Laban Tall, fancy earning £20 for your favourite cause?

Laban, understandably, is rather annoyed with the Bank of England’s apparent inability to hit its 2% inflation target. Lets remind ourselves, the Retail Price Index is at 5.6% and the Consumer Price Index is at 5.2%. Laban scoffs at the idea that inflation will fall significantly in 2012 whereas I think it is incredibly likely that it will, even with the bank printing up another £75bn in freshly minted electronic cash. Only one way to settle this, I propose a bet.

I reckon inflation won’t average above 2.5% and I’ll donate £20 to anyone Laban wants if it does. If Laban will take the mirror of this bet we have ourselves a deal.

As far as why I’m so confident, this morning’s post explained why QE is a good idea when an economy is depressed and Luis‘s explains why QE isn’t really too different from your common and garden interest rate cut. I’ve already covered why temporary factors are what is to blame for elevated inflation, factors which are unlikely to be repeated:

One major source of inflation has been successive increases in VAT. In the last two years it has increased from 15% to 20%, adding at least a percentage point to inflation. A lot of inflation is also still working through import prices since sterling devalued. Lastly, crisis in Europe and continued depression in the US means the UK’s economy can expect little external support.

And finally Paul explains why inflation is unlikely to rise next year; nobody has enough money to keep it going…

Here’s the key graph, from the Office of National Statistics:

Like the US, Britain has no wage-price spiral — wages are going nowhere.

Plus we have continued contraction of the state sector which will cause people to be unemployed, to lose their services, and will have various knock on effects through the rest of the economy. Unlike Hopi I am not worried that we will soon need to battle inflation, inflation will splutter down on its own to a more comfortable rate.

So, Laban, that is why I am not worried about inflation. Would you like to take me up on my bet?

Filed under: Blogging, Economics, Blogging Bets, Inflation, Krugman, Laban Tall, Luis Enrique, Monetary Policy, Money, QE, Quantitative Easing

Money gets printed, get over it

Guest post by Luis Enrique (edited from an e-mail by LO)

Something I find particularly striking is how few people seem to recognise how similar QE is to standard monetary policy. QE is often called something like a bank bailout by the back door, or corporate welfare, or a harbinger of hyperinflation, but that doesn’t make much sense in the context of actually existing monetary policy.

In standard macro theory, if people want to hold more money they will sell interest bearing bonds for cash, which would increase interest rates. But if the BoE is targeting say a 2% rate, it will create money and buy bonds to keep they rate at 2%. So changed in money demand are accommodated.

If the BoE wants to cut the rate from 2% to 1% it announce it is doing so and will print money and buy bonds to get it there. This will cause bond prices to rise, creating a “windfall” for bond holders and banks that charge fees for trading bonds. The money it creates thus doing is every bit as inflationary as the money created by QE. Probably more so, in fact, because the money is less likely just to sit in reserve.

Many people object vociferously to QE yet yet wouldn’t blink at a decision to cut interest rates from 2% to 1% despite their similarities.

Filed under: Economics, Luis Enrique, Monetary Policy, Money, QE, Quantitative Easing

Why we should support QE in language an undergrad student can understand

Here’s a piece on QE I wrote for the LSE student rag (with some help from Luis Enrique).

Printing £75bn does not sound like a plan to make us all richer. It sounds like a plan to turn us into Zimbabwe. But last week Mervyn King, Governor of the Bank of England, announced that is exactly what he will be doing. When complete, the Bank’s Quantitative Easing, or QE, programme will have seen £275bn leave the printing presses, nearly £5000 for every person living in the UK. Informing the Bank’s decision is the news that more than two and half million people are now unemployed, including nearly a million young people. In fact, many students reading this will have chosen to come to LSE because finding employment has been difficult. Urgent action is obviously needed to tackle this, but printing money appears a method of dubious merit. Of course, there is a logic to the Bank of England’s action that may mean students graduating this time next year will find it easier to get a job than they expect.

