The Bank has announced 75 billion more QE (Photo: PA)
On the basis that inflation is better than depression, I suppose it is just about possible to go along with the Monetary Policy Committee's decision to increase "quantitative easing" by a further £75bn.
But I worry about it. I worry both that it will be ineffective in terms of stimulating investment and growth, I worry that it is going to be very difficult for the Bank of England to unwind these now vast holdings of government debt, I worry that we are now perilously close to outright monetisation of the deficit (a policy approach which all economic history shows ends in abject disaster), and I worry that ultimately, it's bound to be inflationary.
In a speech two or three weeks back, Adam Posen, until recently an outrider on the MPC in demanding more QE, said that such fears were "unfounded" and "unwarranted", but answer me this. How's the further plunge in the value of the pound that greeted this announcement not inflationary? Even the Bank of England's own analysis of the effect of QE to date, which is based on quite questionable methodology, estimates that it has added 0.75 to 1.5 percentage points to CPI inflation for a maximum gain in real GDP of 2pc. That doesn't seem to me to be a particularly good trade off.
And you cannot help but think that the long term impact of all this money printing is almost bound to be highly inflationary. Already, the Bank of England has bought up around 20pc of the national debt, equal to some 14pc of GDP. This will expand it to close to 30pc.
Since a fair old chunk of this debt is in the form of inflation protected gilts, which have not been part of the asset purchase programme, the proportion of the conventional gilts market that will be sitting on the Bank of England's balance sheet by the end of the latest batch of purchases is going to be rather more than a half. When something looks mad, it generally is. Yields on ten year gilts are already at historic lows at less than 3pc. Is it really sensible to be driving them even lower?
In his speech, Mr Posen said "we will know that monetary policy has done enough for long enough when long term interest rates rise due to demand for capital from our private sector taking on risk and making investments". But why would they rise when there's the open cheque book of the Bank of England willing to buy up almost anything that comes onto the market? And if they do rise, it's much more likely to be because investors expect inflation than than a sudden return to rampant business investment.
Despite these concerns, I guess it's just about possible to support what the Bank of England is doing given the extreme downside risks to the economy that have swept in from the Continent over the last month or so. With all this talk of coordinated action, we have to assume that other central banks are poised to follow suit, though I'll believe it when I see it as far as the European Central Bank is concerned. Jean-Claude Trichet is holding his monthly press conference shortly, so there may be more to say on this later.
But it's a disappointment that the Bank's statement made no mention of the "credit easing" flagged by George Osborne, the Chancellor, in his conference speech. This is an idea worth pursuing – a way of getting the newly released funds to the bits of the economy that really need it and stimulating some much needed business investment.
As it is, I fear that it will again be the investment bankers who are the major beneficiaries. QE is like a drug; once hooked, it's very difficult to wean yourself off. Just how many fixes are required before you realise you are an addict?
What's more, as every addict knows, to get the same effect, you have to keep increasing and repeating the dose. The way things are going, the entire gilts market will end up in the hands of the Bank of England. I'm sorry, but I fail to see the difference between such an extreme position and outright monetisation of the deficit, the sort of thing they got up to in Weimar Germany. In that case, the end result was not just the destruction of middle class savings, but the currency itself.
UPDATE: ECB has announced more liquidity for the banking sector, but there's no QE even remotely to compare with what the Bank of England is doing. Now there's a surprise. Apparently, the pros and cons of cutting rates were discussed, but by "consensus", the ECB council decided to leave them unchanged. Again, no surprise there.
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