Tuesday 13 January 2009

Dillow defends QE

I read virtually everything Chris Dillow writes. his blog is excellent and I find it very useful to see the marxist view of the world laid out so well, even though I disagree with most of it and comment to that effect from time to time.

However, today's' post is worthy of a reply:

It starts "I fear that a hatred for the government has clouded the minds of some of its critics. Guido and the Devil’s Kitchen are upset by the proposal in the Banking Bill to abolish the obligation upon the Bank of England to produce a weekly balance sheet."
Well, both have a history of being against this QE thing for a few weeks now. In fact no one even thought this an idea of any merit to even be discussed until the Government ran out of policy options very recently.

Then the main refutations of anti-QE position:

1. The idea that “printing money” is something sinister associated with banana republics is just gibber. As Willem Buiter says, printing money is what all central banks do.
Um, I think it is the amount of money printed that matters and whether it is unsterilised or not. This is OK as far a being pedantic goes, but is not really a defence.
2. The Bank couldn’t print money in secret even if it wanted. Quantitative easing (QE) works by the Bank buying assets from commercial banks - and giving them money in exchange. It must, therefore, announce its intentions to do so to banks, and therefore the rest of us.
Without controls on what they do, the Bank can do anything. In fact it could buy assets, reduce their value to zero and make them disappear along with the loan created to buy them(in a very roundabout way I happen to think this WILL actually happen). Without control, we are powerless to see what is going on inside. Also the Treasury will have a lot more power and we all know that really is opaque - our view of the BOE is a crucial window in the coming months. If there is no problem wit this, then why are they making this change to the banking bill now? (The only reasonable explanation could be the costs of producing the data are considered excessive or that the data is actually not very accurate - the first is remote given how much statistical crunching power the Bank has, the second is just scary).

3. There’s little point doing QE in private. The point of QE is to prevent severe deflation. This is best done by raising inflation expectations, which in turn is best achieved by making as much of a song and dance about printing money as possible. Indeed, in theory it’s possible that the announcement of QE alone would be sufficient to raise inflation.
QE is to prevent severe deflation. Well, then all is fine, we are only predicted to have -1% inflation by Q3 2009. No need for QE then. However, QE could also be used to bail out the banks and get them lending, I don't see why this would have to be public if it worked, especially if the said banks are nationalised when it occurs.

4. Even if there’s no weekly balance sheet released, it’s quite likely that the data contained in it will be released elsewhere, as it is now - for example, table B1.1.1 of Bankstats.
So why not just release it every week. Why change this in an act of Parliament? I hope all the data is published.
5. The notion that the weekly data is a “major control” over the Bank is pish. The current data show that the Bank’s balance sheet has more than doubled in size since late September. I’d be happy to be corrected here, but I don‘t recall this arousing critical comment and analysis from Guido and DK.
Can't speak for Guido or DK, But C@W have warned that the Bank has lost control some time ago, of interest rates and monetary policy in general. Hence my fears about their ability to deliver QE.

There can be an economic case for QE, as I wrote here some months ago. However, with Politicians in charge it is never going to work in reality. They won't know when to end it and will want to manipulate it for electoral purposes. It has given Japan 170% GDP debt ratio and still sclerotic growth. All the more reason to have some oversight of the BOE and some published statistics for clever economists such as Chris Dillow to review its progress.


Old BE said...

I can see the logic in increasing inflation expectations (to a degree) to stave off deflation, but I think deflation is very unlikely given the amount of cash already being pumped around. But that still isn't an argument to remove the transparency requirement. Is the government deliberately trying to destroy confidence in the currency?

lady macleod said...

very informative, thank you

Bill Quango MP said...

I don't believe the inflation figure of -1% will come about.
Fuel and food are not coming down fast enough and goods..well the sales are already over and we have discussed currency enough times before.
1-2% inflation seems much more likely.

Mark Wadsworth said...

Unsurprisingly, I'm with you on this one.

Dillow does not appear to address the underlying point that in normal times 'money' and 'credit' are more or less the same thing, but in times like these it's 'credit' that's lacking (i.e. confidence in economy in general; and more particularly confidence that if you lend 'money' to somebody they will repay it) mucking about with numbers on bits of paper ain't going to change that.

Letters From A Tory said...

At precisely the time that the Bank should be kept at arms length from government and be allowed to focus solely on the economy, the interference of politicians reaches a new high.

CityUnslicker said...

BQ - i agree whether real inflation does or not is uncertain.

On the measures the ONS uses the massive falls in oil price alone will cause Year on year collapse in the rate of inflation. Oil fell 66% between July and December 2008.

So we might get to -1%. in fact if we don't on their measures, then some real huge inflation is gauranteed in 2010!

roym said...

i agree with blue eyes as far as restoring confidence goes. but seeing how quickly the bank had to retreat on interest rates, there's no guarantee they would execute QE correctly.

Andreas Paterson said...

CU - Quantitative easing in Japan began in around 2001 and at the time it began national debt was already around the 140% mark so it's effect on GDP is fairly minor, it's also worth pointing out that Japan's growth record looks a lot better if you consider it on a GDP per capita point of view. I'm still undecided about QE, but I think it's fair to say that in Japan it can't be have seen to have made things any worse.

CityUnslicker said...

Andreas - Thanks for the links, most enlightening. I am happy to debate the effects in Japan. From what I read it had little or no effect, at quite a big cost and probably helped to kick-off the yen carry trade which has been so disruptive worldwide. There is a suggestion that it heled to stop a deflation - but as always, we will never know.

If something does not make things better, then why bother?

Anonymous said...

What about FT Alphaville, and Sam Jones' Marxist ravings on the subject?

Anonymous said...

you can't beat deflation by increasing inflation expectations because deflation is caused by a real reduction in M4 money supply which can only be counter-acted by measures to increase M4 money. Since M4 money supply is made up of debt + cash then you have two possibilities: increase debt (tried and in the process of failing) or print money. Ideally you should print money openly and in a rational manner so that markets react to it in a calm and measured manner. Do it covertly (and worse than that in a bodge covert manner that is actually clear to everyone qualitatively but not qunatitatively) and you will end up with disaster - starting with a run on the £.

This government it seems, cares more for its own reputation than the economy, so it is doing its dirty business covertly in the hope no-one notices and it can make it to the next election. Not only will it cause a run on the £ but we can assume it will use its new powers not only to write off bad debt but also to pay for its ongoing expenditure. This will lead to the appearance of mysterious plugs in the black hole of government debt which will lead the citizens to question the value of money itself - especially the value of money for government contracts.

Time to buy physical gold held somewhere overseas where NuLabour can't get their hands on it (or prevent you from trading it).

Anonymous said...

I don't know about calling Chris Dillow a Marxist, a bit lefty at times perhaps, but I've never seen much Marxism from him.

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