In today's FT, Gavyn Davies confidently predicted that the Bank of England would again turn on the printing presses:
The Bank of England meets on Thursday with expectations running high that the MPC will announce a further large dose of quantitative easing. Even if they pass this month, which seems possible, this is likely to be only a temporary postponement. Whenever it comes, the next move will be another bout of “plain vanilla” QE, involving the purchase of £50-75bn of government bonds, and taking the overall Bank of England holdings to over one third of the total stock of gilts in issue.
Moreover, the former Goldman Sachs Chief Economist thinks QE has worked:
(T)the growing consensus among central bankers is that their experiment with QE is still working. It was a shot in the dark, and a rather desperate one at that. But up to now it has had the desired effect, which is certainly a far better outcome than the alternative.
We are four years into this crisis and UK real GDP is about 15 percent below trend. The recovery from the downturn has been the slowest in over 100 years. That appalling record might extend further into the past, but economic data beyond 1900 becomes too unreliable to say. Nevertheless, the Bank of England and dubious former investment banker types like Davies think that printing money is the road to economic prosperity.
The argument seems to be that quantitative easing avoided a far worse outcome. It is an unprovable counter factual that provides intellectual support for a further round of reckless money creation.
These are old arguments. The battle is lost. The Bank of England will continue regardless. However, Davies highlighted one curious aspect of the strategy. When the next round of quantitative easing is over, the Bank of England will own over a third of the outstanding stock of government debt.
That is a strange state of affairs. One part of the public sector - the Bank of England -is printing paper to pay for the activities of another part of the public sector. If this is such a good idea, why didn't we think of it before? Instead of raising taxes, the Bank of England could have simply rolled off a few reams of crisp £50 notes off the printing press and handed them over to the Treasury.
Let's try another difficult question; if the purpose of quantitative easing was to boost economic activity, why didn't the Bank of England buy commercial paper and try to reduce interest rates for hard pressed enterprises? Why did they focus their asset buying activities solely on government paper?
A cynic might think that the real purpose of quantitative easing was not to boost the economy, but to finance the government deficit with money creation.