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Why we should support QE (or printing money)


3:38 pm - October 20th 2011

by Left Outside    


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Printing £75bn does not sound like a plan to make us all richer. It sounds like a plan to turn us into Zimbabwe.

But last week Mervyn King, Governor of the Bank of England, announced that is exactly what he will be doing. When complete, the Bank’s Quantitative Easing, or QE, programme will have seen £275bn leave the printing presses, nearly £5000 for every person living in the UK.

The Bank’s actions appear odd, even dangerous, only because of the rarity and extremity of our situation.

In normal times the Bank doesn’t announce how much money it will be printing, it just changes the interest rate at which it will lend. To keep growth steady, when the economy is decelerating they cut interest rates to encourage spending and when the economy is accelerating they raise interest rates to discourage spending.

You can raise interest rates as high as you like, but can only cut them to zero, and that is where they’ve been since March 2009. This means they have to try to encourage spending through other methods.

In nervous times, we all would like to improve our balance sheets, we all want to build up buffers of savings, and that often involves wanting to hold more money in our current accounts. When one person does this it causes no problems, but when we all become more nervous we all end up wanting to build up a safety buffer.

Unless extra money is put into circulation we get slowly poorer until people decide they have the right amount of money relative to their earning and spending. We have a recession. We have our current stagnation.

QE is designed to put more money into circulation and to create more safe places to invest that money. That should lead to healthier balance sheets and more demand to employ people and will bring the economy back to life.

Looking at the UK and global economy, three things imply the Bank’s actions will help more than hinder.

One major source of inflation has been successive increases in VAT. In the last two years it has increased from 15% to 20%, adding at least a percentage point to inflation. A lot of inflation is also still working through import prices since sterling devalued.

Lastly, crisis in Europe and continued depression in the US means the UK’s economy can expect little external support. The Bank of England has little influence over any of these and has ignored them to focus on what it can influence in the domestic economy.

If the financial crisis or government policy has wrought such damage upon us then QE will merely produce ever higher prices. If there is still some slack in the economy then we will see more people employed and better living conditions for everyone.

Simplistic comparisons with Zimbabwe may be attention grabbing, but in reality QE may be the best hope we have to get the UK back on track.


A longer version is at Left Outside’s blog

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About the author
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


1. Man on Clapham Routemaster

A much better idea is introduce a new currency (call it the New British Pound) Anyone wishing to convert from the old money would have to declare what they currently hold. I think money would certainly start floating back into the country. Just the tax alone could reinvigorate the economy. Would that work I wonder?

I disagree, its more of the same strategy and will fail. It’s just protecting the balance sheets of the banks, who by and large are the only ones to issue money as debt. You should read Positive Money’s proposals for a real solution to this financial crisis http://www.positivemoney.org.uk/

3. gastro george

It can’t be said too often that QE is not “printing money”. It’s merely an exchange of assets – from interest bearing bonds to non-interest bearing cash. Which is why it has had such little effect, apart from increasing the liquidity in the banking system (as the money has to go somewhere to make a return).

4. gastro george

It can’t be said too often that QE is not “printing money”. It’s an exchange of assets – from interest-bearing bonds to non-interest-bearing cash. It does little apart from improve the liquidity of the banking system, as the cash has to be invested somewhere else.

QE is not about growth, it is a way to prop up our banks (again) because we are not regulating them.

The timing of the QE announcement was very suspicious.

Just the day after we the QE annoucement we got news that they had downgraded our banks. The QE was an attempt to deflect attention away from the fact that the BOE/FSA are still not regulating the banks properly.

That is why I called for Mervyn King to go on my blog. Darling wanted to fire him but couldn’t find anyone better and didn’t want to spook the markets.

Kings main goal is fighting inflation but it is permanently over target. QE will just prolong the problem. His secondary goal is to regulate the banks. He is failing at that too.

Recently we found out that 60 European banks need bailouts. Top of the list is RBS, which Gordon told us he had saved, and Barclays, which got away without a cash injection last time but which did receive cheap money from the first rounds of QE.

Then, days later, Barclays announce that they are lending billions to a non-investment grade US company – even though they will need bailing out when Greece defaults.

The banks are still chasing deals (backed with our money) to push up revenue so they can get bonuses.

We may have no choice but to use QE at this point, but it should be seen as a failure and somebody should be fired over it.

Nobody got fired over the first credit crisis. Mervyn King should definitely get fired over the second one when it begins.

6. gastro george

Obviously it can’t be said too often – sorry, double post.

The big danger with QE is that it can severely exacerbate inflation if demand isn’t there. Another dose of QE looks likely to do this as demand has fallen further. Also, it seems likely that banks will profit from more QE without any benefit to the wider economy.

Whatever the value of this £75 billion, it has been taken from the other money in existence. It is the same as pouring water into a barrel of beer. He has taken purchasing power away from ordinary people and given it to his pals, who will get it at the ‘old’ value. By the time it percolates through the system, the people at the end of the line have already seen their prices rise.

The rich get richer, the poor get poorer, and the mechanism for this wealth transfer is inflation of the money supply. And leftwingers applaud? Crazy.

