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Quantitative easing: the case for ‘printing money’


12:08 am - January 8th 2009

by Sunder Katwala    


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‘Brown plans to print more money’ was the front-page headline on tonight’s Evening Standard, and tomorrow’s Daily Mail front-page splash follows suit.

With interest rates set to fall again in the morning to their lowest level since the Bank of England was founded in 1694, the question is whether government should look at expanding the money supply.

‘We are looking at the issues. No decisions have been taken’, a senior Treasury source tells the Standard.

I don’t have the technical economic expertise to judge the balance of risks.

Somebody who does is Rachel Reeves, who is the prospective Labour candidate for Leeds West and also a former economist at the Bank of England. She makes the case in the new Fabian Review.

Reeves’ article ‘Why £20 billion is not enough’ identifies four priorities for further action following the pre-budget report’s stimulus package.
1. action on bank lending;
2. supporting the mortgage market with guarantees for securities backed by new mortgages;
3. financial reform through the G20;

4. Print More Money

Quantitative easing, a radical policy option which was used in Japan in 2005 to end their 15 year recession, could be used now in the UK. Quantitative easing is a policy tool used when conventional monetary policy no longer works – as they nominal interest rate approaches zero. The Bank of England can either print more money or buy government and corporate debt so that long term interest rates fall. Quantitative easing is not without risks (it can push up inflation) but the potential benefits now outweigh these risks. Such a strategy is increasingly seen as a way to kick-start the economy and should be adopted.

But ‘quantitative easing’ is a complex issue. Jeremy Vine got rather tongue-tied over it as the BBC’s Paul Mason tried to explain it on his show on new year’s eve, while the phone-in saw an A-level student point up the hyper-inflation of Weimar Germany, while Mason pointed out that comparisons with Zimbabwe were absurd, when the risk is deflation, not inflation.

This highlights the difficulties of the public politics.

But if the Bank of England does now believe that the evidence demands action on the money supply, then it would make little sense (as with the ‘n-word’ debate over public ownership of Northern Rock, and then the banking bailout) for worries about political taboos from a very different context to be a veto on necessary action.

Vince Cable is reported as saying that this is a ‘knife-edge situation’, highlighting the potential dangers but arguing that the ‘dire straits of deflation’ could leave the government with no choice but to take drastic action.

Similarly, Standard Business Editor Neil Collins writes that “this is not be as daft as it sounds when inflation is melting and there is a danger that the broad money supply will start to shrink. If this is allowed to happen, the recession could spiral into a slump, with catastrophic consequences”.

Cross-posted from Next Left

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About the author
Sunder Katwala is a regular contributor to Liberal Conspiracy. He is the director of British Future, a think-tank addressing identity and integration, migration and opportunity. He was formerly secretary-general of the Fabian Society.
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Reader comments


I now see that Vince Cable has written a column which addresses this in The Independent tomorrow.
http://www.independent.co.uk/opinion/commentators/vincent-cable-confiscating-savings-from-the-poor-is-both-stupid-and-cruel-1231923.html

He writes

“The big, looming, monetary issue is “quantitative easing”: that is, printing money. What happens is that the government borrows from the Bank of England, not from the markets. It expands the money supply to keep the economy going and also to counter deflation without simultaneously increasing government debt. The attractions are obvious, as are the dangers.

The Robert Mugabe school of economics provides a salutary warning about uncontrolled monetary expansion in generating hyper-inflation. The road to Harare is not as long as we might hope. Monetary easing may prove to be necessary but will have to be managed with great skill and care: Too little easing and the crisis drags on – as in Japan. If there is too much, the authorities face the messy task of mopping-up liquidity by issuing bonds which add to the burden of borrowing or else we lurch back from deflation to inflation. So interest rates may soon become yesterday’s story”.

It does have to be used carefully, but it can have great advantages and is the natural response to the problems we have now. Probably the most succesful example of its usage is from Japan, but 1930’s Japan where it was very succesful in helping fight the effects of the great depression- can’t do better than that.

Japans modern financial history is well studied, but going further back it is less well known. Takahashi Korekiyo, the finance minister who implemented the measures has been credited with inventing Keynesianism before Keynes, and then actually implementing it succesfully. Its something well worth looking at again in the current circumstances.

“comparisons with Zimbabwe were absurd, when the risk is deflation, not inflation”

There is an extent to which anyone making comparisons to Zim should be horsewhipped in the eyes. I can’t quite work out whether Tories (in the “we shouldn’t deal with the prospect of deflation by expanding the money supply through low-cost low-risk government borrowing” sense) are stupid or actually just view the ideological imperative to punish the Feckless and Poor [*] as greater than the benefits of not hurting them.

