Friday

We need quantitative easing

Rather unexpectedly I was invited onto the Today programme this morning (appearing at 7.50am) to talk about another bout of quantitative easing. Then the programme decided we should talk about the ban on short-selling of bank shares in France and some other countries. (You may be able to listen to the conversation via here.)

But before I knew about the change of subject, I read quite a lot about quantitative easing. It made me think that governments have certain responsibilities and one of the most important is to keep a close eye on the amount of money in the system. Ahead of the boom, it allowed money supply to rise too fast. And now it is allowing money supply to contract slightly. The broad measure of money – M4 – is down 0.4% in the past 12 months. How on earth can the economy recover in the face of zero growth in money? It is absurd. The economy is almost guaranteed to continue very weak with all the consequences that entails such as higher unemployment than would otherwise be the case.

Meanwhile the government is obliging banks to lend less money in relation to their capital. The new Basel accord for banks across the world demands that the ‘core’ capital ratio goes up from 2% to 7% – a massive rise. This will not come fully into effect until 2019 but it is already restricting bank lending.

So we have restricted bank lending and zero growth in money supply. Who can be surprised we have no recovery to speak of?

I believe that the economy will get so bad over the next few months that the Bank of England will finally agree to have more quantitative easing. It won’t be printing money. It will be stopping money from being shredded.

See also this ‘question’ by Jamie Dimon of Morgan Chase to Ben Bernanke, the chairman of the Federal Reserve in the USA.

  1. Nick Clegg and yet more political claptrap about the banks
  2. A ‘crisis of capitalism’
  3. A different view of who is to blame
  4. President Clinton contributed to the current financial crisis
  5. The proposed top Capital Gains Tax rate would be higher than that in China, where the image of the late Chairman Mao, communist, is displayed on the bank notes
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2 Responses to We need quantitative easing

  1. A libertarian says:

    Dear James,

    As you have noticed yourself, state welfare programs seem to have only limited success. Or even backfires badly.

    Can you imagine that applies to state monetary policy as well?

    Because keynesianism did not work in the thirties nor does it work now (it actually extends / -ed the depression). Because socialism does not work. Full stop (sorry for ranting).

    I do strongly recommend you to read Ludwig von Mises’ “The Theory of Money and Credit”. And then you will understand how the central bankers in combination with the red (Mr. Brown in the UK) and the blue socialists (Euro) caused this mess. And not the foolish investment bankers.

    Alternatively you might to have a look at Detlev S. Schlichter’s site paper money collapse (.com).

    Kind regards,
    A Libertarian

  2. I’m no economist but it seems to me that quantitative easing is no more or less than printing money and generating inflation (which is one way of reducing the national debt). What I’m quite sure we don’t need is a consumer-lead increase in GDP (which has always seemed to me to be a very dodgy way of measuring the strength of the economy since it includes all sorts of unproductive economic activities). I read an interesting article on the American economy which reckoned that private investment by business (large medium and small) would increase GDP much more effectively than increases in consumer spending. By all accounts businesses are currently sitting on quite a lot of cash at present but are failing to invest it while (certainly in the US case) there are uncertanties around future govt. policies (i.e. will extra capacity/new enterprise be stolen from them by already high/increased govt. taxes etc.).

    As I say, I’m an amateur onlooker on economic matters. I would welcome more informed comments.

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