This latest QE smells of desperation and is unlikely to have much positive effect. If we must go for QE, why not put the money in the hands of ordinary people? Issue each household with vouchers that are equivalent to money but must be spent within the next three months.

10. Leon Wolfson

MORE agitprop for hammering poorer people’s ability to eat, heat and sleep under a roof?

11. Frances Coppola

Pursuing ever-looser monetary policy to compensate for a fiscal policy that even the IMF thinks is too tight is madness. It hurts people who are living on fixed incomes – notably people in receipt of pensions. Those people typically have little debt so are in a position to SPEND if they have the income to do so. We need spending into the economy by those who can, to offset the deflationary effect of highly-indebted people paying off debt. So what do we do? We pursue a monetary policy that reduces the incomes of those who actually could spend some money. It’s totally bonkers.

It is not the Bank of England’s job to attempt to rescue the government from the consequences of its crazy fiscal policy.

or maybe that’s all he can do and needs to something while are gov distract us all by telling us all how our fellow citizen’s are what’s making our life’s so miserable

I really don’t know what to do with you people.

Below is the key passage, has anybody got anything relevant to say?

In nervous times, we all would like to improve our balance sheets, we all want to build up buffers of savings, and that often involves wanting to hold more money in our current accounts. When one person does this it causes no problems, but when we all become more nervous we all end up wanting to build up a safety buffer.

Unless extra money is put into circulation we get slowly poorer until people decide they have the right amount of money relative to their earning and spending. We have a recession. We have our current stagnation.

Frances, I don’t really understand. Yes, poor pensioners have a high propensity to consume but if that is the case we should tax some people and give the money to them. That could be a deficit neutral stimulus policy, take money from those likely to save and give it those likely to spend.

I don’t see why monetary policy should be used to resolve distributional problems. Monetary policy should be used to keep expected expenditures and incomes growing at a steady rate.

Just the day after we the QE annoucement we got news that they had downgraded our banks. The QE was an attempt to deflect attention away from the fact that the BOE/FSA are still not regulating the banks properly.

Some small banks were downgraded because a small bank was allowed to fail. Rating agencies took this as a signal that small banks were no longer enjoying a government guarantee and were hence riskier.

What you are describing as misregulation is actually very good regulation indeed.

MORE agitprop for hammering poorer people’s ability to eat, heat and sleep under a roof?

Yes, I’m such a bastard trying to prevent people from eating, heating and sleeping by trying to help them get jobs…oh wait.

Whatever the value of this £75 billion, it has been taken from the other money in existence. It is the same as pouring water into a barrel of beer. He has taken purchasing power away from ordinary people and given it to his pals, who will get it at the ‘old’ value. By the time it percolates through the system, the people at the end of the line have already seen their prices rise.

The rich get richer, the poor get poorer, and the mechanism for this wealth transfer is inflation of the money supply. And leftwingers applaud? Crazy.

Thomas…I refer you to something which you must have read and completely not understood/refused to understand.

In nervous times, we all would like to improve our balance sheets, we all want to build up buffers of savings, and that often involves wanting to hold more money in our current accounts. When one person does this it causes no problems, but when we all become more nervous we all end up wanting to build up a safety buffer.

Unless extra money is put into circulation we get slowly poorer until people decide they have the right amount of money relative to their earning and spending. We have a recession. We have our current stagnation.

What you are describing, where money printed magically – without interacting with anything – reduces the value of all other money is not what happens. There is not a constant speed at which money moves around the economy. When this speed reduces either 1) all prices must reduce frictionlessly and immediately 2) we have a recession until prices adjust or 3) we print more money to keep aggregate spending on trend.

Which is the best option? 1) is impossible, 2) is you prefered method 3) is mine.

And yes… it is a pity that monetary policy is conducted through bank balance sheets rather than through a citizen’s basic income top up, but that is how the world is.

Don’t let the perfect be the enemy of the good.

nearly £5000 for every person living in the UK.

I can tell you I haven’t seen any of my 5 grand. If they are going to do QE, they should give it as an amount ot each citizen in the country.

Whilst I agree wholeheartedly with your intention that govt policy should be geared towards helping people who are struggling, I think you are wholly mistaken both about the effectiveness of QE and the availability of other, actually effective, policy options. I also think that you’ve allowed your argument to be framed to far too great an extent by the assumptions and claims of, now quite obviously faulty, neoclassical economics.

QE does almost nothing except bloat bank reserves. It is based on the assumption that banks will start to lend more if they have more reserves. This has quite obviously not been the case – banks aren’t lending and there is also less demand for credit, as people try to sort themselves out and save, as you point out. The injection of reserves makes the banks no more or less likely to lend, because their reserve position does not determine their lending decisions in any case.

More here

There are superior alternatives that all involve the government directly spending – by purchasing goods and services, and by directly employing people when the private sector is evidently unable to – or by taxing less (which, we should note, has no bearing on the UK government’s ability to spend).

