The governor of the Bank of England Mark Carney says that he is “not a believer in the concept of helicopter money” arguing that it can lead to what he called a “compounded ponzi scheme.”
Speaking to the House of Lords Economic Affairs Committee on Tuesday afternoon, Carney was asked for his thoughts on helicopter money and the potential for negative interest rates in the UK, but distanced the bank from either policy.
“We think we could move the base rate closer to zero but have not said we have an appetite for negative interest rates,” he said.
“I am not a believer in concept of helicopter money. In effect a central bank cancels debt that is purchased [from government], it puts a hole in its bank sheet. Government never has to recapitalise bank. We create a fundamental problem with reserves on which we have to pay interest, which is not a problem when rates are low, but becomes one when take away stimulus. We do not have an asset on the other side, you end up with a compounded ponzi scheme.”
The essential concept of helicopter money is that central banks create new cash and give it directly to people to spend on whatever they want. That, in turn, should spur inflation, or so the argument goes. Calls for helicopter money have become increasingly loud in recent weeks, but Carney argues such drops could lead to what is essentially a ponzi scheme — an
investment operation where the operator pays returns to its investors from new capital paid to them by new investors, rather than from profit earned through legitimate sources, eventually leading to collapse where everybody is out of pocket.
When it comes to interest rates, the Bank of England has kept rates at a record low 0f 0.5% for 85 consecutive months, and at last week’s most recent Monetary Policy Committee meeting rumours surfaced that certain members were considering voting to cut interest rates. Those votes didn’t materialise, but it did increase speculation that the bank may go lower if economic conditions don’t continue to improve. Negative rates are already in place in the eurozone, as well as Japan, Sweden, and Denmark among others.
During the proceedings, which featured former Chancellor of the Exchequer Lord Lamont, Carney also talked about his belief that the increasing length of time British people are spending in work has had a “huge positive” impact on Britain’s labour markets, vastly in excess of the impact of net migration.
“The biggest thing in the labour market … since the crisis has been a huge positive labour supply shock because older workers, particularly women, have stayed in the workforce longer. That has absolutely swamped the impact of net migration,” Carney told the the Lords’ Economic Affairs Committee on Tuesday afternoon.
In his opening remarks to the committee, Carney reiterated the Bank of England’s position that it will not make an “
overall assessment of the economics of UK’s membership of the European Union,” adding: “At the same time, the Bank must assess the implications of the UK’s EU membership for our ability to achieve our core objectives of maintaining monetary and financial stability.”
“Assessing and reporting major risks does not mean becoming involved in politics; rather it would be political to suppress important judgments which relate directly to the Bank’s remits and which influence our policy actions,” Carney continued.
Essentially, Carney wants to make very clear that the bank will not take any position on the EU referendum.
Throughout proceedings, Carney took questions on a broad variety of topics, ranging from the upcoming referendum and the country’s current account deficit, all the way to the Chinese economy, and the possible introduction of helicopter money. Here are some of the highlights:
- Carney described the UK’s current account deficit as “one of the vulnerabilities in the UK” adding “I think it’s safe to say it’s running at a rate probably around 5 per cent if you strip various things out and have a smooth level, and that is remarkably high for a large advanced economy. That’s the challenge.”
- While Carney said he won’t take an official position on potential Brexit, he said it is the bank’s “duty” to report its judgments about the risks of the EU referendum.
- Carney said that in the event of Brexit it would be “less likely” that the City of London will retain its position as one of the world’s greatest financial sectors.
- Issues in China are “considerable” Carney said. “I think in the medium term, the issues in China are considerable and it very much depends on how they are handled by the Chinese authorities.”
- Carney once again acknowledged that the buy-to-let market is a big concern, saying: “Growth in mortgage lending is now being driven solely by the buy-to-let sector.”
At his previous appearance in front of politicians, during a session of the House of Commons Treasury Select Committee in March, Carney was accused by eurosceptic Conservative MP Jacob Rees-Mogg of making “making speculative pro-EU statements” that were “beneath the dignity of the BOE.”
Carney, who had been accused of acting like a “bomb disposal expert” by the committee’s chairman Andrew Tyrie because of his measured speech, responded robustly, saying “I’m not going to let that stand.”