Why rule out quantitative easing?
Why has Alistair Darling been so quick to deny that he has any plans to print money? This puzzles me because, in principle, the mere announcement that the government is considering doing so might stimulate the economy.
One of the alleged dangers of deflation is that if people expect prices to fall, they stop spending in anticipation of lower prices later. One way to boost demand, then, is to increase inflation expectations - by merely threatening to consider printing money. This will encourage people to spend in anticipation of rising prices.
Why then, did Darling go out of his way to rule out quantitative easing? Lots of possible answers seem inadequate:
“Higher inflation expectations will raise gilt yields and hence borrowing costs.” But this is only a problem because the gilt funding remit (pdf) is so restrictive, committing the government to issuing conventionals. A more flexible remit would allow it to issue more linkers, whose costs are unaffected by inflation.
“To consider quantitative easing could worsen the downturn, by signalling to people that the economic outlook is even worse than thought.” But Darling has already done this, admitting that the recovery might not come as soon as thought.
“The threat of deflation is exaggerated.” This, though, is inconsistent with the government’s hyperactive efforts to avoid it, by fiscal stimulus and other ad hoc policies.
“Darling does not want to openly admit to hurting savers.” But this won’t do. To any Keynesian, savers are a threat to an economy in recession. They should therefore be hurt.
This makes me suspect there is another reason for Darling’s swift denial that he’s considering quantitative easing.
To say “we’re thinking about it” might make sense as economic policy. But it’s inconsistent with the image politicians must project in a - yes - managerialist system.
Within managerialism, to admit to thinking about possible policies is to confess to uncertainty. But “strong leadership” requires decisiveness, and the elimination of uncertainty. To a managerialist, policies are impossible until they become inevitable; there can be no doubt.
Yet again, good economics and managerialist ideology are in conflict.
One of the alleged dangers of deflation is that if people expect prices to fall, they stop spending in anticipation of lower prices later. One way to boost demand, then, is to increase inflation expectations - by merely threatening to consider printing money. This will encourage people to spend in anticipation of rising prices.
Why then, did Darling go out of his way to rule out quantitative easing? Lots of possible answers seem inadequate:
“Higher inflation expectations will raise gilt yields and hence borrowing costs.” But this is only a problem because the gilt funding remit (pdf) is so restrictive, committing the government to issuing conventionals. A more flexible remit would allow it to issue more linkers, whose costs are unaffected by inflation.
“To consider quantitative easing could worsen the downturn, by signalling to people that the economic outlook is even worse than thought.” But Darling has already done this, admitting that the recovery might not come as soon as thought.
“The threat of deflation is exaggerated.” This, though, is inconsistent with the government’s hyperactive efforts to avoid it, by fiscal stimulus and other ad hoc policies.
“Darling does not want to openly admit to hurting savers.” But this won’t do. To any Keynesian, savers are a threat to an economy in recession. They should therefore be hurt.
This makes me suspect there is another reason for Darling’s swift denial that he’s considering quantitative easing.
To say “we’re thinking about it” might make sense as economic policy. But it’s inconsistent with the image politicians must project in a - yes - managerialist system.
Within managerialism, to admit to thinking about possible policies is to confess to uncertainty. But “strong leadership” requires decisiveness, and the elimination of uncertainty. To a managerialist, policies are impossible until they become inevitable; there can be no doubt.
Yet again, good economics and managerialist ideology are in conflict.
Grow up, please.
To talk of printing money is to summon up images of Zimbawean or Weimar economics. Of course, it scares the markets.
To consider with care, in consultation with the monetary authorities in the other principal ecomonies, the degree of quantitative easing which might be compatible with the changing relationships between different monetary indicators in the changing perspective for the future course of prices is obviously different (except to an economist) and self-evidently responsible. Darling has not denied that his advisers may be doing this sort of thing.