In any case, none of this has anything to do with ‘printing money’ as Gastro George pointed out. This isn’t just a pedantic, hair-splitting distinction, for at least a couple of reasons. Firstly, it allows the terms of debate to be set by the same mendacious and / or misinformed voices who caused this mess and who clearly lack any positive policy proposals. Secondly, using ‘printing money’, even as a shorthand, can seriously impair getting a sensible or accurate idea of how things actually work. You might understand it all just fine, but it’s not likely that everyone reading will.

‘Printing money’ is a pretty insidious frame insofar as it re-enforces an association of money per se with cash, which in turn occludes a clear picture of how the vast bulk of money flows around the place and implies a completely fallacious equivalence between household and government spending. Better just not to use the term, IMO.

Similarly, why dignify hyperinflation claims with voluntary airtime? The onus should be those making such claims in the first place to demonstrate why the UK’s current circumstances warrant comparison with, say, Zimbabwe’s in the absence of the collapse of the agriculture industry and oodles of foreign denominated debt.

Left Outside, you are fighting a valiant fight. However, this short thread demonstrates why QE is not the best monetary policy that we could follow. People including many economist simply do not understand the difference between money and credit. The supply of credit from the banking sector could fall and QE could be successful and creditists would not understand why and deny that it had been successful. They would deny it because they see the world through the perspective of credit and if credit falls they would consider QE a failure. The usual confusion between monetary policy and fiscal policy is also in evidence.

Therefore, we need to move monetary policy away from meaningless targeting of inflation and the undefined purpose of QE. As a longtime supporter of Scott Sumner’s idea of NGDP level targeting, as I suspect you are too. I am delighted that these monetary policies are now being touted as an idea whose time has come. QE can only be a second best policy because for most people they do not see how it relates to them. NGDP level targeting is far superior to QE because it is the same thing as targeting higher incomes and all sides can agree our problems relate to falling incomes. Even Paul Krugman has accepted that fiscal policy is off the table and has endorsed targeting NGDP. We are all monetarists now.

http://www.businessinsider.com/the-hottest-idea-in-monetary-policy-2011-10

http://www.cityam.com/forum/the-real-central-bank-target-not-inflation

http://www.economist.com/blogs/freeexchange/2011/10/monetary-policy-0

http://www.themoneyillusion.com/

http://monetaryfreedom-billwoolsey.blogspot.com/

21. Leon Wolfson

@15- Oh wait, YOU ARE. Keep trucking, Tory-man. (Well, I suppose they might not be far-right enough for you…)

@13 LO

“Yes, poor pensioners have a high propensity to consume but if that is the case we should tax some people and give the money to them.

Inflation has the same effect as a tax on savers and pensioners. QE is a tax on poor pensioners.

“I don’t see why monetary policy should be used to resolve distributional problems. ”

QE is a distributional problem. It takes purchasing power from ordinary people and redistributes it to the pals of Mervyn King.

The problem is not what QE is supposed to achieve. It is what it actually will achieve.

23. Leon Wolfson

@21 – Of /anyone/ struggling to make ends meet. There are plenty of people out there on low salaries and/or benefits which are rapidly being erroded!

@22

I don’t understand your point. Sorry.

The left should strangle people who write shit like this in its name. QE is day light robbery of the working man and woman never mind pensioners and those on welfare. It is part of the never ending bank bailout.

Personally, I’m not convinced by NGDP targeting.

There’s a good (short) critique of it here: http://newmonetarism.blogspot.com/2011/10/nominal-gdp-targeting.html

Vimothy, Bill Woolsey critiqued Williamson’s critique here.

http://monetaryfreedom-billwoolsey.blogspot.com/

28. gastro george

“Unless extra money is put into circulation we get slowly poorer until people decide they have the right amount of money relative to their earning and spending. We have a recession. We have our current stagnation.”

Actually, this is more or less true, but it’s an argument for running a reasonably sized deficit and not for QE.

29. buck dampleather

you can always rely on this website if you are looking for poorly informed commentary attempted by commentators out of their depth.

Inflation is lower in Zimbabwe than in the UK. Lower than 4% in
Zimbabwe – google it. Mystic Mervin should be taken out and shot for his crimes and lies. Month after month we have to listen to his lies about how inflation ‘has peaked’ and deflation is the danger.

It is self evident that the massive and unmanagable debts run up by Labour in funding their welfare regime is now being ‘inflated away’. The colateral damage is dismissed. The prudent savers are punished whilst the profligate are rewarded. This has no moral foundation and is rotten to its core. Historians will recognise the injustice and Mervin’s crimes will not be forgotten or forgiven.

30. bud heavy horn

I imagine that most of the left wingers supporting this website are on state support and therefore they will care little about inflation given they are sitting pretty with inflation protected welfare payments.

Richard,

That’s an odd critique of the critique, since Woolsey doesn’t really respond to Williamson’s argument with anything other than snark.

This post, while not addressing NGDP targeting explicitly, might be a better place to start:

http://newmonetarism.blogspot.com/2011/08/liquidity-traps-money-inflation-and.html

The basic problem, it seems to me, is given that central banks cannot hit their targets under the current regime, there is no reason to suppose that replacing an inflation target with an NGDP target that will make them any more effective. They’ll still be doing exactly the same thing under NGDP targeting, i.e., adding and subtracting reserves to hit a short-term interest rate, just with a slightly different reaction function.

