Readers Question. Just saw a video called ‘How to waste £375 billion? (The Failure of Quantitative Easing)’ by Positive Money. I’ve recently started reading your blog and find your posts very informative. I wonder what you make of the ideas in this video and of this group in particular?
(I haven’t seen the video. For some reason I never like watching videos only reading articles.)
I would say Quantitative easing has been a quantified success. Or perhaps a better way of evaluating quantitative easing is that – it could have been worse, if we hadn’t pursued quantitative easing.
A simple comparison is to compare the UK and US (who have both pursued quantitative easing) with the Eurozone (which hasn’t). In the past couple of years, the economic recovery has been stronger in the US and UK, the Eurozone is in danger of a double dip (or triple dip) recession. The Eurozone is heading towards a dangerous period of deflation. The UK and US have at least a better inflation rate.
Therefore, I wouldn’t say we wasted £375 billion. Firstly, ‘wasting’ implies an opportunity cost – for example, finding it from higher taxes or lower spending. It was entirely created. For all its faults and limitations, the quantitative easing we pursued was better than nothing – especially given the degree of fiscal tightening pursued since 2010.
Problems with UK Quantitative easing
Perhaps a better description of UK quantitative easing is a wasted opportunity. True, we avoided some deflationary effects, but there are reasons to be disappointed and perhaps it could have been better.
Banks largely used the newly created money to make a profit from selling bonds to the Bank of England and improve their balance sheets; because of the recession, little of this extra money fed through into the real economy through higher bank lending (see: M4 lending stats). The side effect was some banks and the bond market did very and interest rates are at very low rates. True, low rates are part of the aim behind Quantitative easing, but low interest rates are of limited benefit, if firms are unable / unwilling to borrow and make use of cheap borrowing.
Parts of the financial services industry has benefited very well from quantitative easing. It is perhaps a little galling to see many of those culpable for aspects of the credit crisis gaining bonuses from the benefits of quantitative easing.
However, to say it solely benefited the rich is to ignore the contribution it may have made to reducing unemployment. UK unemployment has fallen for many reasons – the small economic stimulus is an important factor – never forget reducing unemployment is one of the most important factor in reducing relative poverty. The UK unemployment rate is now 50% lower than many areas in the Eurozone.
Printing money to fund government deficit
Would a better form of quantitative easing have been to print a smaller amount of money, but directly use this to finance government budget deficit, and / or fund public sector investment?
Some argue this would have directly led to higher demand and a stronger economy.
Looking through Positive Money site you mentioned, I did come across this interesting article – Printing money to fund deficit. and a link to a FT article by Lord Adair Turner in Financial Times, 10th November 2014.
The great taboo talked about is the idea of increasing the money supply to fund a government deficit leads to calls of Zimbabwe / Weimar Germany style inflation.
The difference is that we are in a liquidity trap and facing the prospect of deflation / low inflation. In this situation, a higher inflation rate is part of the solution.
I’m not an expert on quantitative easing. The past few years have been a case of learning as you go along. It’s hard to fully evaluate a policy given the relatively limited examples and uncertainties of what might happen next. It is also always difficult to look at one policy in isolation – when so many things are affecting the economy.
But, when you look at the global economy – Japan, Europe and to a lesser extent the UK and US, there is a great danger of deflation, prolonged economic stagnation (and as a result rising debt to GDP ratios). Printing money to fund a deficit could give a helping hand in getting the economy back to a sense of normality. It is relatively painless and would help both government debt, inflation and economic growth.
But perhaps the problem is we are used to the idea that any solution must involve pain – ‘No pain gain’ could easily be the economic mantra of many politicians, especially in Europe. Austerity retains a strong political appeal.
Yes, printing money to fund a deficit could cause a serious inflation problem in many circumstances and would often be an irresponsible policy. But the current economic situation is exceptional and so called ‘virtue’ can easily become a vice.