The Bank’s actions appear odd, even dangerous, only because of the rarity and extremity of our situation. In normal times the Bank doesn’t announce how much money it will be printing, it just changes the interest rate at which it will lend. To keep growth steady, when the economy is decelerating they cut interest rates to encourage spending and when the economy is accelerating they raise interest rates to discourage spending. You can raise interest rates as high as you like, but can only cut them to zero, and that is where they’ve been since March 2009. This means they have to try to encourage spending through other methods.

Over the last nine months the economy has seen no growth when normally it would be almost two per cent larger. If an economy stops growing it may be because bad policies prevent new companies from setting up shop and creating and employing new technologies. Alternatively, an economy may falter because there is too little demand for those new industries and technologies. Whether the Bank’s actions are wise will depend very much on which describes our current situation.

The idea that firms and people may be lying idle because nobody wants their produce is a strange idea at first. If people are willing to work that must mean they want to consume. If they didn’t people would be happy to stay at home and relax. But there is one good people want to buy which won’t put others to work. You buy a car to get from A to B and you employ a mechanic. You buy a sheep because you want mutton or wool and you employ a shepherd. You “buy” money to swap it for something else by working or saving, but you don’t employ anyone because money can be created for free.

In nervous times, we all would like to improve our balance sheets, we all want to build up buffers of savings, and that often involves wanting to hold more money in our current accounts. When one person does this it causes no problems, but when we all become more nervous we all end up wanting to build up a safety buffer. Now with only so much money in circulation this can only happen if we each spend less than we earn. But this is impossible because everyone’s spending is someone else’s earnings. Unless extra money is put into circulation we get slowly poorer until people decide they have the right amount of money relative to their earning and spending. We have a recession. We have our current stagnation. QE is designed to put more money into circulation and to create more safe places to invest that money. That should lead to healthier balance sheets and more demand to employ people and will bring the economy back to life.

In an economy held back by bad policy, printing money does exactly what you would expect it to and makes everything more expensive. At a time of stagnant wages and austerity budgeting this would be a terrible result. Some people have pointed to high inflation as proof the bank has already printed too much money. In one story growth falters because people start demanding relatively more money than goods and services. In that world, printing money -whether through changing interest rates, QE or targeting total cash spending – will make us richer. In the other it makes us poorer.

Looking at the UK and global economy, three things imply the Bank’s actions will help more than hinder. One major source of inflation has been successive increases in VAT. In the last two years it has increased from 15% to 20%, adding at least a percentage point to inflation. A lot of inflation is also still working through import prices since sterling devalued. Lastly, crisis in Europe and continued depression in the US means the UK’s economy can expect little external support. The Bank of England has little influence over any of these and has ignored them to focus on what it can influence in the domestic economy.

In the last three years a lot has changed. Whether more QE is a good idea or not depends on whether the economy has been damaged to the point where we can employ a million fewer people than we used to. If the financial crisis or government policy has wrought such damage upon us then QE will merely produce ever higher prices. If there is still some slack in the economy then we will see more people employed and better living conditions for everyone. Simplistic comparisons with Zimbabwe may be attention grabbing, but in reality QE may be the best hope we have to get the UK back on track.

Filed under: Economics, Politics, Fiscal Policy, Inflation, JS Mill, Level Targeting, Monetary Policy, Money, NGDP, NGDP Targeting, QE, Say

So you fear printing money?

This is the sort of situation you’ll find yourself in. Low inflation and the possibility of (another) economic implosion of the scale not seen since (you guessed it) the 1930s.

Filed under: Economics, I told you so, Kantoos, Monetary Policy, Money, QE, Trichet is History's Greatest Monster

Printing money is okay, we do it all the time!

A lot of people get very worried by printing money. We can trace this line of thought back to the great political economists of the nineteenth century like JS Mill, but it finds itself common on the left and right these days.

You can print yourself into hyperinflation, or even accelerating inflation which can eat into living standards and cloud relative prices. But you can find yourself in deflation by failing to print enough. It is this second problem we have been closer to.

It is sad that people need reminding that hyperinflation impoverished Germany but it was relatively mild reflation which pushed them towards fascism. It seems sensible to me to fear deflation more than inflation. Better yet to find the happy medium, where the economy operates at its potential without prices rising too quickly or people being left on the scrap heap of unemployment.

