Printing money is okay – we do it all the time!

3:13 pm - October 7th 2011

by Left Outside    

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A lot of people get very worried by the Bank of England printing money. We can trace this line of thought back to the great political economists of the nineteenth century like JS Mill, but it finds itself common on the left and right these days.

You can print yourself into hyperinflation, or even accelerating inflation which can eat into living standards and cloud relative prices. But you can find yourself in deflation by failing to print enough. It is this second problem we have been closer to right now.

It is sad that people need reminding that hyperinflation impoverished Germany but it was relatively mild reflation which pushed them towards fascism.

It seems sensible to me to fear deflation more than inflation. Better yet to find the happy medium, where the economy operates at its potential without prices rising too quickly or people being left on the scrap heap of unemployment.

Unfortunately I don’t know where to get the data for the UK, the UK National Statistics website is a joke, but here is some data for the US showing the potential for disconnect between money and prices.

For two decades, money increases along with economic activity, prices increase more slowly (i.e. we got richer). We reach 2008 and the monetary base explodes but prices do not. In fact, prices fall slightly just as the monetary base grows at over 100% a year.

What does this tell us? It tells us that simplistic talk about “fake credit”, “titanic disasters” or “defy[ing] economic gravity” is very wide of the mark indeed.

Quantitative Easing causes a lot of confusion. Normally a central bank promises to print as much money as is necessary to pin short term interest rates at a level predicted to produce stable prices and full output.

Around the world, our last crisis was so severe that short term interest rates went to zero and stayed there. The central bank’s method for controlling prices and output was suddenly impotent.

QE is an extension of this normal promise to print and spend to long term debt because rates on short term debt have already been pushed as low as it is possible to go.

QE is far from ideal, in fact it is the least a central bank can do once rates hit zero. But it is the only option currently on the table because many people currently resist a central bank even doing this minimum because they seem not to care about unemployment.

If you support more active policy to help people then it has to be both through QE and after QE. Only by supporting a suboptimal policy will the space ever open up for something more efficient for boosting growth but that is less popular with central banking’s elite.

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Left Outside is a regular contributor to LC. He blogs here and tweets here. From October 2010 to September 2012 he is reading for an MSc in Global History at the London School of Economics and will be one of those metropolitan elite you read so much about.
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Reader comments

I’d supplement this by saying a lot of “inflation” in the UK has come as a result of past devaluation and George’s VAT increase. Two years ago VAT was 15%, last year it was 17.5%, now it is 20%, that will show up in prices but needs to be ignored by the BoE in my view, because it is a temporary phenomenon.

Likewise, the BoE need to look at future inflation. That looks likely to be weak as both the US and Europe are likely to remain depressed and the UK will struggle to rebalance, so there is little chance of demand significantly outstripping supply.

Finally, Sweden and Poland who both most aggressively printed money after recession hit are doing the best now. Whereas the Eurozone where inflation has been kept low by the “impeccable” Trichet, and the US where inflation has been kept lower are still mired in quasi-depression.

2. Torquil Macneil

What is the big fear of deflation? The usual; argument is that people hold onto their money because it will be worth more later, but that’s overstated, isn’t it? Would people really stop spending beaus they thought they would make a killing later? We all buy computers in the full knowledge that ext year we ill get a better deal,don’t we? In fact, falling prices makes spending much less risky and is likely to increase consumption. I would love to her from someone who understands the theory better. Luis Enrique, are you there?

Thanks for going over my head! Bloody Luis Enrique…

Deflation is bad, or at least I would argue mild inflation is preferable to mild deflation, because prices are sticky downwards.

It is easy to give someone a 5% money wage increase. But difficult to give them a 5% money wage decrease.

For example, if you need to cut your staffs wage bill by 5% or your firm will go bust and everyone will lose their job, it is easier to give them a 0% money increase when inflation is at 5% than it is to give them a 5% wage cut when inflation is at 0%. Call it sticky prices or the money illusion or call it stupid, it is a real effect. So that is why deflation ain’t great.

Also, if you think your money is going to increase in value then you will be less likely to spend it, that will decrease consumption, but it could also decrease investment. Why should people get wealthier from doing nothing? That sounds like a very perverse system.

Just some things to ruminate on off the top of my head.

If you can’t work out why printing money so you need a wheelbarrow full of the stuff to buy a loaf of bread, there’s no hope for you.