I don’t think anyone on this thread truly understands what QE is.

In effect, it is forward starting debt. It is a means for governments to inflate their money supply (and thus spending) temporarily without increasing their balance sheets. As such, when this latest crisis is one of government debt, not banking, and interest rates are already as low as they can go, it gives governments what looks like an escape route to keep spending without really facing up to the reality of their problems.

The mechanism of QE is roughly as follows;

– Government issues debt
– Government electronically increases money supply to buy back debt. Govt now holds ther own bonds, and more money is now in circulation
– When those bonds mature (and this is the important part) government has a choice of either collapsing back the money supply or is forced to issue new bonds to fund that increase in money supply. Hence “forward starting” debt.

This increase in the moeny supply fuels short term inflation, but governments with large deficits (like the UK and US) using QE are in effect doing so to part fund their overspends. In that case the markets rightly sense that this spending will continue, that deficits will remain and the QE will unlikely be reversed, so in pushes long term inflation expectations significantly higher as well.

As for people blaming banks for this latest crisis; this time they are basically passengers, and the real crisis is one of government debt. Banks are forced (by government legislation) to hold a lot of government debt as Tier 1 capital for their capital adequacy ratios. When that government debt those self same governments force the banks to hold becomes worthless, banks inevitably start to fail. In this case at least there really is very little banks can do other than hold more cash in reserve and lend less….

33. Leon Wolfson

@32 – It’s corporatist welfare, and an inflation pump. Sure, that’s a description of the effects, but it’s a working one.

When inflation is being USED to rapidly erode an already miserly social welfare net…

34. Leon Wolfson

@30 – Thank you for parodying yourself. Protected. Ahahahahaha.

@28 – Quite

35. gastro george

@32

“Govt now holds their own bonds … When those bonds mature (and this is the important part) government has a choice of either collapsing back the money supply or is forced to issue new bonds to fund that increase in money supply.”

Does this make any sense? What meaning do you think it has if the government has in its possession a piece a paper that means it should pay interest to itself until it should pay money to itself …?

@33 Leon

INflation is being used to erode the massive amounts of debt governments have. Debts pretty much run up because of the huge burden of social security payments.

@35 George

I know it sounds odd, but the government issues debt, people buy it and give the government cash. The government then electronically “prints” more money and uses it to buy back the debt they’ve issued, putting cash back into the system.

It’s a bit of a roundabout way of doing it but it is done this way as it allows the government to control the amount of cash in the system – if they jsut give people money they can never retrieve it. This way they can remove liquidity from the system by issuing bonds, then eliminate the cash they recieve for them, again electronically, to undo the QE.

37. gastro george

@36 Tyler

My previous comment was rhetorical.

“… the government issues debt, people buy it and give the government cash.”

This fundamentally (like many people) misunderstands fiat money. Nobody ever “gives the government cash”, because the government, as you note, can “print” it out of thin air.

You are correct that bond sales can be used to soak up excess money in the system. But essentially cash and bonds are very similar – promissory notes issued by the government. It’s just that they belong to different asset classes, with different interest rates. Which is why the effect of QE has been minimal, except to add more liquidity to the banking system, and support asset prices, as the cash tries to find a better interest rate than zero.

38. Leon Wolfson

@36 – You missed “scroungers” off that rant.

Never mind that much of the spending is because of Tory policy (Thatcher pushing people into IB and savaging the North), and the current economic crash. No, it’s more important to actually push UP the amount borrowed than to address the causes.

Never mind that we had full employment for some years, and other spending priorities than the welfare state.

@ 37 George

Whilst the government can indeed just print money, it can’t do so without affecting the money supply. I was being a little loose in my terminology, but bondholders really do give the government their cash for a period of time.

@ 38 Leon

Ah the old Thatcher was evil rant. How atypical. Never mind she hasn’t been in power for 20 odd years and Labour were in power for 13. It’s still all her fault.

Did you know manufacturing, typically a “northern” industry if there were such a thing, fell 3.6% under Thatcher and Major’s Tory governments. It fell 11% under the last Labour government.

And yes, it is social security which is the largest and fastest increasing part of government spending, not just in the UK. Indeed the crisis and resultant recession have pushed unemployemnt figures up, but social security spending has been trending upwards for many years. Mostly because politicians of all breeds are unable to ever make unpopular but necessary choices, so simply try and put them off for as long as possible. I mean, look at Osbourne now. He has put in place a much needed yet fairly tame austerity package and every hard leftwinger is positively foaming at the mouth over it.

40. Leon Wolfson

@39 – Much of the damage she had done was still being repaired. And now the wounds are being ripped open again.

“Mostly because politicians of all breeds are unable to ever make unpopular but necessary choices”

Pruning the herd. Killing off the weak. Social darwinism. What SHIT. The UK’s benefits are miserly, and the Tories are trying to make the problem of “the poor” go away by corpses now.