Posted by: D iversity | January 10, 2009 at 01:06 PM
"To talk of printing money is to summon up images of Zimbawean or Weimar economics. Of course, it scares the markets."
All of which only goes to show up the pervasive extent of economic illiteracy.
Hugh Dalton (Attlee's first Chancellor) usefully defined (one kind of) inflationary pressure as: Too much money chasing too few goods - which was a fair enough description of the situation in Britain immediately after WW2.
This current recession is because there is too little aggregate monetary demand to maintain real GDP valued at constant prices. What matters with "Quantitative Easing" is whether the UK economy is capable of producing additional output in response to additional monetary demand.
Because of Mugabe's land reform programme, the Zimbabwean economy was unable to maintain real GDP, let alone increase it in response to increased aggregate monetary demand so prices rose to absorb the gap between monetary demand and the value of feasible output at constant prices.
As for the Weimar Republic post-WW1, it too was unable to increase output in response to rising aggregate monetary demand - because of disruption to the German economy as a consequence of the war, post-war revolutions and demands by the allies for reparations payments.
I'm becoming increasingly worried by the extent to which some parties are setting out to promote economic illiteracy in order to stymie sensible public debate of policy options.
Posted by: Bob B | January 10, 2009 at 01:47 PM
Btw there's a collection of academic papers and essays on Lerner's notion of "functional finance":
EJ Nell and Mathew Forstater (eds): Reinventing Functional Finance (Edward Elgar, 2003)
In the news Saturday:
"The British economy has already lurched deep into recession, according to figures from the respected and independent National Institute of Economic and Social Research (NIESR), and is heading for the worst downturn seen in any advanced economy since the Second World War.
"The NIESR has an enviable record for economic forecasting, and said yesterday that it estimated that the UK economy shrank by 1.5 per cent in the three months ending in December – far worse than previously thought. The consequences for unemployment, the housing market and the public finances could be catastrophic."
http://www.independent.co.uk/news/business/news/uk-set-for-worst-downturn-since-second-world-war-1297816.html
Posted by: Bob B | January 10, 2009 at 02:08 PM
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://edsk.org/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,
Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1776 - Annuit Cœptis.
Posted by: MC Shalom | January 10, 2009 at 02:28 PM
Bob B
A century ago,Mrs Patrick Campbell famously allowed that one could do what one liked, so long as one did not do it in the street and scare the horses.
We economists can and should examine and analyse all the options, but scaring the markets while we do it is unnecessary and will be counter-productive. People in the markets are much more economically literate than they were a generation ago; but it will be at least another generation or two before enough of them are sufficiently economically informed for us not to have to guard our language on occasions.
Posted by: D iversity | January 10, 2009 at 09:02 PM
"To any Keynesian, savers are a threat to an economy in recession. They should therefore be hurt."
That's just what Anotole Kaletsky argued in the Times the other day.
But it seems a strange argument for a soi-disant socialist to make. Why should a pensioner on £80 a week, who's scraped a few thousand together for a rainy day and to supplement his income with the interest - why should he get nailed when the millionaire, watching the currency markets and switching into yen or gold survives intact ?
And why shouldn't those who caused the crisis take the hit ?
(I'd also beware of other non-economic consequences. Hasn't this government ticked enough of the Weimar boxes already ?)
Posted by: Laban Tall | January 10, 2009 at 09:37 PM
"People in the markets are much more economically literate than they were a generation ago; but it will be at least another generation or two before enough of them are sufficiently economically informed for us not to have to guard our language on occasions."
I get the point but market actors are more likely to remain illiterate in the absence of public debate and shielded from access to an academic literature that is hardly new.
The unquestioning jump from "quantitative easing" (or printing money) to inevitable hyperinflation, regardless of aggregate supply elasticities (or responsiveness), depends on a mindset which presumes a particular macroeconomic model of the economy applies, namely one where businesses are incapable of responding to increased monetary demand and where there's blocked access to foreign suppliers.