“If you can’t work out why printing money so you need a wheelbarrow full of the stuff to buy a loaf of bread, there’s no hope for you.”

*Head Desk*

6. Luis Enrique

[sorry L.O]

I think there’s also something about real interest rates. The real interest rate is approximately the nominal rate minus inflation. So if inflation is deflation, you get bigger real interest rates.

here’s Paulie:

LO is right that what we have experienced as inflation is a mix of tax effects and real price changes (commodities, exchange rates) and “pure” inflation, which is when everybody gets into the self-sustaining habit of increasing prices and wages each year, without anything “real” going on.

I think a good deal of what the UK has experienced as inflation is commodity and exchange rate. That means if commodities fall and/or the exchange rate does not continue to fall, prices should stabilize.

I don’t think we are in a position where firms are putting up prices because they are experiencing rising demand because people are flush with money. I don’t think they are putting up prices because of wage pressure.

The bad outcome from QE would be price inflation that is not matched by wage inflation, without any accompanying increase in GDP or reduction in unemployment. Now economics being what it is, I don’t think anybody can rule that out for sure, but I cannot think of a sensible explanation as to why that might happen.

7. Luis Enrique

[this means I don’t think “banks will take the money and speculate on commodities” is a sensible explanation].

for the hardcore geeks out there, this is the paper to read on pure inflation versus relative price changes:

and for an assorted unrelated economics link, Robert Solow (pbuh) has written a nice book review on history of economic thought … a nice discussion of the essence of Keynesianism here:

Good stuff but i think you left out certain matters that give this argument greater strength, for one it needs to be noted that we are currently in a liquidity trap, a situation where investors don’t expect long run growth and so are placing their money in safe investments like long yield bonds and gold reserves, this means the general true argument that QE and increased spending lead to hyper inflation, such inflation will only occur when the economy gets back on track.

Even then it should also be noted that while deflation is always bad and almost impossible for central banks and governments to control, inflation can be controlled and can at times be good for the economy, take the post war scenario, if it were not for inflation then we would have had much higher repayment rates to endure. Which if you want to cut the deficit then you might appreciate a depreciation in bond repayment rates.

Hyper inflation occurred in Germany because the 1920’s were a time of relatively normal business cycle’s and there was a stupidly vast increase in the volume of currency, no one is talking about some million percent increase in the volume, we aren’t even talking about doubling it.

9. gastro george

QE is the last twitching refuge of the monetarist. No amount of cheap money is going to do anything without more demand. No company is going to invest without orders (and companies, despite the rhetoric, are swimming in money). We need fiscal policy, not monetary policy.

10. gastro george

Hyperinflation primarily occurred in Germany in the 20s because they owed a lot of money denominated in other currencies.

Re money and prices, economists have quite sophisticated statistical tools, like Hodrick-Prescott filters, for testing correlations between time series. Normally you start by taking at least the first difference of the series so that the time trend is removed. And, for obvious reasons, sampling periodicity is very important. You can see some of this in action in the charts at the end of this paper:

12. Luis Enrique

gastro george

this article was written for you:

It is important that liberals engage conservatives on monetary debates. Since the 1970s, liberals have entirely ceded this aspect of the economic agenda. Even now, calls from the left for more monetary action gain only a fraction of the support of arguments for fiscal stimulus. But the left needs to realize that there is no neutral position in monetary policy—even if President Obama’s jobs plan is passed, its effects can easily be canceled out if the Federal Reserve caves to the singular pressure being applied to it by inflation hawks.

I agree with you that monetary policy alone is insufficient and would like to see some (sensible) government spending, but monetary policy and fiscal policy are complements, not substitutes.

“QE is the last twitching refuge of the monetarist. No amount of cheap money is going to do anything without more demand. No company is going to invest without orders (and companies, despite the rhetoric, are swimming in money). We need fiscal policy, not monetary policy.”

Nope, plenty more monetarists could do, in fact QE is the least a monetarist could propose. For example, a confirmed *target* rather than a confirmed *method*. Mervyn King could say “We will print money and buy things until unemployment reaches 6.5% and only stop in inflation remains at its current level through to the end of 2012.” That’s work better than QE and would be monetarist.

The governor of The Bank of England would be better off going to the top of BT tower and throwing billions of pounds off the side. Give the free money to everyone, not just rich elites.

