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February 06, 2012


 Luis Enrique

Somebody claiming QE will not be reversed - NONE of the gilts will be sold - is not "basically right".

 Luis Enrique

if he'd written "government debt is lower than official figures show, to the extent some QE is not reversed and translates into a permanent expansion of the monetary base" he would have been right.

alastair harris

although of course the government and the bank of england are not a single entity!

Luis Enrique

If Murphy is even half right, let's say 50% of the gilts purchased translate into permanent monetary expansion and debt monetisation, the BoE could loudly trumpet this fact, which would:
1) change expectations concerning future monetary policy in a fashion that theory says will stimulate the economy today
2) take some pressure off the public finances and reduce the need for austerity, something which I believe Merv would like; he's spoken about needing some help from the fiscal side of things.
So, why is the BoE claiming that QE will be reversed?


thank you foryour infromation!


"Richard Murphy is basically right to say that this means that government debt is lower than official figures show"

If you consolidate the BoE and fiscal accounts you MUST consider Bank of England reserves as a liability of the public sector.

a) They correspond to an asset of the private sector.

b) They are interest bearing.

The MMT guys have been banging on about this for long enough. They are right about the accounting, if not about the macro.

So Murphy is not "basically right". He is "basically wrong", and doubly so because he weirdly insists there is some practical (theoretical?) constraint which prevents QE being unwound.

Another interesting aside is that NK theory says QE will only stimulate AD if the central bank can credibly promise to make it a permanent expansion.

Krugman: "A credible commitment to expand not only the current but also future money supplies, which therefore raises expected future prices - or, equivalently, a credible commitment to future inflation - will still succeed in raising the equilibrium current price level and hence current output."

Really I don't know why anybody listens to Murphy on macro. If he can't even get the accounting right, he is not going to get the macro right.

Bill le Breton

If we accept that QE can only stimulate when the Central Bank convinces markets that it will not be reversed and if the CB is saying it will be reversed, then, its object is not to stimulate. Sounds odd, but … if QE leads to an increase in bank reserves and the CB pays a safe return on those reserves in unsafe times, then, its prime purpose would appear to be to make commercial banks more profitable/less at risk.
An increase in the money supply does not have to be ‘pushing on a string’ if the money is created by Government Expenditure financed by private bank lending to the public sector. G yanks on the string.
But that would introduce a new generation of politicians to a forgotten power, which is another way of explaining to them that they, ‘cannot have a debt crisis (when they) can print their own money’. Austerity is more a political strategy than an economic necessity.

 Luis Enrique

I have long wondered why, if the BoE wishes to stimulate the economy, it does not announce that (some proportion of) QE will be a permanent expansion of the monetary base, and commit itself to taking those gilts onto its balance sheet and rolling them over in perpetuity.

When I asked around on economics blogs, I was told that nobody would believe it, and there is no commitment device. It was also explained to me that would be the equivalent of trying to commit to expansionary monetary policy over the long-term, no matter what happens to inflation. The argument goes that should the BoE attempt to do that, at some point in the future banks would stop hoarding all that base money on reserve, inflation would kick off and the BoE will want to reverse QE to suck money out of the economy again. Knowing that, any such commitment would be non-credible.


Chris seems a little confused on this one. If you want to understand QE, read Cullen Roche.

Frances Coppola

Warren Buffett is correct. Any sovereign that issues its own fiat currency cannot have a debt crisis, because it can always create the money to meet its debt obligations (provided they are denominated in its own currency, of course). But it can have a currency crisis - which amounts to the same thing.

QE does not work if banks are not lending normally, as the money is hoarded rather than being spent into the real economy. As a demand stimulus, therefore, its effect is seriously limited. Depressing bond yields in theory should push investors towards riskier assets such as corporate bonds, thus making it easier for companies to obtain finance for expansion, but this also doesn't work if investors' dominant motivation is safety rather than returns and companies are retrenching rather than expanding.

I therefore have serious reservations about the effectiveness of QE. However, the alternative - direct fiscal expansion using created money ("helicopter drops") - carries a much higher risk of inflation as it can only be reversed by means of higher taxes and/or spending cuts, both of which are likely to be pretty unpopular with the electorate. I'd guess that's why no government so far has opted for this solution to the current economic downturn.

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