It seems pretty evident to me that some parties have been trying to stoke up public hysteria in order to prevent informed, rational debate.
Posted by: Bob B | January 10, 2009 at 09:50 PM
Laban: "Hasn't this government ticked enough of the Weimar boxes already ?"
Britain today is nowhere near the situation in the Weimar Republic after WW1.
Bankers with their bonuses - rather than the shareholders of the banks - are hugely to blame for where we are: the Conservatives would dearly like us to overlook and forget that in consequence of the Bush administration, the American economy is also in deep trouble and for much the same reasons.
The big and unanswered question is about how much the central banks in America and Britain, as well as the regulatory authorities in both countries, are to blame for not reining in the banks and so allowing the asset-price bubbles to get larger and larger in consequence of the banks churning out mortgages for borrowers who couldn't afford to repay.
"almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.
“'Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,' he told the House Committee on Oversight and Government Reform."
http://clipmarks.com/clipmark/FB9BB07C-8B31-4C4C-A294-95130493D4A0/
The notion of punishing incompetent and greedy bankers is what made the Bank of England so reluctant to bail out Northern Rock. It then came out that the Financial Services Authority, by its own admission, hadn't been paying much attention to the risky business that the bank had been taking on.
Posted by: Bob B | January 10, 2009 at 11:46 PM
In case any readers think I'm being unduly hard on those banks:
"HIGH-STREET banks are selling customers’ debts to 'vicious' agencies who begin bankruptcy proceedings against homeowners for debts as small as £1,800.
"The agencies are behind a surge in statutory demands - letters giving debtors 21 days to clear debts of £750 or more or face bankruptcy and repossession of their home."
http://www.timesonline.co.uk/tol/money/consumer_affairs/article5489226.ece
"LLOYDS TSB has come under fire for sending debit cards to thousands of children as young as 11 without telling their parents.
"The cards enable children to buy goods online without their family’s knowledge, and in one case, a 15-year old boy was able to buy cheap cigarettes, Viagra and a fake adult ID. [30 June 2008]
http://www.timesonline.co.uk/tol/money/borrowing/article4241836.ece
Posted by: Bob B | January 11, 2009 at 02:24 AM
This is all intersting stuff, but the question is why is the government too scared to even discuss quantative easing?
Despite all these arguments the answer is probably the managerlism one Chris identifies, added to the demographics of savers.
Most savers are in the 50 and older age group. These people have paid off, or are near to paying off, their mortgages and their minds are turning to retirement on a fixed income, if they aren't already living off one. They are also old enough to remember the pernicious effects of inflation from the 70's and 80's. Any talk of quantitive easing, no matter how economically desirable, will set their alarm bells ringing. They will also be relatingthe horror stories to their children.
What we don't have is access to the voting intentions of these people. Intuitively, they are unlikely to be Labour supporters but a large section will have stuck with Labour after '97 and I am wil to bet that this is at least in the back of the Chancellors mind.
Posted by: The Great Simpleton | January 11, 2009 at 09:02 AM
"This is all intersting stuff, but the question is why is the government too scared to even discuss quantative easing?"
FWIW I think the government is sensibly being increasingly cautious in case certain newspapers immediately try to stoke up hysteria - some have already (ridiculously) suggested Brown is well on the road to Weimar Republic hyperinflation or Zimbabwean outomes. It has got to the stage where HM Treasury can't even consider various tax change options without claims these are firm policy commitments.
Have you read accounts of the interview of David Cameron by Andrew Marr on BBC TV earlier today?
"In the interview, carried out in his west London home, Mr Cameron admitted making mistakes. He said: 'I now see just how unaffordable Labour's spending plans are. Perhaps we could have seen that earlier.' Mr Cameron said he would increase government spending from £620bn this year to £645bn next year - rather than the £650bn proposed by ministers."
http://news.bbc.co.uk/1/hi/uk_politics/7822854.stm
After reading that, I fell about laughing. Is Cameron really serious about the Conservatives spending only £645bn next year rather than the £650bn proposed by ministers?