Also, the fact that the monetary base grew at a faster rate than the CPI does not necessarily mean that the US got richer (although I think it’s reasonable to assume that as aggregate wealth increases, so too will the quantity of currency people want to hold, cet par).

For the first section of the first graph, the base is basically paper currency, and a small quantity of bank reserves. What you see when the base shoots up towards the end is basically a different monetary regime, where the Fed starts 1, actively using its balance sheet to support lending in the economy (which increases the base because it increases the amount of reserves), and 2, paying interest on bank reserves.

So one obvious reason that the new base was not inflationary (or more inflationary) is that the banks are being paid to hold it, i.e., it’s effectively like debt.

Mervyn King could say “We will print money and buy things until unemployment reaches 6.5% and only stop in inflation remains at its current level through to the end of 2012.”

I’m pretty sure that the Bank of England could not buy anything unless those things were financial assets and risk free. So essentially, the Bank can buy anything, but only as long as it is UK govt debt.

17. Luis Enrique

vimothy I think it has been buying corporate bonds in previous rounds of QE, but not this one, apparently.

and the only thing stopping it buying other assets, if anything is stopping it, would be its own rules. which could change.

18. gastro george

Luis, I wasn’t suggesting that we should only use fiscal policy, obviously a mix is needed, but the current mainstream view rejects any form of fiscal stimulus.

It was quite laughable over the last few days as one set of experts was lined up to say that more QE was required and inevitable, followed by another set of experts saying that it would make little difference.

“We will print money and buy things until unemployment reaches 6.5% …”

LO, It would depend what they are buying. Buying financial instruments isn’t going to do anything. Buying tangible things that might employ people, that’s something else.

The current situation reminds of a burning house. Osborne is sitting at the kitchen table saying, “I’m not moving until the fire goes out”, while flicking burning matches over his shoulder. The “markets” are running around him like children, shouting “fire, fire”, while flicking burning matches over their shoulders …

19. Luis Enrique

ah, sorry gg, got wrong end of stick

There is nothing to stop the Bank buying private sector assets. However, it takes credit risk onto the Bank balance sheet. Mr Osborne’s letter to the Bank yesterday barely concealed the hint that he would like to see the Bank buying assets beyond government bonds. However, Governor King clearly does not believe that the Bank should expose itself to private sector credit risk and I forecast that they will ignore Mr Osborne and predominately buy gilts. Technically, King is correct that an independent central bank should only expose itself to significant credit risk if it has a clear indemnity from the Treasury for any losses. Until the Treasury gives them that indemnity QE2 will be similar to QE1. There may be some EU laws against state aid that prevents the Treasury offering an indemnity.

In the 19th century when the Bank was private, they had mostly private sector risk assets on their balance sheet. As recently as the 1980s under Mrs Thatcher the Bank had significant credit risk on their balance sheet. However, they were not formally independent from the Treasury so did not need an indemnity. Since they are now independent with the Treasury being the only shareholder, they probably feel that credit risk beyond the risk from the commercial banks requires a guarantee for any losses from the government.

vimothy I think it has been buying corporate bonds in previous rounds of QE, but not this one, apparently.

This is true–it bought some high grade corporate debt via the APF. However, the problem the Bank has is that UK capital markets are not extensive enough for this to form a large part of the programme.

The Bank can only buy very high grade (risk free) assets to minimise risk to its balance sheet, i.e. to prevent itself from redistributing wealth via losses on its portfolio.

22. Luis Enrique

Richard W,

would you mind explaining, if you know it, what the real effects of central bank losses are? because it’s not easy for me to understand why it would matter.

I am thinking more of the relevance to the EU situation, where the ECB seems (to my mind, mystifyingly) reluctant to assist with the grand bank recapitalization / sovereign bailout / sovereign default deal needed.

23. Luis Enrique

ah, vimothy, I see what you meant … and you also provide something of an answer to my question for Richard

Why don’t they just give everyone £7000. Then those people can either pay off their credit cards which call me Dave said is vital. Or people with no debts could deposit the money in the banks, which would help re capitalize the banks.

Just by pass the rich banking elites.

@ Sally,

they’re not listening, they’re lost in all their macroeconomic BS, unable to see that printing up a huge amount of money and giving it to a bunch of bankers, whilst the rest of us see our money devalued and our bills going up is an outrageous rip-off.

