Thursday, March 05, 2009

Quantitative pleasing

On the news they are calling it "new money". The banks call it "quantitative easing". In my history lessons about the thirties they called it "stupidity".

Whatever jargon you choose to use it all amounts to the same thing - printing new money and pretending you've just increased the size of the economy.


Jeff said...

And there was I thinking I would have that title all to myself.

Too early to see if it'll work. It does feel like a horrid game of Roulette though, hey?

Jim Jay said...

And you got there first by the looks of it - drat!

Unfortunately I suspect we'll never know if it had a positive effect - only if it gets out of control.

You're right it's all a gamble - no one seems to really know how the economy works, if it works, and so they're just throwing ideas at it.

Strategist said...

I'm no economist, but...
it seems to me that dreaming up some new money could serve to grow or restart the economy if productive resources are lying idle throughout the economy for want of money. However, it must of course also serve to devalue any pre-existing pounds in your pocket or under your mattress. But presumably if the 2% inflation target is threatened, they'll stop doing it? (I haven't seen the news today yet, so I'm flying blind here.)

I think what is stupid about this - scandalous, obscene, criminal in fact - is that if you have the gall to conjure up £85bn and everyone else in the world is happy to accept that a pound is worth pretty much what it was worth yesterday, think of the things you could buy! I'm thinking of the green electricity infrastructure George Monbiot talks about in his book, which seemed outrageously expensive, but it could be anything, the end of child poverty, you name it. All these things have a price tag of that order. But instead they have chosen to give it to a very small number of their mates in the city who have lost their shirts and should by rights be out of business. Basically the public treasury is being looted by a small number of people in front of our very eyes and we are doing nothing!

Jim Jay said...

Well, I've been thinking about this - if we gave everyone a voucher to buy, say, a bag of chips (which chip shops could redeem) and everyone went and bought their bag... what happened?

There are no extra chips in the world. We've just "treated ourselves" at our own expense. It begins to lay bear the fact that money is just a social trick which we begin to undermine when we conjure more money out of nowhere.

In fact (drawing away from my terrible analogy) we've just undermined the pound when it's at a very low figure and I would have thought this is likely to devalue it still further although not just abroad but at home too.

It's an inflationary measure at a time when it appears that we're heading towards deflation - so there is method in the madness - but my worry is this is exactly the way they tried to get out of recession in the thirties and it was a disaster.

Back to the chips just for a moment - I think it's times like this that help us understand that it isn't money that has value but resources and labour.

Anyway, this may be the first set of "new money" that's created. I wonder how many more times this year we'll see this.

Benjamin Solah said...

Huh? This is insanity! I read this in Melbourne's The Age this morning. Doesn't this cause inflation? Printing money doesn't actually create more wealth, it just devalues the money we already have, right?

Jim Jay said...


So the logic goes like this - I think.

The UK is predicted to go into 2% deflation - a bit of spit in the system should save us from that terrible fate by loosening up spending and bringing us back into a bit of inflation without going crazy.

Essentially no one is spending so by diluting the cash supply it should get things going.

My main worry is that spending is not the problem but debt and an emphasis on the hypothetical aspects of the economy.

ModernityBlog said...

printing money eh? big, big do do's to come

Anglonoel said...

If everyone in the UK over the age of 16 was given £1,500 each to spend in the next 3 or 6 or 12 months I could appreciate it. However, this comes across as legalised money laundering.

The football terrace chant 'you don't know what you're doing' seems to apply to the powers-that-be at the moment.

scott redding said...

Sushil Madhwani, a former member of the MPC, wrote an article for the Times recently:

"I was part of a group that published a report in 2000 arguing that central banks needed to make sure that they “leant against the wind” as an asset price bubble was emerging. Otherwise, we feared that the bursting of the bubble could force us into a situation where, with interest rates close to zero, one would be forced into using QE, an unproven policy tool. It is a source of considerable regret to me that we failed to persuade colleagues on this issue, who instead took the view that they would rather “mop up” after the bubble burst."

Shirley Williams was on Question Time last night. She compared the entire situation to constipation, and that they have to play a game where not enough QE will leave things as they are, and too much will leave us too, er, loose.

The Times, again:

"Some commentators argue that banks will still find excuses not to lend, whatever strategy the Bank of England adopts. David Adams, head of residential at Chesterton Humberts, believes that banks are “avoiding lending by downvaluing properties when buyers apply for finance”. There are also concerns that the withdrawal of cash from deposit accounts will make it harder for some lenders, especially building societies, to fund mortgages in the future. Yolande Barnes, Savills residential research director, points out that “discouraging saving perpetuates the lack of credit”."

Strategist said...

Scott, I would take absolutely anything emerging from the Head of Residential at Chesterton Humberts or the Head of Residential Research at Savills with a lorryload of salt, because if there was anyone whose job is was to bullshit the property bubble back into being, it would be them.

Now about Jim's chips. Jim your analogy is perfect for the Keynesian. What if everyone is unemployed, has no money and can't afford chips even at knockdown prices? The fatfryer lies idle, potatoes rot in the fields, and the chippie owner lays off all his staff and drowns his sorrows. But if you invent some money to give to people, the productive resources are pressed back into action, more chips are in fact made, and the chipshop owners starts to buy spuds again, invest in a new bigger fryer and everyone gets back to work in a economy running at full employment. So you can make more real things like chips appear by inventing money.

Banks invent new money all the time, that's what they do. Sometimes it works and sometimes the bubble bursts, it's all depends on "market sentiment"

I'm still more concerned by the question of what do you spend your invented money on?

Jim Jay said...

AN: Apparfently when the Japanese did this a while back they actually gave the money to the population rather than straight to the banks and financial institutions in the hope it would trickle through.

Quite how well that worked I'm not sure.

Strategist: I think you're right about how the money's going to be spent - as it seems it's just going to get sucked into the financial blackhole.

The spending priorities of government just seem all out of whack. On the mundane level of spending on nuclear weapons and unpopular wars we've been prioritising useless rubbish over job security and combatting climate change and other social ills for some time.

PS It was Milton Friedman who had a magic helicopter which was his way of describing this very policy.

scott redding said...

The Indy has had three recent articles that are worth reading on all of this.

$597.5 billion was withdrawn from UK banks in the last quarter of 2008 alone ... a "silent run" on them.

Hamish McRae: "What will happen? To be honest, I don't think anyone knows." His next two paragraphs start, "It gets worse" and "It gets worse still."

Jeremy Warner: "Banks and other financial institutions that avail themselves of the facility [may] merely hoard the cash they get from selling government and corporate bonds to the Bank of England, rather than feeding it out into the wider economy. Banks are still terrified of running out of cash, and are determined, with regulatory encouragement, to rebuild liquidity pools. The initiative may therefore have little, if any, effect ... It's illegal under the Maastricht Treaty for the Bank of England to create money to buy gilt-edged stock directly from the Government. But what's being proposed amounts to pretty much the same thing ... It's like the Mad Hatter's tea party. It's going to take years to clean up the resulting mess. Twinkle, twinkle, little bat."