Good grief! The difference of £5bn is within error margins.
On the 2nd of January, Cameron was absolutely certain that the cut in VAT - as suggested by Ken Clarke in an interview with The Times - had clearly failed to stimulate consumer spending.
I concluded from that silly intervention that Cameron is obviously a fool and certainly unfit to be PM - he evidently doesn't appreciate that to evaluate the success or failure of a significant step change in fiscal policy when many other changes are happening at the same time, we need to construct and validate a model predicting what would have happened in the absence of the policy change and that can be very technically challenging.
Posted by: Bob B | January 11, 2009 at 05:11 PM
Obama is urging fast approval by the US Congress for an additional fiscal stimulus worth £509bn ($775bn):
"Obama Reiterates Need for Fast Action on Stimulus Plan":
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/11/AR2009011100922.html?hpid=topnews
"US President-elect Barack Obama says urgent action is needed on the economy, and his $775bn (£509bn) stimulus plan could create up to four million jobs. Mr Obama, who takes office in two weeks, wants to cut taxes and create jobs through increased government spending on public works projects.
"'It's not too late to change course, but only if we take immediate and drastic action,' he said."
http://news.bbc.co.uk/2/hi/americas/7822223.stm
And that is on top of a predicted UD federal budget deficit in the coming fiscal year of $1 trillion.
Doubtless, George Osborne will shortly be going over to America to tell Tim Geitner (proposed new US Treasury Secretary, previously head of the FED in NY) and Larry Summers (proposed Director of the National Economic Council, previously economics prof at Harvard) that this is "fiscal insanity".
Posted by: Bob B | January 11, 2009 at 07:36 PM
LSE Prof Willem Buiter warns of massive dollar collapse downstream
http://www.telegraph.co.uk/finance/4125947/Willem-Buiter-warns-of-massive-dollar-collapse.html
Posted by: Bob B | January 11, 2009 at 07:38 PM
The government prints new money all the time. For the government to say they are considering it when they already do it is just nonsense.
The only thing they're considering is doing it on a noticeable scale.
Posted by: tbrrob | January 11, 2009 at 09:55 PM
Martin Wolf comments on his new book: Fixing Global Finance (Yale UP)
http://bayesianheresy.blogspot.com/2008/02/martin-wolfs-new-book-fixing-global.html
John Kay's new book: The Long and the Short of It, on how to make banking boring again, is due out shortly.
Posted by: Bob B | January 12, 2009 at 02:04 AM
"The government prints new money all the time. For the government to say they are considering it when they already do it is just nonsense."
Thankfully, Prof Buiter has clarified the matter of "printing money" so lucidly that even the Daily Mail and Daily Telegraph will be able to stop stoking public hysteria about the Weimar Republic and the prospect of Zimbabean outcomes:
"Yet ‘printing money’ - that is, creating base money, either through the issuance of currency or by increasing the stock of commercial bank reserves held with the central bank - is what central banks do in a fiat money world. They do this not just in Zimbabwe, but also in the US, in the Eurozone and in the UK."
http://blogs.ft.com/maverecon/2009/01/quantitative-and-qualitative-easing-again/
Posted by: Bob B | January 12, 2009 at 09:13 AM
"EVERY child born in Britain will owe £17,000 because of Gordon Brown's 'morally repugnant' borrowing, Tory leader David Cameron claimed today."
http://www.thisislondon.co.uk/standard/article-23617303-details/Brown+binge+'means+each+UK+child+will+owe+%C2%A317,000'/article.do
Cameron is a silly man - he's not the faintest understanding of what he's on about. An American folksy saying applies: It's not what a man don't know as makes him ignorant, it's what he knows that ain't so.
