Thursday 9 February 2012

Here we go again.....

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.

7 comments:

markymark said...

I think that the human brain seems to deal with the issue of money printing very badly. I think this is so for a number of reasons.

Humans don't deal very well with a change that doesn't have an immediate effect but where the outcome is only known some time down the track. Money printing now seems fine and when the results arrive with vengence in say 2 years time - in my view this will be massive inflation - people will have difficulty linking it to QE. People will look for more immediate causes - nasty bad companies profiteering off others miseries!!

Also, the human brain deals with very large numbers badly. I know that 75 billion is a large number but no-one gets too worked up over the difference between 75 billion in printing and 50 billion. The numbers are too big to process.

People are also myopic and focus on the here and now like 4 year olds. No money printing means austerity now!! proper austerity. Modern Western society doesn't deal very well with spending less now.

Lastly, people only think in terms of nominal numbers - nominal health spending for next year, nominal house prices etc.. This means that people don't process inflation very well. The price of things going up - shares, houses and salaries - makes them feel good because its all nominal. If nominal prices rise slowly and real prices decline people get confused.

Electro-Kevin said...
This comment has been removed by the author.
Electro-Kevin said...

Marky Mark - Very good.

I was fortunate to have my IQ checked by an NHS consultant recently - I've been suffering from debilitating memory loss.

My score is 128. Not a genius but well above average and good enough to see the flaws in money printing straight away.

Yet recent studies indicate that being to the right of the political spectrum corresponds with low IQ.

Really ?

It seems to me that the West is in decline because it's reversed the truth on all manner of issues.

Why would it do this ?

Political correctness.

Once we began our contortions with one untruth the others followed quite easily:

The dumbing down, the prizes for all, the credit for all ...

Once those are in place it takes a brave politician to reverse them, whatever their cost.

If that necessitates printing money so as to keep general order then that's exactly what they'll do.

I suppose it's the gentler way of managing our economic decline. I believe that to be what we're witnessing. The fewer of us who can afford to travel to countries where it's not happening then the fewer of us will be aware that it is happening.

The concept with which the human mind has its greatest struggle is relativity.

What it can't see it can't know.

In many ways that's a mercy.

Anonymous said...

Why not look at why the government's debt and deficit has grown!. Its not because the current government has become more generous or has taken on more staff - its because we are being drained by the nationalised banks who are deleveraging a.k.a writing off the poor loans they made.

This is Banking Crisis II. Banking Crisis III is just around the corner.

craigs clock said...

£50 billion??

Whats £50 billion between friends? :)

miken said...

It's funny. The stock market nearly always seems to increase when new QE is announced and issued. But then the stock market falls back again some 12-24 months later. I wonder if there is a graph showing QE announcements and QE issues Vs stock market levels?

RenterGirl said...

Remember when Japan handed out gift vouchers to the population to encourage spending. It's capitalism and its failed.