26. Luis Enrique

Sally, if you are actually interested in an answer, and not just being rhetorical, I offer my best guess here.

(you keep referring to QE as “free” money, I’m not sure if that betrays that you don’t know what QE is, or whether you are just exaggerating for effect)

@ 21. Luis Enrique

Well if the central bank is exposed to significant private sector credit risk they are also exposed to insolvency in the event of losses even if the losses were in their own currency. How would just be creating more money to cover their losses be consistent with price stability? Hence, if the Treasury wants them to assume credit risk they should also guarantee through the taxpayers the potential losses. Moreover, for the central bank to assume private sector credit risk is a quasi-fiscal subsidy. If they bought BP bonds rather than Tesco bonds it is favouring one private sector firm over another. The ECB have been involved all along in quasi-fiscal subsidies through accepting all manner of poor quality assets in repos. The inimitable Willem Buiter covers the issues of central bank insolvency and fiscal subsidies here. I am not sure as he claims that the BoE did get from the last government an indemnity against private credit risk.

Just to be clear, nobody would enjoy receiving a cheque for a couple of thousand pounds more than I would. Really.

But that isn’t an option at the moment. Successful monetary expansion should mean that isn’t necessary because my wage will begin to go up more than prices. But if QE doesn’t work, but is supported, we are a step closer to the bank buying £X amount of debt from George and George using that to mail out cheuqes for £X/60m to everyone.

If everyone slags off QE as not going to work, or as only corporate welfare we will probably never reach that point.

Full Disclosure: Perhaps I have begun to lean more towards monetary stimulus over fiscal stimulus because as a young, fit, healthy, male who works in retail while studying at a graduate level part-time, there is next to no chance of me receiving any help from any level of government whatsoever. That’s fine, I’m having a great time, but that may impact on my thinking without me noticing.

Mr Thompson “they’re not listening, they’re lost in all their macroeconomic BS”

Yup. Just more welfare for the rich. Should have let the fuckers go bust, and watch all their share options and pensions and bonuses go up in smoke.

Guillotines are too good for these people.

30. Charles Wheeler

It’s good to see the “left” in such wholehearted support of a policy that seems to work like this :

Labour, 2008. QE1 announced. Mervyn King says there won’t be inflation because of the ‘output gap’ – all those factories running two shifts when they could be running three. BoE Pension Fund moves all its assets into inflation-proofed bonds (really).

Sterling devalues by getting on for 30% (and the printed money goes into share and commodity prices). This raises inflation dramatically, because most of what we consume, especially commodities, is imported – those factories were non-existent divisions on the BoE map board. Wages are static, because mass immigration means it’s a buyers market for labour*.

With prices rising and wages static, the only way to keep household consumption up is to send the wife out to work or spend on credit. But the wife’s been at work since 1989 – it was the only way you could afford the mortgage – and who’s going to increase their personal debts in this economic climate ?

So consumption falls. Working people are getting poorer at around 5% a year. There’s a small increase in manufacturing for export, but the balance of payments is still massively negative. Retailers suffer, the economy flat-lines.

OMG. The economy is not recovering ! Inexplicable !

Conservative, 2011. QE2 announced. King, abandoning reality completely, says it’s because his magic crystal ball says inflation is going to fall dramatically. Sterling devalues (it’s dropped 10c against the dollar in a couple of days). This raises inflation again, because most of what we consume, especially commodities, is imported.

Wages are still static, because mass immigration is still at near-record levels despite the crisis.

So consumption falls again, as it must.

OMG. The economy is not recovering ! Inexplicable ! Time for QE3 !

Rinse and repeat until UK real wages are at Chinese levels and pensioners are self-immolating in Parliament Square.

32. Chaise Guevara

@ Luis

I’ve kept out of this thus far, as I’m not an economist, but I feel I can butt in in the spirit of honest enquiry: what’s wrong with the idea of distributing funds to the people to help the economy? In layman’s terms if possible, I don’t speak economics. It seems to me that this policy would lead to an immediate burst in spending, hopefully helping out businesses and thus boosting employment, and also in some cases help people pay down debts – which wouldn’t create the intended benefit but would at least help people and possibly help a few people losing their home and perhaps ending up on state aid.

@ 30:

I’m also not an economist, so I’m quite possibly wrong, but injecting lots of money into the economy at once generally leads to rapid inflation, so giving people any significant amount would probably have the same effect.