[*] as regular readers know, in Tory parlance this means “people who have jobs, don’t get paid very much money, and borrow a bit more to make up for this, like Mrs Thatcher said they ought to, but she was a lying oik and doesn’t count”.

Tinter – interesting. thanks. I didn’t know about 1930s Japan.

There is an extent to which anyone making comparisons to Zim should be horsewhipped in the eyes

I’ll agree with that.

the comparison with Japan is a bit tricky (I did my uni dissertation on the Japanese financial crisis so I’m a bit of a geek on the subject). The recession lasted for so long partly because:
1) The govt took a while to flush out the bad loans from the banks because it didn’t want to upset the markets too much.
2) the companies themselves didn’t want to cut costs too drastically by getting rid of 1000s of employees. Throughout the recession, Japan’s economy had an unemployment rate other western govts would still give up right their arms for.

Basically though, monetary policy failed because despite super-low interest rates, deflation was still a problem. The govt printed money and borrowed by the bucketloads and yet inflation remained low. they couldn’t really do anything for a while until the boom of the 2000s lifted them up.

So I’m not sure the comparison entirely works, especially since the Japanese economy works very differently to ours.

Though I guess it depends on what the money is used for…

I’m sure they could find an irrelevant tax they can cut to out-inane the Tories 😉

Interesting article Sunder, thanks for the Cable link.

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won’t Work.

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn’t create $1 of investment.

In a Liquidity Trap the last thing the Market needs is liquidity.

Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.

Those purchases maintain the demand for long-term asset in an unstable equilibrium.

When this desequilibrium resolves the Market turns chaotic.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order

Abstract:

This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labour, Stagflation, Greenspan Conundrum, Deflation and Keynes’ Liquidity Trap…

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

A Credit Free, Free Market Economy will correct all of those dysfunctions.

The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

In This Age of Turbulence People Want an Exit Strategy Out of Credit,
An Adventure in a New World Economic Order.

A Specific Application of Employment, Interest and Money
http://www.17-76.net/interest.html

Press release of my open letter to Chairman Ben S. Bernanke:

Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won’t Work.
http://www.prlog.org/10162465.html

Yours Sincerely,

MC Shalom P. Hamou
Chief Economist & Master Conductor
1776 – Annuit Cœptis.

I’m sure they could find an irrelevant tax they can cut to out-inane the Tories 😉

Like VAT ?

BTW I hope Mr. Sunder you will not miss the fact that on aprevious thread I have knocked your claim on Orwell into a cocked hat ansd theres plenty more where that came from.

I have decided to stop work today our company will no longer be cutting costs and trying to compete more efficiently instead we have issued ourselves with vouchers on which the words One Pound are written and spending them on Hotels , houses , Untilties , that sort of thing .
have we just passed ‘Go’ then , I didn’t notice ?

There is obviously deflation – quite healthy defaltion – in the price of all kinds of goods, especially technology, though this may be coming to an end with sterling’s fall.

And there is obviously deflation – also quite healthy – in the price of housing which is only just back to “trend” levels now.

But where exactly is this generalised deflation? Even if the RPI falls for a while, well, that will just take out some of the big price rises of the past couple of years.

Though I guess it depends on what the money is used for…

Quite so.

10. Mike Killingworth

The problem is going to be in the presentation. The idea that printing money causes inflation, if not hyper-inflation, is a pervasive meme, the moreso among those of us who are old enough to remember the 1970s. The examples given in the article are widely known: no one has direct experience of the misery caused by deflation (nor is there a “locus classicus” of the Weimar/Zimbabwe type) so it is harder for us to relate to it.

So I’m not sure the comparison entirely works, especially since the Japanese economy works very differently to ours

..and yet when it comes to gaily justifying wartime levels of debt international comparisons are thrown around like confetti as if all economies did work in the same way. I am not sure that you have made it sufficiently clear in previous comments on debt that such an argument was specious in the extreme . All I can say is thank god we have an army of community interface liaison officers to save us or lord knows what trouble we would be in.

Bye Bye Darling

Great post Sunder!

of us who are old enough to remember the 1970s

Ah yes the 1970s that untouched Eden . Little did we know then that the evils of Thatcherism were even then slithering into our innocence with designs on this paradise ( or 25% inflation , no lights and the Miners turning the lights off ). Printing money is in any case a waste of money itself . Why not simply deem the new value of a blade of grass to be One earth pound , then we will all be rich I tell you .( In grass terms ).
AS those of us old enough to remember the period will know the temptation to print money is especially keenly felt by a Government who care for nothing but keeping power no matter that the consequences will take decades to squeeze out .
If any of you were thinking of having children , you may wish to train them in a hunter gatherer life style . Hint hint

By Bye Darling

“Like VAT ?”

