Quantitative easing will do little to secure the recovery, says Jeremy Warner.
The Bank of England has been edging in the direction of more QE Photo: Christopher Pledger
With a bit of luck, this week’s relatively strong third-quarter growth figures might give the Bank of England pause for thought as it prepares to sanction another bout of quantitative easing (QE), popularly known as “printing new money”. As Hallowe’en approaches, opinion is turning against this much-deployed but little-understood form of monetary witchcraft, and with good reason.
The Bank’s Monetary Policy Committee has been edging in the direction of more QE for some months now; George Osborne, the Chancellor, has repeatedly suggested that it could provide a useful counterweight to the austerity of his fiscal consolidation plans.
In the United States, more QE is already pretty much a done deal. The Federal Reserve’s Open Markets Committee is next week expected to give the go-ahead to a further $500 billion of asset purchases. That might seem small beer against the $1.7 trillion already spent, but to describe an extra half-trillion of the stuff as “QE-lite”, as some Fed insiders do, still seems something of an understatement.
All in all, policy-makers are becoming worryingly dependent on further QE for salvation. The argument goes that with mountainous public debt excluding the possibility of further stimulus packages or tax cuts to boost the economy, why shouldn’t we just print more money instead?
To understand why this is a policy blunder in the making, it’s best to start with the case for the defence. There is plenty of evidence to suggest that the initial, crisis-provoked burst of QE worked as intended. It’s always impossible to prove the counterfactual – what might have happened if no QE had been applied – but it seems likely that the economic contraction would have been a great deal worse.
By boosting the money supply, QE helped keep interest rates in the real economy low, supporting consumption and allowing many companies to refinance themselves in the face of contracting credit. An otherwise catastrophic collapse in confidence, investment and trade was partially offset.
But you can have too much of a good thing – and as things stand, it’s quite hard to see why more of this monetary hocus-pocus would help things any further. On the other hand, the risks of it are all too obvious.
The case for going further rests on the idea that the private sector is not yet ready to step into the breach left by a shrinking state, and may actually be about to contract even more. In such circumstances, it would become necessary to keep pushing down on interest rates, to encourage both consumers and businesses to spend more.
It’s a funny old therapy that prescribes another dose of the same poison that brought the economy to its knees – too much consumption and not enough saving – but let’s leave this wider paradox aside for the moment. The more immediate problem is that it’s not at all clear that the slight reduction in interest rates that more QE might bring about would cause consumers to save less. Indeed, it could have the opposite effect: those with a surplus of savings might become more conservative still if they saw the outlook for income worsening at a time when their long-term security is being eroded by heightened inflation.
And where is the deflation risk that might justify more QE? It’s hard enough to see it even in the US, where – to my mind – a long-incubating problem of structural unemployment, hidden for years by the credit boom, is being misdiagnosed as one of deflation. It’s harder still in the UK. With inflation still stuck well above target, expectations of future inflation rising, nominal GDP growth back at almost 6 per cent, and the velocity of money – that is, the number of transactions for any given unit of cash – recovering fast, more QE becomes a very hard sell indeed.
Of course, the economy will require plenty of policy support to compensate for a planned fiscal squeeze that amounts to roughly 2 per cent of GDP a year for the next four years. But it is not at all obvious that more QE is the right way of providing it.
The Bank of England has repeatedly told us that recessionary pressures will cause inflation to abate – yet it has remained stubbornly above target. No one will believe the Bank if it cites a deflationary bogeyman that doesn’t yet exist as justification for turning on the printing presses again.
If all that new money actually were to reach the parts of the economy that needed it, I might have some sympathy. But QE has failed either to expand bank credit to small- and medium-sized enterprises or to lower its cost to them. It has, however, provided spectacular money-making opportunities for the City and inflated new bubbles in bond, commodities and emerging markets.
Goodness knows how central banks will unwind the vast positions they already hold in the debt markets, but the fear that they’ll end up taking the easy option and monetising what the Government owes – permanently adding it to the money supply, as happened in the 1970s – will only add to concerns about inflation.
There are plenty of ways to help the recovery, from raising infrastructure spending (which is perfectly compatible with deficit reduction) to boosting business confidence by enhancing the environment for investment and job creation. But please, no more QE.
http://www.telegraph.co.uk/finance/economics/8094536/Mervyn-King-must-turn-off-the-printing-press.html
