Thursday, 4 February 2010

End QE, but not because of Inflation

Surveying the blogs today there are some sound and not so sound commentys. Guido is keen that we end Quantitative Easing today. Rightly, he points out that is is impossible to tell if it has really done anything. I can see a recovery in the stock market and a Government able to spend as a result, so it has done something. Whether those two things are worth £200 billion is another story.

Here I am torn becuase personally I saw QE was going to put the market on rocket fuel and invested accordingly. Taking a wider view, removing £200 billion of future spend to help the election today is pure theft and a con on the public who do not understand the trick. That the Tories do not explain what is being done is shameful.

Without QE demand may have fallen further, but with a floating currency the UK could have gotten through with a lower value Pound. With the end of QE it seems as if the pound will fall further in any event; Perhaps it was all for nothing?

Finally, John Redwood, the most sound Tory on economic policy, agrees with Guido that the threat now is inflation. I don't see it myself, inflation is a backwards looking indicator not a forward one. There is too much unemployment for wages to be pushed up, Government spending is going to fall, VAT tax rises are netural because they put up the price of goods but they reduce demand, income tax rises reduce demand. The one factor pushing inflation is the fall of the Pound - unless that is catastrophic we are not going to have inflation over 3% or 4% for years. We won't have the GDP growth either, sadly, instead it looks more like a Jpan style form of low level stagflation as compared to the 1970's. The effect is the same though unfortunately.

End QE, but not becuase of inflation, but becuase there is little evidence it has revived the private sector or achieved much apart formget us further into debt and call our Soverieng rating into question - it has only succeeded in propping up our discredited Government.

18 comments:

Blue Eyes said...

"it has only succeeded in propping up our discredited Government"

which is surely why it will continue for another month or two...

Jonathan said...

CU

Did you see the NIESR report comparing QE in the US and UK? http://ftalphaville.ft.com/blog/2010/02/03/140136/central-bank-deathmatch/

Their view was that

"Quantitative easing on its own has probably added half a per cent to actual and prospective growth in 2009 and 2010 in the UK and the US...
In addition, a lack of willingness to use credit easing in the UK to reduce borrowing costs faced by firms has probably meant that the output gap has been 1 percentage point larger than it could have been if policy had been shaped in the same way as in the US."

From what I understand the criticism seems to be that the BoE should have used QE to buy corporate bonds rather than gilts and if I remember right, when QE was first proposed corporate bond buying was going to be a large part of it. Somewhere along the line though it seemed to turn into a way of short term government funding.

Monevator said...

I think part of the *something* QE did was address the confidence issue. Asset prices began to recover far faster than any QE money entered the system. It was more like poker than traditional policies. (Maybe like rates in the 1980s).

Is it really fair to say it "cost" £200 million? After all, the BoE has got a ton of assets for its money that it can sell off (albeit I predict at a loss, given the outlook for gilts). It can then debit away the money it created, for a likely much smaller bill.

@Jonathan, the issue with corporate bonds is it sounds good on paper, but in reality in means the BoE becoming god of the market.

Imagine if it had chosen to buy the corporate bonds of company A, but not of its rival B. You can imagine the message this would send out about B, which is hardly the stability the bank was looking to create.

I think QE has probably played a role in addressing the corporate bond situation in the traditional way, through an untraditional measure, but it's very hard to extract from other influences.

Jonathan said...

Thanks Monevator,

The problem of becoming a market 'god' could be overcome by buying a bit of everything that comes up? I agree that if there was preferential buying that would be a huge issue.

NIESR seem to think that there is some way of disentangling the effect given they gave higher marks to the US system. As you said it probably is difficult though and its unknown how much confidence we can have in the NIESR figure.

Was gilt buying the only way of improving confidence though. It seems to have fitted conveniently into the political cycle allowing Brown to delay any real pain until after the election. What happened to helicopter Ben's pre credit crunch ideas of widescale distribution of money to the populace.

Weekend Yachtsman said...

"It has only succeeded in propping up our discredited Government"

As BE already said, that was the whole idea, was it not?

Incidentally, although you're right in pointing out all the things that will prevent wages or prices from rising, those are surely symptoms of inflation, not causes.

The cause is a decline the value of the (essentially valueless) paper currency, and this can hardly fail to happen when the quantity of it has been so enormously and so recklessly increased.

If you make much more of something which has no intrinsic value, naturally its price will fall.

CityUnslicker said...

Excellent debate all.

