Ritchie of the day

although note that quantitative easing in the USA and UK has so far not raised interest rates,

Gosh, that\’s good, isn\’t it?

Especially as the purpose and intention of quantitative easing is to lower interest rates.

8 thoughts on “Ritchie of the day”

  1. The danger with QE is that it could prove inflationary and interest rates might therefore have to rise – which as you correctly point out, Tim, defeats the entire purpose of QE. Fortunately that hasn’t happened so far. Ritchie could have explained that better, but technically he isn’t wrong, exactly.

  2. Frances, QE keeps interest rates low by ensuring oversupply of money. Of course it’s inflationary and we now have, what, UK inflation running at about 10 times official interest rates. The whole purpose of that is twofold – to keep government interest payments easily affordable (in fact if you lend money to the government you’re effectively giving them some as well), and to persuade people to not hold cash – i.e. to invest or spend it. The only reason interest rates would have to rise would be if people actually did too much of that, causing said inflation and realised that money is really worthless, risking very high inflation. It will happen and no doubt the great wise central bankers will miss it by about 6 months. But clearly the dogma that interest must be higher than inflation is broken.

    Let the rate float.

  3. JustAnotherTaxpayer

    “The danger with QE is that it could prove inflationary and interest rates might therefore have to rise”

    That is not a danger, raising inflation expectations is desired and expected with QE, because inflation expectations went negative in ’08.

    If the economy returns to the point where *it becomes necessary to raise rates to withdraw excessive demand* then QE will have been a resounding success.

    “money is really worthless, risking very high inflation”

    This type of hyperinflationary doom-mongering is nothing better than the depressionary doom-mongering in the Guardian. Nominal spending growth is the key, and it is has been growing modestly well.

    Scott Sumner is your man for this stuff.

  4. The aim of QE is to spur economic activity (creating inflationary presure)

    Inflation, despite its many negative impacts, has the happpy coincidence of eroding the future value of present debt

    Anybody know of any governments that would favour an inflation induced reduction in the future cost of their debt (With the potential for a bit of currency weakness thrown in for good measure if you don’t raise rates to counter that pressure), thus reducing the amount that taxpayers will be called on to provide ?

    Things that make you go hmmmmm ?

  5. I don’t know a lot about economics, except in the Hazlitt primer sense of macro – supply and demand, and opportunity cost – so in that respect I am a lot like Murphy. Where I deviate from Murphy is that because I acknowledge my economic ability is slight, I generally refrain from pontificating on its more abstruse areas. Murphy feels no such restraint. It’s that damn Dunning-Kruger again.

  6. QE is about hammering the yield curve into shape, making sure the banks have a nice wide, profitable spread from short term borrowing to long term lending and that the government remains solvent.

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