Tuesday, 20 September 2011

More QE fizz for the double dip?

This is certainly how Neil Hume sees it when the Bank of England stats showing how successful the intervention was. As someone whose badly smashed suckers portfolio is in need of a boost, QE sounds good.

On its own though, I don;t see how it helps to re-balance the economy at all, it does help keep up money supply, but it also rigs the system and leaves us with a future problem of unwinding all the assets that the Bank of England is borrowing today.

More radical is to do more QE - much more, perhaps another £200 billion, but to raise interest rates to 2%. This would keep up the money supply, but allow savers a rate of return and seek borrowing and lending normalise somewhat - an adjust away from the fantasy economy. In gross terms this will be less stimulative overall, but would cure some of the strange things that we now see (idiot borrowers like me well rewarded for taking huge risks, careful savers getting reemed).

Too radical for economists to implement though, sadly

9 comments:

Blue Eyes said...

Well if QE really did boost the economy by 0.5% in real terms then why stop at £200bn? Let's see how far we can push the string? £50bn a month until real growth hits 2.5% a year???

I don't think it is supposed to rebalance the economy, it is supposed to stop the economy falling into a liquidity trap.

Blue Eyes said...

BTW as a total aside I notice that the retail banks are offering higher LTV mortgages at the moment. With more money printing is the outlook for house-buying likely to improve, get worse or stay about the same, do you think?

Electro-Kevin said...

'Idiot borrowers'

Time will tell. One thing that seems foolish at the moment is to keep a lot of cash.

I've taken a middle path. Simply the cash in my pocket and manageable amounts of debt - even with interest at 10%.

Boring.

Small minded.

I can't help what I am.

If you can protect the rump of your wealth then why not take advantage of cheap borrowing to buy assets and take a risk that rates don't rocket and your assets don't adjust downwards ?

CityUnslicker said...

House buying I am not so sure about BE, with QE there will be a boost for all assets. Then again, houses are longer term borrowing and interest rates on the long end of yields will be less affected - so maybe not the big boost as say shares and commodities and gilts?

EK - Makes sense to do that. The key is to borrow very liquid so that you can repay it, borrowing on long term, like for instance a nice low cheap floating mortgage at the moment could finish you if rates suddenly jumped due to euro default etc. (In truth, you'd have a few hours to sort yourself out, maybe a day or two!)

Sebastian Weetabix said...

I fear raising interest rates will push a lot of businesses and mortgage holders over the edge. Of course, we probably ought to do that, in order to precipitate a housing crash & purge the poison out of the system - rather than continue this lingering slow economic death we seem to be experiencing - but I cannot see any politician allowing the MPC to do it. If they did I suspect BoE independence would end in a heartbeat, to popular acclaim.

hovis said...

SW - I can see what you are saying but the reason no politician would do that is the utter devastation that would cause to the aspirant class rather than under / other class

TheFatBigot said...

What is left of my addled brain goes back to 1989-92. There had been a house-price bubble prior to the recession and the government left interest rates to find their natural level once recession hit.

True though it is that businesses folded and people lost their homes because they could no longer support their borrowings, the result within very few years was an economy from which (as Mr Weetabix put it) the poison had been purged.

We have seen the same thing recently with Iceland's reaction to the collapse of its dodgy banks.

The worst thing any government can do is deny reality. Sadly, our government bases most of its policy portfolio on exactly that denial - as does the Labour opposition. It's what got Greece into its current pickle, and will drag down any country over time.

Anonymous said...

That is roughly what Scott Sumner advises.

Commit to get nominal GDP growth getting back to trend growth with as much QE as is necessary. It will then be necessary to raise rates pretty soon, once we get back on trend growth, to keep demand in check.

Low interest rates are a symptom of deeply depressed demand; cure the demand problem, and rates will rise.

The "hard money" nutjobs who want to raise rates just for the sake of it depress me.

Anonymous said...

"The "hard money" nutjobs who want to raise rates just for the sake of it depress me."

Well the "soft money" nutjobs who want my pay cut through inflation just for the benefit of those who have taken on too much debt just depress me.