Does the UK have a sensible strategy for recovery? Just recall: the last time it tried the credit-expansion route to growth, it ended up in a huge financial crisis. Why should it rationally expect a different outcome this time?, asks Martin Wolf in Financial Times, 13th Feb 2014

Indeed, it is astonishing how little this crisis has shaken conventional wisdom. On the contrary, it is widely believed that it is safer to rely on private borrowing than on public borrowing as a source of demand. An expansion of private borrowing to buy ever more expensive houses is deemed good, but an expansion of government borrowing, to build roads or railways, is not. Privately created credit-backed money is thought sound, while government-created money is not. None of this makes much sense.

We couldn’t agree more.  By fuelling our economy through ever-rising levels of household debt, we are repeating the mistakes that led to the 2007-08 financial crisis. Ever since that crisis, the Government and Bank of England have tried to encourage further consumer borrowing via further lending by banks. As former FSA chairman Lord Turner put it, this was a “hair of the dog” strategy for economic recovery, treating the cause of the financial crisis – excessive borrowing – as though it could also be the solution.

However, household debt can only grow faster than salaries for so long before the weight of the debt becomes excessive. With household debt already close to its highest level in history, and set to rise further as a result of Government policy and easier lending by banks, we believe the current economic recovery is unsustainable.

Just as the economy is running on borrowed money, the recovery is running on borrowed time.

There is therefore a need for an alternative strategy for a more sustainable economic recovery. This paper proposes this alternative, a new solution:  Sovereign Money Creation.

It offers a way to make the recovery sustainable. In a similar way to Quantitative Easing, Sovereign Money Creation (SMC) relies on the state creating money and putting this money into the economy. But whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, SMC works by injecting new money directly into the real economy, via government spending, tax cuts or rebates. Our analysis shows that by getting spending power directly into the hands of the public, this new solution could be up to 37 times more effective than Quantitative Easing in boosting GDP.

The pivotal advantage of SMC is that unlike the Government’s current growth strategies – which all rely on an over-indebted household sector going even further into debt – SMC requires no increase in either household debt or Government debt. In fact, SMC can actually reduce the overall levels of household debt. It would also make banks more liquid and the economy fundamentally safer.