I made a rare visit to London yesterday. It was only my second since March 2020. All present agreed that as we reluctantly accepted we were older people we might not be visiting again for some time: 19 July represents an at least partial return to lockdown for all of us. The behaviour of those at Wembley is a very obvious threat to those who know that Covid is a real risk, as is the case for anyone over 60.
Being a bunch of economists, this was, of course discussed. This is, of course, a personal reflection on the conversation, which was also framed by football, racism, a government clearly in panic and to a large degree out of control on Covid, and the impact that all this is having on the swirling cauldron of sentiments now apparent in politics.
There were a number of points of agreement. A sweepstake on when interest rates might rise proved to be a waste of time. No one thought it likely before 2025, and it’s not clear why it could happen then given the massive over-gearing within the private sector economy meaning it has almost no ability to afford such rate rises, which many younger people (in particular) are simply unaware of as a risk, and for which they have no margin for tolerance as a result. In effect, there was a consensus that conventional monetarism is dead.
There was also some agreement that unconventional monetarism is also dead. That is QE, of course. I do, however, have to be clear as to what I mean. The logic of QE for central bankers is that they have the right to unwind this process. As we, however, agreed, there is no foreseeable situation in the UK where this is likely. The government is going to run deficits for a very long time to come. The economy will be vulnerable. Bank lending without government guarantees to businesses that are massively undercapitalised is likely to be low. New government injections of cash look like they will be required for years. Reversal is unimaginable.
That gave rise to another agreement. Central bankers are not independent in this case, and the pretence that they are should be dropped.
That resulted in agreement that it should at least be agreed that QE needs to be reframed in that case. My old concept of Green QE, or Peoples’ QE as Corbyn had it, is back in the frame as a consequence. QE as fiscal policy to fund direct intervention in the economy in other words.
Summary of the current political scenario was agreed to be hard. It is unstable. But from failing on the culture wars, to a collapsing NHS, and massive numbers of Covid cases, completely internationally aberrationally, it seems that this government is very definitely losing the plot. Its popularity will decline. We could not see how Johnson can survive another lockdown (which seems likely) given the promise of irreversible reopening. But what might happen then is unclear.
More clear is the need for continuing Covid support. If Sunak has his way and withdraws this the feeling was that recession is very likely. But that could increase inflationary pressure by creating supply disruption. The pressure is short-lived though. It is not going to flow into wages. That means the damage will be real.
On unemployment the sentiment was a significant increase with the end of furlough. If businesses fail that could increase further, and quickly.
As to consumer spending, there was little reason to agree with Andy Haldane: the spending boom will be short lived.
And the chance that the government will invest as required is low unless QE, tax and the way in which savings are organised are reconsidered. That’s when the debate really started. I fear that will have to be for another time.