The recovery's coming - but the UK's taken a permanent hit
Here's my take on the August 09 Inflation Report. First, the good news, Quantitative Easing is working. Now the bad news: working means avoiding a catastrophe. It's taken £175bn - and says my interlocutor Doug McWilliam of the CEBR will probably take another £50bn - just to avoid a prolonged slump.
Even with 0.5% interest rates right through to 2011 and the full £175bn still in circulation until then, the Bank of England is predicting inflation will undershoot the 2% target for CPI. That means we should expect interest rates to be low for at least that long. It also signifies the recovery is going to be pretty appalling: weak and fragile.
The Bank's famous "fan chart" looks mighty perky - a near symmetrical V, centering on the last three months, showing that - although the recession is not over, the fastest period of shrinkage is over. But there are serious risks - both global and intrinsic - that this comes out worse than they think.
Here's the problem. QE, together with the 680bn guarantee for the bad assets of Lloyds Group and RBS, has begun to turn banking around. But there is scant growth in lending to individuals - and loans to companies are still shrinking. And so the Bank's main target on QE - expanding the money supply - is, well, off target. Growth of broad money (M4) has slumped and continued to slide even after the Bank started printing money. That's because while money makes its way from the BoE to the banks, it does not make its way in sufficient quantities into the pockets of borrowers or businesses.
Let us put it brutally: to save the banks the real economy's recovery is being delayed and perfectly healthy companies sacrificed. The governor of the Bank told me today this was more or less inevitable - we'll be discussing with politicians whether there are alternatives.
On top of all this there is a political variable: the Bank's growth projections today are based on the Labour budget figures. If, as the Conservatives have indicated, they rip these up and tighten faster there will be question marks over the growth projections.
Today's unemployment figures only tell half the story of the jobs market: pay freezes, short time and hyper-flexible work practices are contributing to the rapidity of recovery - but also to the permanent hit to economic demand that will dampen economic growth for the first half of the next decade.
Tonight we've got a trio of front-line politicians to discuss this, together with former MPC dissident David Blanchflower. Tune in at 2230 on BBC2.