The story of the UK economy is a tale of two economies.
First there is the ‘real economy’ which we interact with daily, woven into the length and breadth of Britain, and characterised by productive output in the form of goods and services.
Then there is a financial economy that sits on top of it, centred around the City of London and outside of many people’s reach, characterised by speculation and asset bubbles.
But the way in which governments and central bankers have prioritised the financial economy over the real economy has turned this story into a tragedy.
The past few decades have been difficult for the real economy, as multinational companies have exploited globalisation to drive down wages and outsource jobs, faced with little resistance from negligent governments and a weakened trade union movement.
In response to this trend, Britain’s politicians and central bank has chosen to abandon the real economy, instead opting to gamble on credit booms and housing bubbles as a means of boosting prosperity.
As a result, while incomes have been left to stagnate in real terms (with the past decade being the worst for wage growth since the Napoleonic Wars), the economy has relied on easy credit to keep afloat.
Instead of providing support to the real economy, the government and the Bank of England’s response to economic decline has typically been to deregulate finance and cut interest rates in order to flood the economy with credit, which inflates the price of assets like property and shares.
This helps mask the decline of the real economy, as property owners feel wealthier, encouraging them to spend more, in the belief that they will continue to grow richer as house prices rise.
But house price inflation is a zero-sum game which does not add to the productive capacity of the economy.
Unlike the prosperity derived from producing new goods and services, rising asset prices constitute an illusionary form of wealth.
Like most bubbles, the housing bubble is sustained only by the delicate confidence of investors and ever more borrowing.
Ultimately, such unproductive debt-fuelled growth cannot continue indefinitely, as the US learned a decade ago, to devastating global consequences.
Unfortunately policymakers have failed to learn these lessons from the last financial crisis.
This is evident in their response to it, which has been to pull out all the stops to keep the financial bubble growing.
As the government took money out of the real economy in the name of austerity, the central bank had to step up their stimulus.
While politicians told the public that there is ‘no magic money tree’, the Bank of England quietly created £445bn of new money through quantitative easing (QE), which they poured into the financial sector, again pushing up the price of assets.
This was great news for the wealthy, who hold most assets.
The Bank of England’s analysis suggests that the richest 10% have thus gained £350,000 each from QE. But it was less good news for the wider country, as for every £1 of QE, only 8p trickled down into the real economy.
But perhaps even more worryingly, the mistakes which caused the last financial crisis are being repeated through QE, through the way it makes the fate of the economy even more dependent on the inflation of an unsustainable asset bubble.
Policymakers like to pretend that there is no alternative to our financialised bubble economy, and that QE in its current form was the best policy tool available.
This is not true. There are more sustainable strategies which could have used ‘QE for people’ to restore the strength of the real economy.
One simple alternative is ‘helicopter money’, where the an equal amount of the money created by the Bank of England would have been distributed directly to all citizens.
Such an approach, advocated by the likes of Adair Turner, would have meant every person in Britain receiving £6,834 each.
This would have allowed financially strained households to pay down their debts and sustainably increase their spending in ways which would stimulate the real economy.
The Bank of England’s money creation powers could also be used to finance national and regional investment banks, distributing funds for new infrastructure, green technology and skilled industry to help rebuild left-behind economies across the country.
We therefore have a choice in the story we want for Britain’s future.
We can have a story where we direct money to the real economy in a way which increases the real wealth of the whole population in a more sustainable manner, or we can continue story of debt-driven growth through asset bubbles which serve the wealthy.
The latter does not have a happy ending.