The “austerity” package is something which has KILLED growth, lead to HIGHER borrowing and is hurting millions, as well as slashing their rights. Of course anyone sensible is frothing. It’s the fanatics who think it’s a good idea. There are billions upon billions for the Tory’s pet projects, mind you.

Evil. Pure and simple.

@ Leon

Seriously, less frothing, more reality. The hyperbolic nonsense red flag waving socialists like you spout really does mark you out as a loony lefty.

As i say, It was the Labour party that really did for the UKs manufacturing industry.

The UKs social security payments might seem miserly, but happen to be one of the best in Europe, let alone the world.

The austerity package hasn’t killed growth. Europe’s debt crisis is the thing doing that. Regardless – had there not been an austerity package the UKs ballooning debt would have quickly started to act as a massive drag on the economy (if it hasn’t already) and it could quite easily have degenerated into a much more serious problem, not least with much higher funding costs for our debt.

What part of a 10%/150bn budget deficit don’t you understand?

42. Leon Wolfson

@41 – More reality, less wooly-headed belief in things going your way because they should be so. I’m perfectly moderate, I’m just mocking the hardline single-track mind right wingers as usual.

“As i say, It was the Labour party that really did for the UKs manufacturing industry.”

You think it’s “reality” to constantly lie? To deceive yourself that the One True Party can do no wrong, that there is nothing in this world which can touch the armour of your assumptions?

The austerity package has turned what was a recovery into a slump, and heading down. The EU’s debt crisis hasn’t changed most EU’s countries economies that way…we’re tracking WELL under them, despite not being in the Eurozone.

No, wait, it’s MAGIC. MAGIC LABOUR DUST! And the debt which is HIGHER than the Labour plan would have caused? Ah yes, that debt, which you clearly by your support for the austerity plan love. We won’t be AAA for long, not without growth. And there’s no chance of that with single-minded morons at the helm.

What part of “no growth, more debt” don’t you understand? What part of “people dying to save cash for pet Tory projects” don’t you understand? What part of Tory Scum don’t you understand?

@42 Leon

I wish I could post bloomberg charts into comments here, but when I say that UK manufacturing fell significantly more under the last Labour govt that the previous Tory one I can prove it….it’s officially released data. Maybe try looking them up some time.

The EU debt crisis HAS slowed growth down across Europe. The UKs slow growth is mirrored by that across the rest of Europe.

The austerity package is pretty minimal in real terms, and only slightly faster than the plan Labour’s Darling proposed (and more importantly knew was necessary), and moreover it is roughly on target at the moment. Let us remember that it was the last Labour government who managed to leave us with an enormous structural deficit and an economy singularly poorly placed to weather a recession.

This idea that we can grow our way out of a 10% budget deficit is frankly nonsense. To do so before our debt dynamics became unstable and acting as a massive drag on growth would need something like 4% annual growth for the next 10 years. Which even in a boom is pretty hopeful. Had we very low government debt beforehand we would also have more leeway, but again, between the measured debt and the amount of off balance sheet liabilites the government has that simply wasn’t the way Labour left the economy.

You really can’t do any more than scream through foam flecked lips that Tories are evil. Many on the left can see that austerity is unpleasant but necessary. It’s those on the loony left like yourself who seem to think we can carry on as before and no spending control is needed. The socialist model you hold so dear was tried and has comprehensively failed through bankruptcy – jsut have a look at Greece.

*Facepalm*

Employment in industry has declined because…

1) Productivity in manufacturing can grow quickly, but people don’t need that many more manufactured goods, they prefer services. So employment shifts from manufacturing to services and manufacturing employment declines.

2) Over the last 30 years at least 1-2bn people entred the global division of labour. Manufactured are cheaply transported so employment in manufacturing moved to where labour was cheap. This is why Asia is a burgeoning region and not the arseend of poverty and suffering.

…these have little to do with whether the Tories or Labour are in power.

45. Leon Wolfson

@43 – Once the damage was done? Of course it was going to keep falling. But the damage was Tory, Tory and Tory!

EU growth has slowed, but UK growth started falling earlier and is falling harder. We’re not even IN the Eurozone, this is at the foot of ConDemNomics!

“Slightly faster” is the key. It needs throttling back. The billions being spent on pork-barrel projects like the NHS reorganisation needs to be STOPPED. Cancel the Olympics, prevent Boris from building his useless shite in London he’s borrowing for.

And YOU are evil. Not just the Tories. And no, to get foam, try a foam cannon. Or for that matter a handgun. Otherwise it’s just another hard-right Tory troll on the internet, and you’re funny. (In the head).

Austerity is NOT WORKING. It’s all about social darwinism and social cleansing. Nothing else. There are other ways to control i.e. the housing benefit bill which wouldn’t cost an additional penny, but the Government refuses to even consider them, while the economy BURNS.

Given Greece’s structural problem is well known – systematic tax evasion, you’re a liar as well.

46. gastro george

@43

Tyler, your comments about Greece show how much you don’t understand. The situations of Greece and the UK are entirely different because the former is not in control of it’s currency. Greece must borrow money in order to spend. The UK doesn’t have to, as it issues it’s own currency.

