Wednesday 24 October 2012

Stop QE and raise UK interest rates

QE is not working, we have tried this now for several years, since 2010. Every time the UK tries it the effect gets less and less - the law of diminishing returns.

Worse the more we continue the more likely people will realise the fallacy of pretend money printed to help the Government keep the deficit rising. There is no plan for paying back QE. I have asked several of the leading economists in the City in recent days and all are baffled by the answer. Some say it will be run off, others that it will be monetised. Not one of them seriously believes the bank will put it back to into the market - demand would crash and rates spike.

So the more we do, the more difficulty we are getting into. Worse now, is that the effect is so weak, yes the stock market is stronger and the banks are fully zombified without breaking. But the economy is flat. No new companies are coming in to take out the heavily indebted and so spark a wave of consolidation. The banks roll over loans they know cannot be repaid in nominal terms.

If we raised rates, the situation would change, savers would get a return, as would investors. More normal market disciplines would return - maybe even the banks would be forced to write off more loans and de-zombify the economy.

The pain would be worth the gain, of course, as it would stall house price inflation and favour exports over imports, no Government is going to want to do this. But surely this is the sensible option, going back to normality and away from fantasy? instead we have prediciotns of 3 more years of ultra-low interest rates; and so 3 more years at least of grindin nothingness for the UK economy. My only hope is the notes of the Bank of England meetings show that at least a new way is being discussed, even if only by a minority.


Sackerson said...

Here's a view:

QE is not to promote growth, but to ward off deflationary collapse caused by declining velocity.

If QE stops, government finance unravels at high speed and we get major economic dislocation as loads of people lose their jobs and demand plummets.

If interest rates rise, ditto, because of massively increased debt servicing costs. Plus the bond market takes a bath and "cautious"-oriented pensions and investments are hit for six.

Keep clapping your hands and Tinkerbell may live a little longer.

The time for what you suggest is when velocity picks up. But because of overall debt load, the sea-change in sentiment and the longterm transfer of productive capacity overseas, I don't see that happening for a long time.

Blue Eyes said...

So CU you think QE won't be reversed because it will cause interest rates to rise killing everything in their wake so you propose raising interest rates instead?

Government policy at the moment is a confidence trick. Enough QE to keep the government's borrowing costs down while it reduces the deficit to a sustainable level without the mad deflationary policies being implemented in Spain and elsewhere. Keep the economy stable for long enough for private debts to fall a bit and get a bit of private sector momentum going.

We are in a massive depression. Zombie banks and zombie firms we may have but keeping them alive while we wait and hope for something else to turn up must surely be the least worst option.

In the 19th century everything would have been allowed to go bust, trashing the economy but allowing it to rebuild. Nobody would tolerate that now.

Jim said...

I said right at the beginning of this Depression that the best we could hope for was the Japanese outcome - zero growth bumping along the bottom for (possibly) decades, but without the whole thing slipping violently into a deflationary liquidation or an inflationary (possibly hyper-inflationary) spiral. Either of which would have massive destructive effects on society. Indeed it's possible society as we know it might not survive either of those extremes.

There are no sunny uplands to be reached by some cunning economic sleight of hand. No return to 2-3% growth year on year. We have increased our living standards for a good part of the last 40 years by taking on more and more debt. It might take 40 years to work through the effects of that.

This is the normal for the foreseeable future.

Sackerson said...

And the Japanese outcome is unlikely. We didn't enter the crisis as a creditor nation, our people have lost what savings culture they had, and we've merrily sent away our productive capacity.

Marc Faber recently repeated his advice to buy a farm. He lives in the predominantly agricultural region of Chiang Mai in Northern Thailand. Chnces of me buying and running a small farm - safely - in the overcrowded and unruly UK?

Anonymous said...

Is it just me or is the timing of this thing a bit odd? Is Mervyn trying to get out of jail scot free and at the same time screw the next guy? Does he know something that he's not letting on? Everyone knew this before it started so why speak up now? A bit smelly.


Electro-Kevin said...

There are two ways of looking at house price inflation of course.

Old people getting richer

Young people getting poorer

And if I were a young and skilled person I'd make sure that the old people paid top dollar for my rare talent and if they didn't respect me enough I'd bugger of and leave 'em to fester in their own wee.

Budgie said...

I agree with Sackerson particularly on this, but every comment has good points. Sorry, CU.

CityUnslicker said...

What is enough QE?

How do you unwind it?

What are your ideas for stopping the government thinking it has discovered the free money tree.

I wrote this before Mervyn's speech - he is clearly trying to set the blame up for the next guy,

I fear I have few shumpterian readers....

CityUnslicker said...

Also, he lack of activity caused by zombie fiction is also killing the service economy.

Graeme said...

it is hard for the madarins to break the cycle of "the man in Whitehall knows best". They retained the bread ration till 1957! it takes a minister of guts to say "no". can anyone explain why nit mtook so long for WW2 rationing to be dissolved....POWER is the answer. Ministers want POWER. They should be trained and rewarded to devolve power. But they are not. So our democracy is always going to work poorly.

Dick McPrick said...


Soros fucked the BoE 2o years back by banking £700 million in an afternoon, nowadays the BoE doesn't get out of bed for half a Trillion. I got sacked for saying it's inflationary and I completely stand by my wrong decision. But FFS, I don't care if Mervyn's left a dump in the bottom drawer - we are where we are.

I don't buy conspiracy theories against the bank. They had to work with an egregious mind that had an authority beyond normal channels. As soon as they became too big to fail everyone hunkered down - the politics was fine but the economics fucked. I used to work in the gutters of Halifax and to lose that town over the whims of the Belgians seems satyrical.

Guilt synonomous with gilt; ah, what the fuck are you gonna do? It is amazing that we have debates about energy security based on price. I'm gonna sit here and fume about inflation and be wrong every time - fucking marvelous. Merv's been a good lad, better than that O'Donnell chap - tried to make out he was the bees knees - wanker! Application withdrawn - yeah? Too fucking right.


Blue Eyes said...

Did Mervyn really surprise you when he said he didn't want helicopter money and he wanted to sell the gilts back at some stage?

"What is enough QE?" Really?

That's a bit like saying "what is the right interest rate" or "what is the ideal price of a pint of milk".

CityUnslicker said...

BE -you make my point, there is no limit to QE, so how will it ever get unwound without terrible consequences? Japan is a very bad example here given they actually save domestically and even then have ended up with 200% GDP debt.

I don't see it, but he consensus is against me at the moment. It won't be in a year or two.

Blue Eyes said...

I'm guessing it will be unwound when inflationary pressures call for it to be unwound. I'm not sure I understand your point at all. You are calling for real rate tightening but also saying that real rate tightening till be terrible. Confused.

Sackerson said...

C, for the avoidance of doubt, I'm not against the ending of QE. Just now now, without any other kind of change. The BoE is buying time; the question is, what are we doing with the time bought?