BoE should now end its asset purchases at the earliest opportunity.

Professor Tim Congdon
Chair, Institute of International Monetary Research, University of Buckingham
Julian Jessop
IEA Economics Fellow
Andrew Lilico
Europe Economics
Professor Kent Matthews
Cardiff Business School
Professor Trevor Williams
St Mary’s University
Professor Philip Booth
Director, Vinson Centre, University of Buckingham
Juan Castaneda
Institute of International Monetary Research, University of Buckingham
John Greenwood
Chief Economist, Invesco
Professor Patrick Minford
Cardiff Business School
Peter Warburton
Economic Perspectives

Figure 2