A comment by Sam Brittan:
"Those alarmed by UK official projections showing public sector net debt climbing from 36 per cent of gross domestic product last year to 57 per cent in 2012 should bone up on their history. There are long passages in Macaulay showing how the nation prospered despite increases in the national debt - regarded by sages as catastrophic. In his one and only Budget speech, Harold Macmillan noted how the national debt had risen from £600m in 1914 to £8.4bn in 1939 and £27bn in 1956 - representing 27, 133 and 146 per cent of GDP. As Macmillan put it: 'Whatever the temporary difficulties from trying to run too fast, if we stand still, we are lost.'" [Financial Times on 5 December 2008: Sam Brittan: A framework for economic stability]
http://www.samuelbrittan.co.uk/text324_p.html
Posted by: Bob B | January 12, 2009 at 11:01 AM
For international comparisons of projected outstanding Government debt as a percentage of GDP in 2009, try Table 1 in the Lloyds TSB Economic Weekly report of 26 November:
http://www.fxstreet.com/fundamental/analysis-reports/economics-weekly/2008-11-25.html
Posted by: Bob B | January 12, 2009 at 11:01 AM
What scares me is not QE in itself, in a text book it looks pretty logical but in the real world will the politicos know when to press stop on the printing press?
The economic problem behind all this, that of SE ASia and emerging markets brings lots of new capital to the market, China fiddling its exchange rate to the Dollar by buying lots of greenbacks forcing artificially low interest rates, which in turn leads investors banks to take bigger and bigger risks, which went unchecked by the governments all seems to say to me that the last 6 to 8 years of economic growth have been a mirage, and as such the market correction will have to take this into account. QE at best will just slow this process down, at worse civil disorder.
The problem with economics is that it only sees money as a veil over barter, and does not take the value of money (or trust) into account, this is why I will vote against QE.
Posted by: passer by | January 12, 2009 at 12:04 PM
If I think my savings might be about to become worthless, then the only thing I am going to be spending them on is Krugerrands.
Or something of the sort.
I will not be buying up imported cars or wide-screen tellies or holidays in Lanzarote or whatever it is El Gordo would like me to do.
Those of us old enough to remember the 70's know what 15% annual inflation can do to us. We also know that Labour governments ALWAYS end like this, and forewarned is forearmed.
Posted by: Andrew Duffin | January 12, 2009 at 03:39 PM
"We also know that Labour governments ALWAYS end like this, and forewarned is forearmed."
That's just historic nonsense. Harold Wilson's Labour government didn't end with a crash in June 1970. The polls at the time were reporting a Labour lead until late in the campaign - as I well remember.
It's arguable that Major was very lucky to win the April 1992 election for the Conservatives after the dysfunctional economic policy run by Nigel Lawson as the long-serving Chancellor 1983-89. In fact, Labour held a lead in the polls until late in that campaign but then there was the notorious Labour rally in Sheffield on the 1st of April:
"Ahead of the event, Labour was polling a decisive lead over the Conservative Party, but this was dramatically reduced the following day, with Gallup even placing the Conservatives ahead of Labour"
http://en.wikipedia.org/wiki/Sheffield_Rally
Posted by: Bob B | January 12, 2009 at 08:23 PM
News update
Readers may be interested in this news item from late yesterday reporting the agreement among the coalition partners in Germany on a stimulus package to boost the German economy:
"Jan. 12 (Bloomberg) -- German Chancellor Angela Merkel’s coalition agreed to spend an extra 50 billion euros ($66.8 billion) in the next two years, its second attempt to stem the worst recession since World War II in Europe’s largest economy.
"The coalition parties, in a six-hour meeting in Berlin until 11 p.m. local time, forged agreement on a package of measures including about 36 billion euros in infrastructure investment and lower taxes. The Christian Democratic Union, its Bavarian sister party the Christian Social Union and the Social Democratic Party announced the plans to reporters after talks ended. . . "
http://www.bloomberg.com/apps/news?pid=20601087&sid=aHof8i2giiPw&refer=home#
For comparison the value of the stimulus package propsed in the Pre-Budget Report here in November was worth about $30 billion (or £20bn).
