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Now some surveys are suggesting that parts of the UK economy are enjoying their best growth since 2006. So is that it then? Is the crisis that began in 2008 well and truly over? And here is another question: does it just go to show the government was right all along? Austerity works, QE, or quantitative easing, is best?

There are reasons to think the recovery this time around is for real, unlike in 2009/2010 when the UK saw something of a false dawn. This time real things seem to be happening. UK exporters are enjoying more success selling their wares outside the Eurozone, and the success enjoyed by the car industry is a good example of this. Then there is evidence of reshoring, as companies look at return at least some of their manufacturing to their home markets.

But does this really prove that austerity works? Does this really prove QE was the right thing to do all along?

There is something quite ironic about something George Osborne has said. He has often laughed off ideas that the way to solve a crisis caused by having too much debt was to borrow more. That was how he has defended austerity. And yet, by encouraging a new housing boom, it could be argued that Mr Osborne is trying to solve an economic crisis caused by too much household debt, by getting households to borrow more.

It boils down to whether you think government debt is worse than private debt. Just remember that in many parts of the world, such as Spain for example, household debt became government debt.

Now let’s focus some more on UK household debt. In the year 2000 UK household debt to disposable income, according to the OECD, was 112 per cent. In 2007 it was 174 per cent, and in 2012 it was back down to 146 per cent. The Office of Budget Responsibility recently forecast that UK household debt is set to rise again – albeit not by a great deal. This differs, by the way, from the US which has seen the ratio fall to a much lower level, and which is expected to fall even further.

Household debt keeps getting forgotten. It was household debt across the UK, the US and Europe which explained why QE was never going to lead to hyperinflation. Households had become afraid to spend, to borrow. The money supply, the broad money supply, which economists believe is associated with inflation, is as much determined by debt and borrowing levels as anything.

Despite the Bank of England issuing £375 billion in QE over the last few years, the broad money supply has only seen very slight growth. See it terms of a bath with a big hole in it. You turn the tap on full, to make up for the water leaking out of the bottom, and many, who seem to be oblivious to the hole, fret that the bath will overflow.

QE was never going to lead to hyperinflation and the biggest failing of the European Central Bank was not to realise this.

But just because QE was not going to create hyperinflation that does not mean it is a good idea. If you have a bath with a hole in it, what is the best thing to do? Is it to turn the taps up full, or try to fix the leak? QE amounts to taking the former approach.

The trouble with austerity is that it can work when tried in isolation. But it has not been tried in isolation; rather it has been a Europe wide thing. This has had disastrous consequences for the UK and Eurozone.

The UK had a worse downturn than most of the Europe because the UK was more reliant on its banking sector. The UK is enjoying a faster recovery than the Eurozone partly because it is not in the euro and has a cheaper currency, and partly because of QE.

But while QE has not created hyperinflation, it has led to higher asset prices. To misquote George Osborne: “How can you solve a crisis caused by asset prices being too high, by getting asset prices to rise?”

What the UK, the US and Europe need is for central bank money printing to fund investment to enable the world’s developed economies to start fulfilling the potential of the fantastic innovations we have seen in recent years.

Instead, we have seen the UK return to old habits. Central bank policy via QE and government policy are combining to push up house prices and household debt when what we need is more investment. This is not a good development.

© Investment & Business News 2013

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