34. Chaise Guevara

@ 31 XXX

That much I get… I was under the impression (possibly from the other QE thread) that Luis wasn’t saying we shouldn’t inject money, he was debating over HOW we should inject money. So I was accepting the “let’s inject money” thing provisionally, and wondering why we should effect this by giving it out to the population.

35. Chaise Guevara

Sorry… why we *shouldn’t* effect this by giving it out to the population.

When people say “printing money” you imagine that the Bank is literally printing up money and passing it to the banks, so it’s natural to ask, why don’t theyn print up the money and hand it to people who deserve it, meaning anyone but the banks. But this isn’t what is actually happening. When the Bank of England “prints money” it doesn’t make anyone richer, because it uses that money to buy assets. This makes the wealth of the private sector more (or less) liquid, but it leaves the level of wealth unchanged.

What you are suggesting Chaise is that the government should raise everyone’s income, which is a different thing.

37. Chaise Guevara

@ 34

Run that by me again. Disregarding the literalism of actually printing new banknotes, I was under the impression that QE involved directly adding extra money to the economy. If so, I don’t see how that could leave the total wealth unchanged. If not, I appear to have misunderstood the whole premise.

It involves adding money and removing bonds, so that the private sector has more of one type of asset (money) and less of another (long bonds), but the same level of wealth.

39. Chaise Guevara

@ 36

Then I HAVE misunderstood the premise. What’s the idea behind that, then? Liquidity?

@34. vimothy: “When the Bank of England “prints money” it doesn’t make anyone richer, because it uses that money to buy assets.”

My house mortgage is an asset owned by a building society. The Bank of England could buy one fourth of my mortgage and make those funds available for loan by my building society.

But my building society and bank do not wish to loan money to citizens and businesses because they are wary about getting the money back. My bank, especially, wants to do business with people who create wealth and who become sticky customers, which is a contradiction.

“Printing money” alone does not change anything. Distributing printed money is a risk, but what else do you do?

41. Luis enrique


First, although I’m not confident I understand all the consequences, I like the idea of mailing cheques and other people do too.

This is going to be an expansion of the answer I gave to Sally above. If they have a good reason for not doing it, this is my guess. The BoE is in charge of controlling inflation. If it buys assets of reliable value, like bonds, when it thinks it needs to contract the money supply it can sell those bonds, easily. If they mailed cheques, it would still involve the BoE buying bonds and having the govt actually mail the cheques. The only way to suck up money is for the government to raise taxes or cut spending to generate a surplus which they’d use to repay the bonds held by the BoE. But the BoE can’t get the govt to put VAT to 30% up just because it wants to tame inflation. So QE is as it is, so the BoE retains control over the money supply.

Having typed all that, I just thought, the govt could mail the cheques, then the BoE could just sell the bonds to private investors if it wanted to withdraw money from circulation, like it does normally. So turns out I don’t know the answer. Ah, hang on, then it would simply be like the govt had borrowed the money and spent it, pure fiscal, just like a tax cut or spending increase funded by borrowing as normal. Because the bonds would end up in private hands and the tax payer would have to pay the bill. So we’d just get cheques we’d have to pay for in future taxes, inflation or not. 

42. Luis enrique

In case it’s not clear, by selling bonds to the public in return for cash, the BoE withdraws money from circulation

It involves adding money and removing bonds, so that the private sector has more of one type of asset (money) and less of another (long bonds), but the same level of wealth.

Not the private sector surely.

The financial sector will have more liquidity- whether they choose to pass it on to the productive elements of the economy is extremely doubtful in the current climate.

In fact they won’t.

Luis Enrique – “In case it’s not clear, by selling bonds to the public in return for cash, the BoE withdraws money from circulation”

Only if it doesn’t pay the coupon (in which case no one would buy) and if it refuses to redeem them (ditto).

45. gastro george

Which is why QE has little impact – you’re just exchanging one asset (money) for another (bonds). The only difference is that money doesn’t attract interest, so it goes somewhere else in order to make a return. This props up other asset prices, which may be a good thing in a crisis, and it adds liquidity to the system, but it may also cause asset bubbles.

How this affects the real economy is tangential at best.

46. Chaise Guevara

@ 29 Luis

Ok, I think I understood most of that. Forgive me (I promise this is less stupidity on my part and more to do with beer consumption), but am I right in saying that, to do the equivalent of what the BoE’s doing but with the public instead of banks, it would actually have to buy stuff off the public? Because you’re giving people liquidity by buying things they want to sell?

