Monday 21 August 2017

The end of QE remains unplanned - why?

There is an interesting article by Douglas Carswell on Unherd today.

In it he shows both his grasp of the situation and also the lack of any nous to deal with it.

Correctly, he identifies QE as being one of the main drivers of social ill over the past decade. The rich indeed have got richer through no effort other than pure financial alchemy - assets have gone up in price, if you owned assets, then yippee!

Meanwhile debt has been too cheap, now everyone has debt and even the Government is overly keen on saddling people such as students with debt. The Government has both too much deficit and debt - as do most around Europe.

That this is the fault of the Central Bankers is undeniable - conservative types, as you would want, they have done very little for the past 5 years. Last year in the UK they even decreased rates further.

Worse, there is still no plan for unwinding QE, in an off-guard moment last year one leave to the Bank was busily promoting the opposite - suggesting QE was here forever and interest rates could never be raised back to what were considered normal levels.

I find this very hard to buy, it is the classic "this time, its different" mantra that never works out as its proponents say. What happened was that the economies of the West, loaded by too much private sector debt due to the banking bubble, collapsed and to avoid destruction, the Government took on the debt.

Thanks to that, the Government's are prepared to wait a generation or two for the debt to inflate away (this time via currency depreciation, hence the currency depreciation war of the past 7 years). So there is limited immediate pain. I can see why civil service mandarins and central bankers think this is the best way forward, which for them it is. It sees continuity of service for themselves and their class.

Where Carswell goes well off target is endorsing the mad Labour plans for more debt and financial alchemy to double-down on the mistakes of the past! How even more QE is supposed to fix the current problems is beyond me - asset prices (this time of chosen assets, remember Gordon Brown and the Gold sale!) would still rise and the side effect maybe some more infrastructure - but the main event would be crippling Japan style debt.

The only sensible course is to wean us off QE. This will be painful, reversing QE will reduce Government revenue, which means less spending, because today it is getting on for £10 billion in Government income - all from money printed by its own bank and lent to itself.

We can't raise rates too high, as that affects those most hurt by the debt bubble, those without assets. We will likely need higher taxes on capital gains, including houses, to make up the hole in Government finances.

I don't like ever advocating tax rises, so I won't - the balance to increasing capital gains taxes must be reducing income taxes further - perhaps not quite in balance as their is QE to be unwound and a deficit to clear. But a re-basing of the tax system based on the current economic environment is long-overdue. Really, the most surprising thing is that is a necessity of the change in Central Bank monetary policy and you would think they might raise is sometime, that they don't is a bug of the system where monetary and fiscal oversight are separated.


Anonymous said...

Maybe it's time to switch to an emphasis on taxing assets rather than income. That way the "rentier" class pay a bigger role in the raising of taxes and we can start to make a serious dent in the QE/debt whilst also levelling the playing field a bit. How about LVT (land value tax)?

..........I'll get my coat.......

Demetrius said...

In the long past there have been many forms of QE in many places. None of them have gone on forever. You might get a bust or you get hyperinflation or you get intolerable social conditions or you get all of them. So what happens this time?

Anonymous said...

House prices have risen simply because of the huge increase in population.

As for government "debt", this is all a part of the myth that the money system depends on -- that there is only a certain amount of gold in the world, so that if you borrow it you have to physically repay it. But today, money is just a number on a spreadsheet and has no physical reality whatsoever.

What is the point of taxes when the government can increase the money supply whenever it wants to ?

I don't think anybody knows what to do now that money is purely an arbitrary digital concept.

Don Cox

Charlie said...

Don: "House prices have risen simply because of the huge increase in population."

What caused previous house price crashes? Large population falls?

House prices are a function of credit availability and nothing else.

andrew said...

Anon +1

and sell it as a way of making the chinese/russian london flat owners pay for the safe and civilised society they bought into.


Money is a way of distributing / allocating resources - and shifting the liability for provision of resource in time.
If QE / deflation / inflation / war / peace allocates resources 'well' (choose your metric) we get better off.

Otherwise worse.

(Personally, it has all got so complicated, I don't think we'll ever really know)

CityUnslicker said...

Anon - LVT is not an asset tax really, it is communism as it involves the state being able to seize your property at will. No thanks.

We have a perfectly workable capital gains tax, if capital gains rises are outstripping income it is not beyond the wit of man to re-balance things, without resort to ripping up Common Law and the Magna Carta.

hovis said...

There will be no unwinding of QE.

Charlie: I'd nuance that and say House prices are a function of demand, nothing more.

Of course easy credit, removal of lending multiples, overseas hot money comes, and large volumes of imported populations will to live in poor conditions making multi-occupancy BTL lucrative then you have house price inflation at all levels of the market sooner or later.

Andrew: absoluteley money is a way of distributing / allocating resources but not only. the fact that the majority of what passes for money is debt is of course often overlooked and its effects pernicious. The price is no longer a signal of value, nor does it allow alllocation effectively.

DJK said...

Charlie is right, house prices are a function of credit. How else to explain the house price bubbles in Ireland and Spain, where there was massive building booms but no boom in population?

In the UK, house buyers almost always take out the largest mortgage they can afford with their income then buy the biggest house they can afford with it. As income is fixed but mortgage repayments are proportional to interest rates it follows that the biggest affordable mortgage, and hence house prices, are inversely proportional to interest rates.

