As the Bank of England note in their our purple chart, the reason to unwind QE is that if inflation is too high the bonds held can be sold to reduce the inflationary trend in the economy.
First, let’s note that there is only very limited inflation in the economy at present.
Second, let’s also note that this is not because of the creation of excessive new money by the QE programme. As Charles Adams has shown at Progressive Pulse, the M4 measure of broad money in the UK (which is generally used for appraisal of monetary risk) has flatlined since 2010, contrary to all previous experience.
Far from QE creating excessive new money supplies it has, at best, managed to maintain the money supply. There is then no risk of general inflation from excessive money creation as a result of QE. But this is, according to the BoE, the only reason to unwind it. To unwind it to tackle inflation caused by other factors, such as leaving the EU with its consequent impact on the exchange rate, makes no sense at all. That would be to use the wrong tool for the wrong job.
We have increased M0 substantially and we rather do expect that to feed through into M4 at some point. That is generally how things work, it’s akin to the money multiplier. Now, if Ritchie has some evidence that this is never going to happen then he should present it, we’d all be, central banks included, most grateful.
But the assumption that it never will therefore never retract QE is an extraordinary claim, requiring extraordinary evidence. Which ain’t being presented…..
Will unwinding QE work?
On this I can be emphatic: no it won’t.
Unwinding QE cannot stop an inflation it did not cause: only abandoning Brexit can do that.
Snigger. Brexit caused inflation stops 12 months after the pound falls as the currency change drops out of the figures. It’s also going to be a hell of a shock when the Fed announces net month, isn’t it?
The risk of QE is then deflation, a negative impact on investment, asset price crashes, recession, major insolvency and, as a result, likely bank failures to be followed by a bail out, using QE.
No doubt cats lying down with dogs too. He really is leaving the more than occasional hostage to fortune here, isn’t he?
Can we leave QE in place?
The short answer is, yes, of course we can. QE can just be allowed to roll. Or it could, as bonds are redeemed, be gradually allowed to unwind as reinvestment of the proceeds of redemption did not take place.
And now he’s just descending into mind-gargling idiocy. Because that’s how everyone is planning the QE run of anyway.
Ahh, no, I get it. He said QE will never be reversed. And he’s predicting now rivers of blood if it is. But if he can claim that not reinvesting as bonds mature is not running off QE then he’s got a get out of jail free card, hasn’t he? Because that is the method which will be used, not reinvesting maturing sums.