Oh dearie, dearie, me Polly

So, let\’s have quantitative easing but let\’s do it right this time:

Already, examining the UK\’s flatlining economy, the International Monetary Fund has called this week for more quantitative easing, essentially the Bank printing money. But will it be done as badly as before? The Bank\’s own research shows it can\’t track where the money went or what effect it had. Once it was paid through the banks, it vanished into the great financial casino and not into the real economy. This time, the Bank could, as the economist Lord Skidelsky suggests, put the money into an infrastructure bank, or, as others suggest, into regional industrial banks, or a green investment bank, any of which would invest in production, jobs and projects of lasting economic value.

But the thing is, that isn\’t quantitative easing. That\’s printing money to pay for government spending.

The two are not the same thing.

QE is an attempt to boost the money supply in order to, well, boost the money supply. For as everyone agrees, yes, even the Keynesians, the last thing we want to have in recessionary times is tight money. So, as I insist you understand, as even Keynes himself would agree, we should have loose money. Print the stuff and pour it into the financial system.

If you want it in monetarist terms, MV equals PQ and as V falls in a recession you want M to increase so as to avoid a fall in Q.

Good, so that\’s QE. And the point about QE is that when we no longer need loose money, as we climb up out of recession, then it\’s reversible. As V increases we can reduce M and thus avoid P soaring: we can dodge the inflation that would come as a result of having increased the money supply so much.

If we instead print money and spend it on a Green Bank, regional banks, whatever, then we\’re not doing QE. We\’re simply printing money in order to spend it. This is what Zimbabwe did. Yes, it stimulates, but it\’s that fiscal stimulus on steroids. Creating Mo, base money, and then spending it in a non-reversible manner, is the most inflationary way possible of dealing with matters. If indulged in too far, it leads to what happened in Zimbabwe.

Sadly. Mo is no longer published but the talk is that the £200 billion (or whatever) of QE should be transformed into £200 billion of such direct spending. Which would be a non-reversible expansion of Mo by, well, I don\’t know but I would bet that it\’s a large percentage of that money supply. 20, 30% perhaps? If it is that much (and I would welcome correction here) then we\’re simply building in a 20% inflation rate for the future…..and if inflationary expectations gain hold, more than that.

They\’re simply not the same thing: QE, an evanescent, reversible, increase in the money supply to make sure we don\’t have tight money as against printing money to spend, irreversibly, on the usual lefty wish list.

I admit that the usual suspects have been pretty cute in calling this \”green quantiative easing\” but given that the source is R. Murphy I hope that people can see there are likely to be sound and basic economics reasons why there\’s a problem with the idea?

7 thoughts on “Oh dearie, dearie, me Polly”

  1. Polly is correct to say that QE didn’t work, though. Its purpose, as stated in the Bank of England’s economic report, was to raise domestic inflation enough to allow interest rates to be lifted off the floor so that normal monetary policy can recommence. But the inflation we’re currently experiencing isn’t domestically-generated, it’s a consequence of tax increase and high global oil and commodity prices. The UK economy is still on the floor and so are its interest rates.

    QE failed, and in my view has no chance of working next time either, because banks would rather invest that money in vibrant emerging markets than the depressed UK. I don’t blame them, do you?

  2. Dear Tim

    Though I have very grave doubts about “green banks”, regional “industrial” banks and other measures to send money where it doesn’t want to go, I am puzzled by your logic, and would welcome any comment.

    If QE is reversible by selling government bonds and cancelling the money received, why is that option not available if the QE is used to fund government expenditure? It would still be releasing money into the economy, wouldn’t it?

    The difference with Zimbabwe is that they never turned off the tap, let alone reversed the flow.

    In addition, would the QE actually have to be reversed in that way? Could not a future government restrain money supply by other means, eg interest rate policy, central bank deposit requirements etc.?

    Kind regards


    Tim adds: Because you can’t reverse the spending. You’ve spent it.

  3. Thanks Tim, but if QE goes through the banks, it is lent to people and companies who spend it too, otherwise the Q would not E, would it?

    Tim adds: If the QE were indeed being spent by people and companies then it would have that very same effect, yes, and we’d be having home grown inflation and the QE would be withdrawn. But as you’ll note, QE isn’t being spent. What it is doing is keeping interest rates down a bit which is what it’s meant to do.

  4. So government borrows £10bn to spend on X, and Bank buys £10bn of gilts. Is this describing the current scenario or Polly’s dream one?

  5. If I were Emperor of the Universe, I’d ask Polly a simple question: integrate 1/(1 + sin 2 x) dx. Failure to answer would mean her automatic disbarment from commenting on anything with numbers in it ever again. I’d be a benevolent despot, you see, and wouldn’t (e.g.) simply have her eaten by badgers as punishment for her unearthly fuckwittery.

    She’s even more clueless than Yazmin Alibhai-Brown or Madeline Bunting, so I suppose you have to give some allowance. She should be in a home, really. It would be a kindness.

  6. I still like more clarification from Tim here. If the additional money is not being spent, what has happened to it? It seems to me you are arguing in favour of the ‘balanced budget multiplier’ which last week you were so dismissive of

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