No central agency possesses the knowledge required to ‘know’ how much money should be in circulation…Policies like QE increase regime uncertainty and generate systemic instability. They have the potential to make matters worse, and ignore the fact that you cannot buy confidence.
This is, I think, mostly true and important. The underlying problem here is: what, exactly, are the links between the financial and real economies?
There are two extreme views, both mistaken.
One - simple-minded monetarism - says that there are close links; people who sell bonds to the Fed will spend the money on goods and services, thus raising aggregate demand. We know this is wrong because the first $1.7 trillion of US QE - equivalent to around 12% of GDP - did not unleash a boom.
The other extreme says there’s no link at all because we’re in a Keynesian liquidity trap, in which the demand for money is “virtually absolute” and so money raised from selling bonds merely flows into cash, with the result that “the monetary authority [has] lost effective control over the rate of interest.“
This is wrong because QE has affected asset prices: it has reduced bond yields in the US and UK, weakened the dollar and raised share prices.
The uncertainty mentioned by Anthony focuses on the question: what will be the real effects of higher asset prices? There’s no shortage of possibilities. The weaker dollar should raise US net exports. Lower bond yields should encourage firms to borrow to invest. Higher share prices should stimulate investment (via Tobin’s q) and consumer spending (via wealth effects); the allegation that QE will cause a bubble in emerging markets is not a complaint, but a hope.
I have two concerns here. One is that there’s another effect of QE. It is also raising raw materials prices and the costs of production; Richard Murphy is (for once!) right.
Secondly, these mechanisms are weak; investment isn’t very responsive to asset prices, nor exports to exchange rate.
One reason for this is that firms’ desire to invest is weak now: whether this is merely because of “animal spirits” or because, with productivity growth low and a dearth of investment opportunities, there are rational grounds the reluctance is a moot point. In this context, smallish changes in asset prices mightn’t much stimulate investment and employment. What’s more, real options theory tells us that when people are uncertain about the future, they have more incentive to hold onto the option to invest rather than to exercise it.
In this sense, Anthony is bang right to say that you cannot buy confidence.
I quibble on just one point. Anthony says that QE increases regime uncertainty. He’s probably right. But I’m not sure it increases overall uncertainty. In the absence of QE, we’d still be uncertain about whether confidence will return and how fast the real adjustments (away from debt and construction) in the economy will take place. QE doesn’t add to this uncertainty, so much as displace a little of it; there‘s more uncertainty about policy, but less about the real economy, to the extent that the risk of a catastrophe is diminished.