47. Chaise Guevara

Again, sorry, I feel like a kid asking questions on a PHd course here.

48. Luis enrique


Yes, I think so. The BoE could do QE by buying jewellry or cars … Although it would then be taking on resale risk, which it doesn’t with gilts.

Laban, no, those are government bonds and the taxpayer redeems them with money already in circulation. Central banks release money into the economy by buying bonds, and withdraw it by selling them.

George, well yes monetary policy always involves swapping one asset for another, money. That doesn’t mean monetary policy is always ineffective. It is only in present circumstances, where banks may well just keep the cash on reserve instead of sending out into the economy by various routes, that QE may fail. Note that if it does fail like that, it will not cause inflation and will not cost us anything.

The obvious way to get the effect you’re all after is for the Bank to simply monetise govt debt, i.e. buy bonds from the Treasury and hold them until maturity. Then govt spending would be funded by central bank money creation (so central bank is lending to the govt directly).

@ 30. Laban Tall

You are just making stuff up. Sterling depreciated well before QE1, which commenced in March 2009. In theory QE should depreciate the external value of the exchange rate. However, currency values are complicated and are subject to so many variables that one driver of depreciation can easily be overwhelmed by another driver of appreciation. Sterling appreciated after the commencement of QE1. Sterling slightly depreciated yesterday and appreciated even more today. So taking a 2 day snapshot the announcement of QE2 has been bullish for sterling. It is always dangerous to reason from a price change.

Sterling is an international risk asset. If the global economy is doing well sterling will appreciate. In a risk off world sterling will depreciate. When the world economy fell off a cliff in 2008, sterling depreciated with it and all this took place before QE1. International financial flows are a more powerful driver than the BoE balance sheet.

People need to stop thinking about the banks in terms of QE. The banks are only players in the same way that they are players when people are paid their salary. Money is always part of the financial system until it is withdrawn as currency. However, as soon as the currency is spent it will most likely be redeposited in some other bank account. Buying assets from banks would be form of credit easing and not QE. The BoE specifically buy assets from non-banks. The money is only in the banking system as claims against the bank by the seller of the asset. Therefore, banks are just the intermediates and not the main point of QE.

Mailing cheques to people would be a fiscal policy and not something that the monetary authority should do. If the government wanted to do that then the Treasury should do it and issue bonds which the BoE could buy. A tax cut in our current environment has the exact same effect as mailing cheques to people.

What’s the idea behind that, then?

Well, there are different ways of understanding QE and monetary policy more generally corresponding to different ways of modelling the economy.

One way to approach it is like this. Imagine an economy in which people possess a certain amount of financial wealth comprising bonds and money.

Say that there is only central bank money for simplicity. This means that the central bank determines the supply of money absolutely.

Now, in equilibrium supply equals demand. If the central bank supplies more money than demanded, it will cause the price level to rise. This occurs because the public are unable to rid themselves of the excess money on aggregate and can only pass it between themselves like a “hot potato”, which will raise prices until the system settles at new equilibrium with the new stock of money and new price level.

So the basic idea is that there is this one particular type of financial asset called money, which is connected to the general level of prices, since money has a special role as unit of account and medium of exchange.

The central bank allows the public the public to hold a certain amount of its wealth in this form (as money), but it doesn’t supply the wealth. It just says to itself, “hullo, demand for money has gone up–better increase the amount of money the public has by swapping it for some of the public’s bonds or prices will fall”. Or something like that.

@27 Sally,

due to the austerity measures, I suggest an axe may be the better option.

… and back to the macro BS.

RichardW/50: A tax cut in our current environment has the exact same effect as mailing cheques to people.

It puts the same amount of money in to the pool held by the population, yes. I don’t think it’s necessarily the same effect, though, because the distribution will be different.

A tax cut will give more money to the people who pay more tax (absolute, not as % of income), who are generally the rich. But they already have plenty of money, and the economy isn’t driven by their discretionary spending. Conversely, handing out the money uniformly to everyone (or better still? to everyone except higher-rate taxpayers) puts the money in the hands of the people most likely to spend it because they need the extra cash to cover necessary costs.