J - thanks for that link I was going to put it in but then thught it would make the post a bit long.

I don't agree with huge buying for the principle of who do you choose. however, in the market today they would be eminently saleable in way gilts are not. So it was a mistake to do no corporate bond buying.

Monevator - the cost is at a minimum the interest rate on the gilts. now most are 10 yr and often at 3 or 4% pa. So even if just held to maturity that is a lot of debt payment. A sale may incur a loss of who knows what, but certinaly doubel digit percentages. People I ahve spoken to thingk hodl to maturity is the right answer.

The issue on confidence is there are other means of restoring confidence, slashing taxes may have been a better idea. The QE money has not gone into bank lending is a massive fail of the policy which was designed ENTIRELY with that in mind.

JY - That is a pure monetarist view, in which case you have to balance the equation. Lots and lots of money has been destroyed, tillions of it. All burnt on valueless CDO's and such like. This is what the abnks are struggling with. this is why the money supply measures have been very subdued.
There has been lots of creation and destruction, throw in the low volatility and there is no recipe for high inflation.

The mistake (and of course it may be mine in opposite) of those who see print money = high inflation is they are forgetting what got us to that point, a massive financial crisis which lowered the stock of money which needed replenishing.

It is HOW we replenished it that i disagreed with. Also, I doubt QE is finished with, today will prove to be a pause. Its very addicitve giving yourself get out of jail free cards.

Anonymous said...

Note that the £ has been rising against the euro recently. On the back of the Greece disaster i imagine. That may be the £'s saviour. The difficulty of the euro zone finding a one size solution to each countries problems..

Jonathan said...

Regarding the continuation of QE. Is QE an extension of lowering interest rates and getting them to go effectively negative? If so it seems that over the last 3 decades, after every crisis interest rates have come out lower and not returned as high as they were previously. Continuing with this trajectory will probably mean IRs of 1.5-2.5% for the next few years and then back to QE the next time things go wrong.

We seem to have become addicted to lowering the cost of borrowing every time something goes wrong rather than growing through improved efficiency/technology.

Dick the Prick said...

I certainly hope you're right CU. There's an interesting report from the IFS about eliminating national pay bargaining for public sector, we, in our little corner of Blighty are going for a council tax reduction and wage restraint on a significant scale (namely getting shut of loads of people) and with unemployment still a major concern of loads of well skilled workers - hopefully, inflation can be maintained within parametres.

Plus, as a significant proportion of gov spend is on wages, perhaps getting inflation up to 8-10% wouldn't necessarily be a bad thing. Bloody unions though.

CityUnslicker said...

Jonathan - that is very insightful, I hope in a way it is true - easier to trade and plan.

Dick - Well I start a new mortgage in a couple of weeks at the lowest floating rate I could get - so I am betting on me being right. So if I am wrong you can laugh and know that I am duly suffering.

Sebastian Weetabix said...

From a purely selfish point of view I would like the pound to stay low rather than "recover". I depend on exporting stuff. The high pound of the last decade succeeded in exporting a lot of jobs and not much else.

£1=$1.50 seems about right to me.

Budgie said...

I am much more worried about the UK government debt than about £200 billion QE. In round numbers Brown's debt is £1.5 trillion. Including interest, to pay that back means £200 billion less in the economy every year for ten years. A hit of 13 percent to the UK economy for a decade. And some stupid commentators in the MSM talk about hard times for 2 or 3 years.

CityUnslicker said...

SW - the Poudn will do well to stay near $1.50 in the medium term.

Budgie - As you say, its a decade. As i said above, we are going to look like Japan, crippling debt restricting us to anemic growth - all with an ageing population.

Jambo said...

And declining north sea oil...

Steven_L said...

Well I'm not so sure printing sterling does result in consumer price inflation as much as it used to.

Commodities are priced in dollars and one of the major consumers - China - is pegged to the dollar. US and Chinese monetary policy affects these prices, not ours.

Also, price inflation only sets in if wage inflation does, and trade unions are very weak.

All our money-growth inflation seems to go straight into house prices.

CityUnslicker said...

Agree Steven - goes straight to assets. Inflation decided far more by inputs like oil etc.

probably mean inflation targeting by BOE is waste of time now too.

Anonymous said...

"..put the market on rocket fuel and invested accordingly."

Speculated.

I consider myself a capitalist, but even I can tell the difference between speculation and investment.

Richard Elliot said...

Australia failing to rise interest rates this month and the UK ending QE has not helped currency position!