It is pretty obvious that the Prime Minister and the Chancellor of the Exchequer have little or no idea on how to stimulate Britain’s stagnating economy. The Monetary Policy Committee will meet this week and huff and puff in a self-important way.
It might help if they understood what is the problem. There’s no credit in the country. Put another way, there’s a Keynesian liquidity trap.
The UK broad money measure (M4) is reducing by 2.6% annually. This simply shows that there is less money in the system. However, the reserve balances of the banks are up by 17.1%. Much of this is due to the Bank of England’s asset purchase scheme. In November there were purchases of £15bn of gilt-edged securities which added to the money supply. M4 fell further.
The reason the banks are not lending their excess liquidity is mainly because of the regulator’s requirement that they hold higher reserves. “No more Fred Goodwins on our watch” they cry. The FTSE 100m companies are awash with cash and they are hanging on to it.
With continuing uncertainty over whether the banks will need to make further reserves against bad debts and the fears of an unsettled Eurozone there is little room for stimulating the economy without expanding government borrowing. That is under pressure because of the lack of growth.
Perhaps the only liquidity is alcohol consumption and maybe that is exactly what the confused mandarins are doing!
The Alternative Investment Market (AIM)
In the last quarter of 2011 16 companies joined AIM and 24 left. Britain’s main provider of early stage equity finance is in a desperate state. This is adding to the liquidity crisis as well as causing mayhem in the brokerage community.
The additional regulatory requirements now mean that it is expensive to join the junior market. For an introduction of its shares (without fund-raising) an applicant business might have to pay between £500,000/£600,000. In addition, the demands of the process will place a great workload on the executive strength of the company.
The new SEED Enterprise Investment Scheme which is awaiting the Finance Bill 2012 for final approval is brilliant and creative. Unfortunately the maximum that can be raised is £150,000 per company (and only once). However it shows that there some innovative thinking with the Treasury.
More please, much, much more. Britain urgently needs liquidity.