54. Luis enrique

Krugman today. The Monetary Base and Prices

If you think you know printing money debases the currency, you are about as wrong as wrong gets

55. Luis enrique

I mean it need not necessarily. I don’t mean that it won’t.

Krugman doesn’t mention the fact that the Fed currently pays interest on bank reserves, though, which is weird…

57. Paul Newman

Confusing isn`t it . We are currently suffering food , fuel and ticket price inflation , rising taxes and reducing real wages ( well in the private sector we re anyway) , and things costing less is a “bad” thing. Housing is still vastly too expensive and the middle-class welfare state has been removed without removing the £40 billion of taxes that paid for it . But deflation is still a “bad thing”. There are still huge margins in food an , in fact, most of the UK`s protected business and yet reducing prices is a bad thing?
Why is it a bad thing ? The Insurance industry operates in soft and hard markets selling products that often go down in price. This can be dramatic but whilst its not always easy its not apocalyptic . QE has entirely failed to do any good in the past and with state spending now at well over 50% of GDP it will end up wasted ina public sector pension anyway.
Obviously it is exceedingly dangerous to print money and there are of course costs .The costs are the future inflationary problem or lack of growth due to the high interest rates required to stop that inflation. We are relying , lets not forget on Economists who are yet to get one thing right ,to guide us.
One thing I dodn`t understand is this . If the B of E prints money to buy its own bonds , and those bonds usually go straight into propping up the deficit , isn`t this way of adding liquidity and demand about the owrst there could be .

It goes directly to the biggest wasters in the country ? Or have I got that wrong

Well, one of the things that costs is labour. Imagine that all prices fall in the economy, which is deflation. Everything now costs less, including your labour. So you take a nominal paycut, but haven”t moved at all in real terms. So far, so what.

But debts are fixed in nominal terms, and so the real value of any money you owe has increased. (For example, think about what it implies for your mortgage).

@57 Paul Newman,

you’re on to something there. The fear of deflation is a strange fear indeed. I, for one, do not lose sleep at the ‘danger’ of a reduced bill for electricity, gas, insurance, food etc. I do not worry about the fact that a television that would have cost £2000 five years ago can now be bought for £500.

Also the calculation of inflation is a wholly manipulated statistic, seen clearly in the representation of rising house prices as a good thing (why?), which isn’t included in the inflation index.

In reality, price deflation is the natural process of technological development, which is still seen in things like televisions, but our monetary system is based on inflation, to serve the interests of governments with massive debts, which they want to inflate away, and the bankers who are first in line for the new money. This is justified through a load of hocus-pocus, to mask the cynicism of Keynesianism, which posits that people won’t stand for a reduction in wages, but they won’t notice if those wages are devalued and robbed of purchasing power.

60. Chaise Guevara

@ vimothy

“But debts are fixed in nominal terms, and so the real value of any money you owe has increased. (For example, think about what it implies for your mortgage).”

Again, I may just be displaying my ignorance here, but wouldn’t deflation generally be expected to coincide with lower loan rates?

Paul, thomas, what you are describing is getting richer.

In deflation all prices fall, including the price of your labour, so you leccy bill will go down, and will your wage but your mortgage payments will stay the same. So you will be better off with respect to your leccy bill but not with respect to your mortgage.

Shifting from inflation to deflation will bankrupt lots of people who’s debts suddenly become unaffordable.

You are also assuming inflation is easy to measure and that nominal prices are really important. Food may cost more money today that 20 years ago but it costs about half the labour time it did then. That’s what I care about.

62. Paul Newman

But debts are fixed in nominal terms, and so the real value of any money you owe has increased. (For example, think about what it implies for your mortgage).

You are assuming that your wage has no relationship whatsoever to your performance and productivity.

63. Leon Wolfson

Ah yes, don’t panic, inflation is a myth.


While I do not doubt that deflation would be a problem, particularly in the private sector. Surely a related problem is that the levers the BoE, and government, are mostly designed to combat deflation rather than vice-versa.

Although increasing interest rates is not a problem when the economy is growing, if we enter a prolonged stagflationary period, what levers would the BoE or the government actually have to counter this? Find an oil field with cheap, easily extractable resources a short walk from London city centre?

65. Luis enrique

Richard W, just picked up those Buiter links; thanks.

66. JustAnotherVoter

Truly, I have died and gone to heavan. A full-blown endorsement of Market Monetarism on LibCon. Left Outside, Richard, Luis – you guys rock.

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