The Business Cycle and the UK Economy

The Financial Times ran a story earlier this week wherein the authors described how the prolongation of the depression phase of the business cycle is being caused by the Bank of England. This, of course, is exactly the Austrian theory of the business cycle. Quoting the article:

One in 10 British businesses are so-called “zombies” being kept alive due to ultra-loose monetary policy and the reluctance of lenders to write-off bad loans, according to new data.

The figures highlight concern that such companies are partly responsible for the UK’s sluggish economic recovery, with the Bank of England publicly raising concern over the issue for the first time last week.

The number of companies only able to pay the interest on their debts but not reduce the debt itself – a common characteristic of “zombie” companies – has risen by 10 per cent to 160,000 in the past four months, according to R3, the insolvency industry trade body.

Read paragraph two again. There you will see the FT blames these zombie companies for holding back the UK economic recovery. This while it is the Bank of England keeping these zombies on life support.

It is the Bank of England that is to blame for prolonging the depression in the UK. Firstly, they caused these malinvestments by distorting the most important price signals in the economy, interest rates. Now, they are prolonging the depression phase of the business cycle because they are again printing money to keep interest rates artificially low. The Bank of England should allow market interest rates to rise to increase real savings and to liquidate these zombie companies so that the resources tied up in them (land, labour and capital) can be freed and be reallocated to other more productive and profitable ventures.

The authors (and the Bank of England) gets the cause of the depression wrong. What needs to be done to end the UK depression? As Murray Rothbard explained in Man, Economy, and State:

It should be clear that any governmental interference with the depression process can only prolong it, thus making things worse from almost everyone’s point of view. Since the depression process is the recovery process, any halting or slowing down of the process impedes the advent of recovery. The depression readjustments must work themselves out before recovery can be complete. The more these readjustments are delayed, the longer the depression will have to last, and the longer complete recovery is postponed. For example, if the government keeps wage rates up, it brings about permanent unemployment. If it keeps prices up, it brings about unsold surplus. And if it spurs credit expansion again, then new malinvestment and later depressions are spawned.

The longer the Bank of England sets interest rates artificially low by continuing with its asset purchase programme, the longer the British depression continues for, and the bigger the malinvestments in the economy become. The Bank of England and the UK government must get out of the way of the economy and allow the liquidations to take place before the economy can be returned to health.

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About Chris Becker

Chris Becker is Market Strategist and Economist at ETM Analytics. Becker is Co-Founder of the Mises Institute South Africa. Visit his personal blog chrislbecker.com. Follow him on twitter @chrislbecker.
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  • Piet le Roux

    The funny thing is, if one follows the link to the Bank of England’s asset purchase programme, the Bank refers you to the “Red Book.” Of all colours…

    When the APF is used for monetary policy purposes, purchases of assets are financed by the creation of central bank reserves. Further information can be found in the Red Book:

    Red Book – Chapter VIII – Quantitative Easing (23k)
    December 2010