Welcome. I write to urge you to cool expectations that Britain can live by monetary policy alone.
Our political establishment is reluctant to discuss this in public, but Britain ranks alongside Japan as the most indebted of the larger economies. McKinsey estimates UK private debt at an extraordinary 427 per cent of GDP, vastly exceeding gross public debt at 94 per cent of GDP. By contrast, American private debt is half the UK’s, at 198 per cent of GDP.
Since 2008, the US has succeeded in deleveraging private debt by 14 per cent of GDP. British private finance sector debt has continued to grow since the crisis; and, as a consequence of the government’s policy stance, public debt is rising too.
Public and private investment has slumped, unemployment and underemployment remain far above longer-run normal levels, deflation threatens, and austerity is shrinking UK incomes. This makes it hard for indebted private firms and households to deleverage, invest and spend.
Monetary policy alone is ineffective: Britain is too indebted to respond to monetary stimulus. As McCulley and Poznar have argued, fiscal policy can solve monetary policy’s problem by becoming a borrower and spender of last resort. And monetary policy can solve fiscal policy’s problem of government debt by monetising some portion of it.
Given Britain’s huge private debt, coordination between monetary and fiscal authorities is essential if the UK is to avoid decades of stagnation – or, worse, an Irving Fisher-style debt-deflationary spiral.
So your first task, I suggest, is to persuade the chancellor that financial stability depends on this coordination