Further, Greece just exemplifies why prioritising the deficit over growth doesn’t work. Greece will have contracted by 15% shortly, and yet it’s deficit has widened.

Greece is in a similar position that South Wales was in when the coal mines shut. The solution is not to cut public sector jobs, pensions and wages. That just further depresses an already depressed area. Imagine what South Wales would be like now without central state subsidy. That is the future that Greece is looking at.

@ 44 L.O.

What you say is indeed true, but by the same logic refutes what Leon Wolfson was saying about how it was all Thatchers fault. Which was really my point.

@ 45 Leon

Now I’m evil as well as being a liar? Yes, you really know how to make a proper argument. I’ll move on to Gastro George’s comment, where at least he manages to construct one rationally and properly. There really islittle point talking to people like you.

@ 46 Gastro George

Greece, as you say is not in control of it’s own currency. They also do have massive problems with tax evasion. That is *past* of the problem, but really not all.

The UK can indeed print more money to pay our bills. Short term it can work. Long term though it masively devalues the currency, causes huge inflation and can act as a massive drag on foreign investment. More importantly it damages (through inflation) the pension industry. Given we already have 1.5 trillion of unfunded state pension liabilities, further damage to the private pension industry would be a massive timebomb. It really is a problem that over time you can’t escape from by simply printing money – Japan is very close to that event horizon.

Greece’s problem is that the public sector was way too big, too corrupt and too expensive. There really is no way around that. Whilst cutting it will indeed cause more pain in GDP terms, they’ve got to the stage where they simply can’t do anything else. As you rightly say they are trapped in the Euro, which prevents them from an external currency devaluation (like Iceland, for example) so instead they are forced into an internal devaluation through cuts.

It is ugly, but what other choice is there? They don’t have the money to keep funding it, and the growth needed to make up the difference is simply not realistic. One way or another people are going to get paid less unlesws the Germans are willing to keep subsidising Greece for the next generation. Their economy is simply not competative and their productivity is way too low.

I agree that their best choice would be to have their own currency, but were that allowed to free float people would still in effect be being paid less. It would help their export economy as they would be more financially competative at a stroke.

But just saying “cuts are bad” really doesn’t cut the mustard. They are going to suffer an extremely deep and painful recession either way because they are bankrupt. With cuts it will be bad, without cuts and stuck in the Euro it will be bad and even more extended and were they to leave the Euro it would be bad but relatively speaking shorter.

The comparison with the UK though is that they have similar debt/GDP ratios, similar budget deficits and a similarly bloated public sector spending bill which keeps increasing. Even the coalition plans only in effect cut the bill in inflation adjusted terms – nominal spending isn’t being cut at all. Whilst the UK is a much larger and more powerful economy, meaning we could soldier on a lot longer than Greece ever could, the same problems are there, and will end in tears in the end if not controlled. Not that we are alone in that boat either – the US and Japan are probably ahead of us in terms of the scale of their problems, which tend to get exposed in terms of pension provisions for aging populations.

48. Leon Wolfson

@47 – Of course, can’t talk to the people who are honest and up-front about what you are and what your views will cause. When I was using, quite deliberately, *your* hyperbole there. If you don’t like it, then that says everything which need be known about your tactics.

Japan has 225%. Greece has 144% The UK has 77%. Not comparable.

Greece’s public sector wasn’t all that big. The problem was, as anyone who hasn’t simply swallowed the right wing propaganda, the widespread tolerance and practice of tax evasion. A problem which also occurs widely in the UK in the corporate sector.

The answer is to crack down, hard. Hire some American IRS officials who know how to deal with tax malefactors!

“I agree that their best choice would be to have their own currency”

The hit would easily take 3-4% growth off the UK. Thanks to the ConDems. And austerity has turned the Greek’s problem into a crisis. They have twice as much debt, proportionately, which you outright lie about. And you refuse to see the real problem, preferring for more austerity, when that has actually INCREASED borrowing!

There’s plenty of cash for your Tory’s pork-barrel projects, and for draining off the NHS budget for private profits…but none for the poor. Your solution is social Darwinism and social cleansing, which should be anathema to anyone civilised or with a sense of morals. Of course you’re a Tory, so I repeat myself.

Meanwhile, the Nordic Countries tick along just fine. Canada is doing well. Australia is doing well. But no, evidence can make no dent in your shield of arrogant assumptions.

QE just creates reserves, it doesn’t expand commercial bank balance sheets. Those reserves will not circulate until someone ‘borrows them’ via bank credit creation and expansion of bank balance sheets. Right now, the entire private sector is deleveraging, so any reserves created by QE will make no difference.

The only way out is Fiscal Stimulus – government borrowing to create credit and expand bank balance sheets.

The only role of the Bank of England is to keep rates on government bonds low.

@48 Leon

You are getting boring but i’ll humour you.

You are quite right in saying that the debt/GDP numbers of the three countries you mention are not comparable. Not least because you are not comparing like for like.

