If you were one of the 12 million people who reportedly went to the sales on Boxing Day, then you might be thinking this recession has not been so bad after all. Unemployment is not rising as fast as expected, interest rates remain low and the stock market is up by more than half since March.
The truth is, though, that we have been living in an economic La La Land, induced by perhaps the biggest policy undertaken during the Labour Government's period in office: printing money, or quantitative easing, to use its economically correct but unlovely name.
Judging by the staggering lack of interest shown in QE by Parliament, the Opposition and the public at large, you could be forgiven for thinking it was a mere technical adjustment, which can only be properly understood by gowned economists in the cloisters of academe. But the truth is that it is quite simple to understand and something which any sensible person should take an interest in. Furthermore, there are several historical precedents for it.
In just a few weeks, at its meeting in February, the Bank of England's monetary policy committee has to decide whether to continue with QE. It must walk a fine line between continuing the policy and potentially setting off a surge in inflation; and halting it too quickly and plunging us all back into a financial panic. What a difficult act to perform in an election year.
The way QE works is like this. The Bank of England is owned by Her Majesty's Government and the Chancellor has given it permission to create £200 billion of what is known as "central bank money". Rather than physically print the notes at its works in Debden in Essex, it has simply been buying up Government bonds, or gilts, from investors and crediting electronically the accounts of their bankers.
Investors, mostly pension funds but also international players, have used the resulting cash to buy up shares, gold, oil and even sugar. In fact, QE, as practised here and in America, has set off yet another wave of speculation in financial markets. We often talk of a licence to print money, but in the case of QE this is literally true.
There has been positive impact on the real economy. Companies have used the benign financial market conditions to refinance. Even that sickly old elephant Lloyds Bank has managed to get away the world's biggest ever rights issue, just before Christmas. With their finances in some sort of order and their debts reduced, companies have therefore not felt the need to have as many mass layoffs as forecast earlier in the year. When you look at it like that, QE has been a success. Although one should also recognise that it has come at a cost, such as the continued weakness of the pound. The Bank has also been effectively subsidising Labour's profligate spending programme.
What happens now? At times like these, history can be a useful guide and I am afraid the precedents are rather scary. Printing money has been used before as an emergency monetary policy: during the Napoleonic Wars; in the 1820s; and during the First World War. On two out of three of those occasions the authorities overdid it and the result was inflation, followed by a second crash, when the printing presses were turned off rather clumsily.
The worst of these was the so-called Restriction Period, when William Pitt the Younger ordered the Bank of England to print money after a run on the banks was set off by the last invasion of Britain (a brigade of motley Frenchmen attacked Pembrokeshire in 1797). Inflation hit a record 36 per cent at one point.
The most relevant comparison to our own era, however, is in 1931, an incident so traumatic as to permanently alter the genetic make-up of the Labour Party and presumably, Gordon Brown. The First World War policy of printing money had been abandoned more than a decade earlier. But two years after the Wall Street crash the effects of the policy were still evident and there was a series of bank failures which began in Austria and Germany. The City of London was cruelly exposed.
Ramsay MacDonald, the Labour prime minister, accepted the advice of Sir George May, the former company secretary of the Prudential, who recommended that the deficit of 2.5 per cent of GDP in the public finances (it is 12 per cent now) was far too high, and that public spending should be cut dramatically, including unemployment benefits. The Cabinet consequently split in great acrimony, and MacDonald decided to form a national government with the Tories. Labour has never forgiven him for his betrayal, although the evidence is that May was right and the British economy recovered quite well from 1933 onwards.
In our own time, Gordon Brown is evidently determined not to do a Ramsay MacDonald and to cut public spending. As for the Bank of England, we must pray it has learnt the right lessons from history and will neither print so much money that it sets off inflation, nor withdraw it so fast as to trigger another market panic.
