By injecting new money into the economy, the government could create a more sustainable recovery, according to a campaign body calling for reform of the financial system.
Positive Money sets out an approach that it says could also reduce levels of debt in a new report, formally launched on Wednesday.
It argues that by encouraging consumers to borrow more from banks, in an attempt to fuel the economy with increasing levels of household debt with initiatives such as the Help to Buy scheme, the government is currently repeating the same mistakes that lead to the 2007/08 financial crisis.
This means the current economic recovery is unsustainable, the campaign group says, as household debt is growing faster than salaries.
The report says, “A sustainable recovery requires a lower private sector debt-to-income ratio. Yet since the crisis government policies have encouraged further private sector borrowing for unproductive purposes.
“Meanwhile, the government is attempting to reduce its own debt, seemingly oblivious to the fact that the UK economy is currently suffering from a crisis of private debt, not public debt.”
Ben Dyson, founder and director of Positive Money, added, “If we simply carry on as we are, the ever-rising levels of consumer debt that are ‘helping’ right now will soon strangle the recovery and lead to a crisis bigger than the one we are trying to recover from.”
As an alternative, the campaign proposes sovereign money creation (SMC) – a scheme in which the state injects new money directly into the economy, through government spending and tax cuts, holidays, or rebates.
“The pivotal advantage of SMC is that unlike the government’s current growth strategies, which all rely on an over-indebted household sector going even further into debt, SMC requires no increase in either household debt or government debt”, Dyson explained.
“In fact, SMC can actually reduce the overall levels of household debt. It would also make banks more liquid and the economy fundamentally safer.”
Positive Money argues that the Bank of England could easily begin implementing such a strategy, as the March budget empowered the bank to use “unconventional policy instruments” in efforts to aid the economy.
SMC is not a new idea. Lord Turner, the former chairman of the now-defunct Financial Services Authority, recently suggested a similar strategy under the name of overt money finance.
Such policies are often called “helicopter money”, because it is said to be equivalent to someone dropping money on the streets from a helicopter.
These policies are often feared – and for good reason, Lord Turner added – as they may risk hyperinflation, but he argued, “There can be extreme circumstances in which it is an appropriate policy.”
He stressed that any attempts to inject new money into the economy must be appropriately controlled, saying, “Strong disciplines and rules are…essential to ensure that excessive use does not turn [deficit financing] from a useful medicine to a dangerous poison.”