Charlie said...

hovis: No, house prices are not a function of demand at all. Demand by itself does not cause an increase in prices - there has to be funding to support that demand.

formertory said...

@CU LVT is not an asset tax really, it is communism as it involves the state being able to seize your property at will. No thanks.

As opposed, clearly, to the power of agents of the State to seize your property and assets and even your liberty, in respect of other unpaid taxes? :-)

CityUnslicker said...

former Tory - other taxes you have to pay, also are stuff like Council tax is minimal, LVT is enormous, thousands or even tens of thousands a year. It totally changes the basis for property ownership in my view. It is a terrible idea an, um, invented by communists....

Anonymous said...

Ummm, why are we trying to define a one-size-fits-all rationale to house prices?

If demand outstrips supply, prices go up.
If credit availability is loosened, prices go up.

If you have both, prices go up and up.

As for LVT... No... Just no.

Anonymous said...

Not statistically significant but perhaps an idea of a different way of looking at the issue.

There are 6 5-bed homes in our road. All but one have baby-boomers living in them. No issue with people having space they've paid for but the cost of owning (as in continuously owning) the asset is low.

So instead of counting homes in relation to the population perhaps we should look at bedrooms in relation to the population. They may not be a shortage then....

Difficult decisions will then flow

Anonymous said...

Should add baby boomers = 2 people in a 5 bed home.

Charlie said...

Anon: "Ummm, why are we trying to define a one-size-fits-all rationale to house prices?"

Because in reality, house prices are a function of credit availability and nothing else.

Prices fell by 20% in 2008. What happened in 2008? Did a fifth of the country emigrate? Did the great British obsession with owning property suddenly evaporate? Or did credit become more scarce?

Anonymous said...

Charlie - Different anon here. If that's the case then why is there a pricing discrepancy in houses near London versus the rest of the UK?

House prices are a function of credit availability but also local demand

Anonymous said...

Charlie/Hovis - "demand" is both the number of people or couples or families looking to buy a house AND the amount of credit extended to each of those units*, so you're both right.

Charlie - in 2008 a lot of people were also till wondering if they'd have a job in 18 months so there was a people effect as well as a credit effect, fewer wanted to take on big future commitments.

* which is itself dependent upon interest rates and the ability to pay - somewhat reduced in the young by falling real wages** and by the 9% graduate income tax on that £60k of student debt which is compounding currently at 6.5% or so.

** which for median male earnings are now lower than in 1997, 20 years ago.

Nick Drew said...

the cost of owning (as in continuously owning) the asset is low

speaking as a representative of the demographic in question ...

... you may be sure we think about this a bit, from time to time

on top of the above point, there is also a well-known cash barrier to downsizing: generally reckoned to be c. £30k cash outlay (upfront, obviously) - you need to be saving a b-i-g old amount of gas & electricity & contents insurance & gardening bills to get a return on that

[and of course desirable downsize properties cost not much less (if at all) than what's being cashed in - so maybe not even a net capital gain, nor (in many cases) much difference in the council tax]

the only way it works in terms of hard £££, is a one-off move from a high-price zone to a low-price zone

Ghost of BE said...

CU and others, I recently read a book called "Money, the unauthorised biography" or similar. Very good.

You are right that the distribution of wealth is awful. The way to move wealth from rich to poor is via inflation. We hardly have any inflation at the moment which tells us that monetary policy has been too tight, rather than too loose. I think there is a case for tighter fiscal policy and looser monetary policy in the UK. I also think we should switch more public spending from "services" to "infrastructure". This is hard because nobody accuses the NHS or schools of being flush with cash. Perhaps if the poor were paid to build roads rather than have children and watch Sky we might all be better off. Not a fashionable view.

We should also explicitly abandon the inflation target and have an explicit policy of setting monetary policy in a holistic manner for the needs of the economy as a whole.

Anyone who thinks that the answer is to arbitrarily raise Bank Rate to 5% or to return to the Gold Standard should read the book I mentioned above.

Anonymous said...

Whatever the arguments,surely B of E won't move on it's own. Everything seems to be Central Bank Co-ordinated across the Western world.

Charlie said...

@DifferentAnon: "If that's the case then why is there a pricing discrepancy in houses near London versus the rest of the UK?"

Because wages are higher in London, so buyers have access to more credit.

Graeme said...

"Tighter fiscal policy and looser monetary policy"?

I checked the calendar and it's not April 1. So massive QE and interest rates as close to zero as you can get and monetary policy is too tight? The authorities can't think of any way of loosening it further!

And if fiscal policy is loose then I will write my next comment in Dutch. A VAT cut would set the country free.

Ghost of BE said...


How can you tell if money is too tight? Inflation is too low. How can you tell if inflation is too low? Look at wages, they are not rising despite full employment. And not just in the UK - the US has exactly the same problem. Money can always be looser. The bind is that the Bank's mandate is badly constructed and that is because it was constructed in an era when people thought that if a country achieved low and stable inflation nirvana would follow. Oops.

As for fiscal policy, what is the deficit? Still huge ten years after the downturn stsrted. Too tight you say? Spending cuts are done. Nobody accepts any more cuts. Taxes must rise a bit.

None of this is difficult, it just needs someone to actually lead rather than get buffeted around by headlines. So not this Parliament then.