Posted by: Bob B | January 13, 2009 at 12:08 AM
Of special interest here, Ben Bernanke, chairman of the Board of Governors of the US Federal Reserve Bank, gave a(n important) lecture at the LSE tonight (13 January) on: The Crisis and the Policy Response. The text of the lecture can be downloaded here:
http://www.lse.ac.uk/collections/LSEPublicLecturesAndEvents/pdf/20090113_Bernanke.pdf
Press reporting on the lecture:
"Ben Bernanke, chairman of the US Federal Reserve, warned yesterday that the economic recovery package planned by the incoming Obama administration will not succeed unless financial stability is restored. . . "
http://www.independent.co.uk/news/business/news/bernanke-tells-obama-775bn-fiscal-package-is-not-enough-1334362.html
The report in the Indy goes on to cover evidence to a Treasury Select Committee hearing on the banking crisis and its effects on the UK. Of particular interest:
"Mr Lambert [of the CBI], Mr Moulton and other witnesses urged the Government to 'print money', while Mr Bernanke also spoke openly about the Fed's plans to implement a policy of 'quantitative easing', though the Fed chairman prefers the term 'credit easing'."
Posted by: Bob B | January 14, 2009 at 01:07 AM
I might be displaying my shocking ignorance of economics here, but are the dangers of price deflation really as great as they are painted.
After all, there's two types of purchases - the ones you have to make and make now (food, insurance, power bills, fuel, etc) and the ones that you can hold off on (new TV, computer/laptop, car, mobile phone, holiday). There's a few in the middle, such as clothes, where you've got a window of choice (delay for a while but you have to get it in a reasonable time).
The point is - deflation in the first area of spending won't cause you to delay spending ("Hey, milk's going down in price, I'll wait until next month before I buy more ..."). And in my experience, we've had price deflation in much of the optional areas (anything electronic for a start - computers, laptops, TVs - even cars seem to have not really gone up at all in the past few years). The huge decline in the ability to support delayed gratification seems to have outweighed the attraction of waiting for the deflation.
Anyway, I'm probably missing something important. I'd be interested to know what I've missed (so I can opine knowledgeably when others ask me for my opinion)
Posted by: Andy Cooke | January 14, 2009 at 09:59 PM
FWIW the current consensus seems to be that the UK is unlikely to experience deflation (= negative inflation or a sustained fall in the general price level) but that was prior to the recent downward revision of forecasts about when positive GDP growth here is likely to resume.
Deflation is not the only adverse possibility looking forward - GDP growth could simply stagnate indefinitely with low positive inflation: "bumping along the bottom", as they say. From the reported evidence at the recent Treasury Select Committee hearings, business interest witnesses there were (surprisingly IMO) encouraging about "quantitative easing", presumably because they are concerned to ensure early resumption of positive real GDP growth and believe there is enough prospective slack in the economy to ensure policies intended to boost aggregate monetary demand are more likely to increase output volumes (or suck in imports) than enable UK businesses to raise prices.
However, the possibility of deflation is not to be dismissed completely. Japan experienced almost a continuous decade of falling prices and minimal GDP growth after 1992 in consequence of the burst of the asset-price bubble there which had grown during the 1980s. One factor promoting the deflation and stagnation there was that the banks in Japan were cluttered up with what were euphemistically called "nonperforming assets" from the 1980s boom and became very reluctant to lend. The deflation led to consumers and companies postponing purchasing decisions whenever practicable in the sure knowledge that prices would be lower in a year's time.
I've a personal wish that the public debate in Britain on current policy options is rather more dispassionate and technical in character and rather less given to stoking up public hysteria to lambast the Labour government.
Posted by: Bob B | January 15, 2009 at 01:39 AM