Japan has a fully funded pension system. To do that in the UK would cost about 1.5 trillion, or roughly 100% of GDP. That’s before you add in other massive off balance sheet liabilities the UK has. The UK also has significantly higher levels of private debt, which whilst not government debt, does make funding that government debt harder to fund as the biggest buyers of government debt are people saving for pensions. The Greek and especially the Japanese governments rely on their pensioners to buy their government bonds, yet there is less capacity in the UK to do the same thing.

In total debt terms, the UK has the higherst at around 450% of GDP, and in TOTAL government liabilities terms all three sit at between 200-250%.

((Probably the real tragedy of the Greek crisis is that if bondholders do take a haircut it will be primarily Greek pensioners getting screwed by their government. International investors have on the whole managed to shift their bonds bank to the banks who are forced to show prices as primary dealers, leaving banks the other major party who are going to take pain))

The UK really does have a lot of debt, and the pure debt/GDP number is VERY misleading.

I’m not sure what you are talking about when the UK would take a 3-4% hit, but the best solution for Greece would be to leave the Euro. Or simply not have joined in the first place. When Iceland’s economy collapsed post Lehmans, the ISK also weakened dramatically. Between that and a partial default (which is also going to happen in Greece) their economy got back on the growth track pretty successfully.

The Nordic countries do tick along fine. They also spend less than the UK, and beleive it or not, actually spend less of their GDP on social security. Canada and Australia also spend less on government than we do, but I wouldn’t say the Australian economy is ticking along jsut fine….the data points to a looming disaster.

I’m not sure when social Darwinism came into anything, other than possibly your delusional state. Pure realism says we can’t keep spending more money than we have forever. Your only solution seems to be borrow more (from who, might I ask?), print money or to try and tax people more (when the UK is already taxed highly and tax itself acts as a drag on growth).

You just don’t have any plausible answers.

51. Frances Coppola

Left Outside

I wasn’t actually talking about poor pensioners dependent entirely on state benefits, but those who aren’t quite so poor.

The effect of QE is to REDUCE income to those in receipt of company and private pensions and who are drawing on other forms of savings. This is because QE depresses yields (interest rates) on gilts, which make up quite a high proportion of pension investments. Who exactly were you thinking of taxing to compensate for this drop in income?

I also think it would be sensible to pursue policies to improve the spending power of those on low incomes generally, but that’s a different matter.

52. Frances Coppola

Tyler

Government doesn’t have to issue debt first in order for the BoE to buy securities from investors. Buying gilts is an investment decision by the BoE, not a Government policy. In fact in this latest round Osborne actually wanted the BoE to buy corporate assets, didn’t he? Obviously for the BoE to invest in gilts there must be gilts in circulation, so your statement is technically correct, but it is misleading as it implies that the Govt issues debt specifically so the BoE can buy it back. It doesn’t. In fact part of the point of QE is to nudge investors towards corporate investment by reducing the availability and therefore increasing the price of gilts. If Government issued more debt first this wouldn’t work, would it?

BoE is buying gilts already in circulation. The decision to refinance or redeem at maturity is simply made in the normal course of events, irrespective of who holds the instruments at the time.

The normal way of “unwinding” QE is for the BoE to sell securities. As the Fed is currently doing in very small quantities.

@52 Frances

I was simplifying the situation, but the DMO runs government bond auctions and manages the BoEs debt purchases for them.

The BoE tends to buy older lessliquid issues, which are replaced by new issuance from the DMO. Whilst it is a simplification to say the government issues bonds then buys them straight back, in practical terms this is near enough what happens. It doesn’t really matter if the bond is an older issue or brand new.

QE’s purpose is ostensibly to lower long term interest rates through the purchases effect on yields, but it does give highly indebted governments a bit of breathing space when it comes to financing their deficits. The 200bn of original QE money allowed Brown much more economic leeway going into an election year.

The problem with buying corporate issuance is twofold. The government, DMO and BoE simply don’t have the experience. It’s a big, deep and highly complex market. Secondly, you can’t buy everything, so how do you pick which companies are to benefit and get an unfair competative advantage in their funding terms, and which are not?

54. Frances Coppola

@53 Tyler

Yes, my original comment on this post – and my comment @51 – were both concerned with the effect that QE has on long-term interest rates and the fact that this depresses incomes for annuitants and other people living on savings.

The circularity of QE is one of the things that makes it difficult to understand, I think. I was just concerned that people on this blog might get the impression that Government INCREASES debt issuance for QE, which strictly it doesn’t (although a highly-indebted government might be tempted to do so because of the presence of a ready buyer!) As you say, it is replacing older, less liquid issues.

I for one am very relieved that the BoE declined to invest in corporate assets. The thought of either the BoE or the Government “picking winners” in this manner is too awful to comtemplate.

55. Frances Coppola

Tyler

Oh, and one more thing. Government debt cannot form part of banks’ Tier 1 capital – that is shareholders’ funds and retained earnings. Government debt is an asset on banks’ balance sheets. They hold it to meet liquidity requirements, and to reduce the overall capital requirement (as government debt is risk weighted at zero and capital requirement is ratio of Tier 1 capital to risk weighted assets).

