15th September 2015
In both Westminster and the City PQE has been greeted with a combination of astonishment and derision. Parallels have been drawn with Germany’s hyperinflation in the 1920s and more recently the same outcome in Zimbabwe. Such comparisons cannot and should not be brushed aside. That said we should not dismiss PQE without taking an honest look at the long term dangers of what we now consider to be conventional monetary policy.
History has taught us clear lessons about the dangers of monetising government spending. Monetisation allows governments to boost spending without increasing taxation. Once started governments can rarely wean themselves off the free money drug. They get sucked into a destructive self-reinforcing spiral, obliged to print ever larger quantities of money to maintain economic activity as the real value of their money starts to fall – the end game is spiralling inflation and real economic contraction. In the long run governments can no more print prosperity than engineers can break the laws of physics.