The vat cut was irrelevant, but then the Tory cut proposals are more insignificant. I was merely suggesting there seems to be a war to find the most irrelevant tax cut after that 😉

“The vat cut was irrelevant, but then the Tory cut proposals are more insignificant. I was merely suggesting there seems to be a war to find the most irrelevant tax cut after that ;)”

Yes, they were significantly better – offering businesses the chance to delay VAT payments and improve their cashflow, the failure of which is often the downfall of struggling companies.

I agree with the sentiment on misleading comparisons with other countries and other eras. I can’t see the relevance with Japan in the 1930s. Japan is a very complex society, totally different from Britain. Statistics are misleading and observations from afar are not always what they seem. Unemployment may be low, but having previously worked for a Japanese company for 5 years, there are many people employed in non-jobs; not too dissimilar from Labour’s public sector.

John B, I note your all too familiar, and irrelevant, anti-Tory tirade after only 2 posts. Does your irrational hatred derive from your experiences as, say a miner or a former employee of a nationalised industry? Hmmm….I see you are a writer living in London and you’ve been interviewed by the Telegraph. Was it about country pursuits?

16. James Worron

You know, in the early 80s some of the more intelligent critics of monetarism pointed out that the real problem was not that the money supply was growing too quiclky but the supply of goods and services was growing too slowly. This of course misunderstood that the government’s policy was to stimulate growth through microeconomics, not macroeconomics, in particular through privatisation and de-regulation.

Fundamentally this remains the real issue, we need to produce more, which must largely be done through innovation and improved efficiency.This is the real way to save and ultimately develop the economy. Macroeconomic stimulation may well be necessary and beneficial, but it is missing the point – it is talking about the oil in the car not the fuel.

We should also be wary of macroeconomic stimuli which boost government spending – which involves moving resources into less productive sectors, or which encourage capital to leave the country – as we are seeing with the weak pound.

“1) The govt took a while to flush out the bad loans from the banks because it didn’t want to upset the markets too much.”

Sunny, I am not an expert on the Japanese financial crisis but that sounds like a slightly weird way of describing what was going on in Japan at the time if this guy’s description is accurate:

“The Japanese financial system systematically insulated decisions about allocating capital from market signals. With a heavy reliance on bank lending, an absence of transparency and full financial disclosure, and a suppression of equity markets through stable cross-shareholding, the Japanese system allocated funds according to established relationships and government targeting of “strategic” industries rather than in pursuit of the highest return.

The revisionists praised this system for its long-term focus. Access to “patient capital,” they believed, took pressure off managers to achieve short-term profitability and freed them to concentrate on market share. In fact, however, the absence of market discipline and feedback has caused the Japanese economy to flounder, and has wasted the hard-earned savings of the Japanese people on a truly mind-boggling scale.”

http://www.freetrade.org/pubs/speeches/ct-bl071598.html

In other words, the Japanese government (and elite) was ‘picking winners’. It did pretty well for a while (partly because the path to prosperity had already been trailblazed by other economies), but then floundered. It was the lack of market discipline that caused the crisis and that inability to introduce it that caused it to continue.

More generally, I am wondering if printing money is on the agenda, whether I should really start to move my relatively meagre savings out of sterling. I should have done it last year…

More generally, I am wondering if printing money is on the agenda, whether I should really start to move my relatively meagre savings out of sterling. I should have done it last year…

Can I recommend my new currency ” Blade of Grass ” . The expanding BOG zone is experiencing enormous benefits from fiscal pump priming now and looks likely to out perform its stick in the mud rivals . Come into my office …..

Despite posting about its good use in Japan once, the 2005 usage certainly does not qualify. Japan never really recovered from its 1980 slump, and the tale of the zombie banks it one of the worst examples of inept government intervention ever. The government has introduced fiscal stimulus after fiscal stimulus for more than a decade, and now finds it self… in a huge slump!

They are currently preparing to tackle this with… more fiscal stimulus!

Japan has been governed by the same party for 50 years, and it has become just as complacent and inept as you might imagine. There is almost nothing to take from it in terms of a positive response to a poor economic climate.

Its use in the 1930’s is relevant because it is possibly the best example of using keynesian government debt-based stimulus in a period of deflation and a shrinking economy. Individual structures may be different but the overall economic circumstances were international even then.


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  1. The Fabian Society

    Liberal Conspiracy: Quantitative easing: the case for ‘printing money’: http://bit.ly/OBOZ1





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