56. gastro george

@47 Tyler

Thanks for the compliment, there is a lot to go through, but I’ll limit myself to a few points.

“Long term though it massively devalues the currency, causes huge inflation …”

If you’re talking about hyperinflation, then the empirical evidence does not show this – hyperinflation is associated with countries that have a high debt denominated in foreign currencies, but not if the debt is in the national currency. And remember, I’m not talking about printing money without any restraint, just that we should be allowed to run an appropriate deficit.

“Given we already have 1.5 trillion of unfunded state pension liabilities …”

Heaping together all possible future expenditure does not really offer any great enlightenment. I’m surprised you didn’t go further in time, because presumably our future pension liabilities are actual infinite. And you’re more-or-less arguing yourself into another meaningless circular argument. If you want to fully fund state pensions, then the government would have to park a shedload of cash into some account, to be invested in what? Government securities? So the government ends up paying money to itself again …

Saying that, Norway has done much better with their oil money. Rather than burn it on tax cuts, they’ve invested it for the future. But remember, like with China, this is foreign denominated currency, not Kroner.

“It really is a problem that over time you can’t escape from by simply printing money – Japan is very close to that event horizon.”

If I was actually brave I would wager every penny that I have that Japan will never default.

“Greece’s problem is that the public sector was way too big …”

As Leon has pointed out, the size of Greece’s public sector is almost at the bottom end of developed nations.

“… unless the Germans are willing to keep subsidising Greece for the next generation.”

Right idea, wrong terminology. There is an argument that it is, in fact, Greece that is subsidising Germany, because the latter is extracting massive profits from trade with Greece without giving Greece the chance to adjust their economy to compete. This is, of course, a political problem to sell to the Germans, especially as the profits have found their way into the pockets of the rich in Germany and not to the ordinary people. But the German elite is rather trying to have their cake and eat it at the moment.

@55 frances

Govvies can sit in tier 1 through as you say liquidity requirements. Depends how their ALCOs are set up. Pretty immaterial though – banks are forced to hold lots of bonds the important thing.

@ 56 gastro

Hyperinflation can happen both when countries have large external debt or none at all. It really is about overextending the money supply until trust in the fiat currency is lost.

Pension liabilites are not infinite, because there are only so many pensioners and they only live so long. Pension funds even have pretty exact durations for their pensions. So we know roughly how much we would need to set aside to cover pensions outside of general taxation – which japan has done.

Japan is toast. Most of their tax revenues simply go on debt servicing. Its not sustainable. Their only way out is to use their massive USD reserves to pay down local debt (they have little offshore debt), but that would dramatically strengthen the already strong yen, killing their export industry. They may not default in the most basic sense, but that economy is screwed. Not that it’s really gone anywhere up for the last 25 years anyway. The lost decades really should serve as a warning about QE.

Greece has 350bn govt debt for just over 10m people. They also have a massive budget deficit. That’s approx 35k EUR a head…it is well know that greece’s public sector is bloated, unproductive and expensive, and public sector pensions too generous. Where do you think all that debt came from??

Utter, utter garbage. QE is just throwing good money after bad. It’s another welfare scheme for private bankers to keep their bonus money flowing. Here’s why we shouldn’t do it and what we should do instead:

http://is.gd/TmbMnK

@ Voice of Treason

Jesus, so you agree with the principle behind QE (print more money until people’s cash balance is restored) you just don’t think it is the most efficient way of doing it?

Well, I agree, but QE is a necessary step towards anything else, so while I appreciate you trying to move th Overton window, a slightly less rude tone would suffice.

@ Tyler, where do you stand on monetary policy in general? With Friedman or Schumpeter?

@ 59 / Left Outside:

OK, I apologise for my overly robust tone. I find it frustrating that the debate is conducted within such narrow parameters; that Overton window takes a hell of a lot of shifting.

QE is not a ‘necessary step’ towards anything. It’s just a policy which has already failed 3 times and will fail again. The only sense it which it succeeds is that it helps private banks maintain liquidity, so it staves off a full-scale credit melt-down (temporarily at least).

However, if private banks have shown us anything in the past 30 years, it’s that they are not interested in dull, sensible long-term investment. They want to make a fast buck, which means pumping up short-term asset price bubbles. The flavour of the month is commodities (and/or gold). This will just lead to inflation with little or no growth in the real economy.

QE is very different from printing money for genuine public investment. The latter is not inflationary, because it brings resources into production and increases the capital base.

But public investment does not have to be a top-down process of government diktat. We should create a new National Investment Bank (or perhaps several such banks) from the banks we already own and mutualise it / them, giving every citizen equal non-tradeable shares.

These banks would be given a mandate to invest in small businesses, green technology, housing, community projects and co-operatives. This would make cheap finance available to ordinary people and unleash their creative power, freeing us all from the tyranny of private banking. That would make the ‘Big Society’ more than a meaningless campaign slogan.


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  1. Liberal Conspiracy

    Why we should support QE (or printing money) http://t.co/yMp9N015





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