Unfortunately I don’t know where to get the data for the UK, the UK National Statistics website is a joke, but here is some data for the US showing the potential for disconnect between money and prices.

For two decades, money increases along with economic activity, prices increase more slowly (i.e. we got richer). We reach 2008 and the monetary base explodes but prices do not. In fact, prices fall slightly just as the monetary base grows at over 100% a year.

What does this tell us? It tells us that simplistic talk about “fake credit”, “titanic disasters” or “defy[ing] economic gravity” is very wide of the mark indeed.

Quantitative Easing causes a lot of confusion. Normally a central bank promises to print as much money as is necessary to pin short term interest rates at a level predicted to produce stable prices and full output.

Around the world, our last crisis was so severe that short term interest rates went to zero and stayed there. The central bank’s method for controlling prices and output was suddenly impotent.

QE is an extension of this normal promise to print and spend to long term debt because rates on short term debt have already been pushed as low as it is possible to go.

QE is far from ideal, in fact it is the least a central bank can do once rates hit zero. But it is the only option currently on the table because many people currently resist a central bank even doing this minimum because they seem not to care about unemployment.

If you support more active policy to help people then it has to be both through QE and after QE. Only by supporting a suboptimal policy will the space ever open up for something more efficient for boosting growth but that is less popular with central banking’s elite.

Filed under: Economics, Politics, Adam Posen, Adam Smith Institute, Douglass Carswell, Inflation, JS Mill, Liberal Conspiracy, Monetary Policy, Money, Prices, QE, Quantitative Easing, Sunny Hundal, the Bank of England, Unemployment, We need to talk about money

Where did money come from?

Doing the rounds on teh interwebs is this fantastic post by David Graeber, and anthrolopogist, on where money comes from.

The basic “story”, and it is only a story, is that first there was barter, then people realised you couldn’t always swap your stuff for what you wanted (no double coincidence of wants), so people invented money, then people invented lending money at interest, then, eventually, capitalism.

This is an economist’s fairytale but the truth, or at least what we know so far is infinitely more interesting…

The actual evidence is that in Mesopotamia—the first case we know anything about—these more widespread pricing systems in fact emerged as a side-effect of non-state bureaucracies. Again, non-state bureaucracies are a phenomenon that no economic model would even have anticipated existing. It’s off the map of economic theory. But look at the historical record and there they are. Sumerian Temples (and even many of the early Palace complexes that imitated them) were not states, did not extract taxes or maintain a monopoly of force, but did contain thousands of people engaged in agriculture, industry, fishing, and herding, people who had to be fed and provisioned, their inputs and outputs measured. All evidence that exists points to money emerging as a series of fixed equivalent between silver—the stuff used to measure fixed equivalents in long distance trade, and conveniently stockpiled in the temples themselves where it was used to make images of gods, etc.—and grain, the stuff used to pay the most important rations from temple stockpiles to its workers.

[...]

The numismatist Phillip Grierson long ago pointed to the existence of such elaborate systems of equivalents in the Barbarian Law Codes of early Medieval Europe. [7]For example, Welsh and Irish codes contain extremely detailed price schedules where in the Welsh case, the exact value of every object likely to be found in someone’s house were worked out in painstaking detail, from cooking utensils to floorboards—despite the fact that there appear to have been, at the time, no markets where any such items could be bought and sold. The pricing system existed solely for the payment of damages and compensation—partly material, but particularly for insults to people’s honor, since the precise value of each man’s personal dignity could also be precisely quantified in monetary terms. One can’t help but wonder how classical economic theory would account for such a situation. Did the ancient Welsh and Irish invent money through barter at some point in the distant past, and then, having invented it, kept the money, but stopped buying and selling things to one another entirely?

The killer blow for economists comes here though…

Murphy argues that the fact that there are no documented cases of barter economies doesn’t matter, because all that is really required is for there to have been some period of history, however brief, where barter was widespread for money to have emerged. This is about the weakest argument one can possibly make. Remember, economists originally predicted all (100%) non-monetary economies would operate through barter. The actual figure of observable cases is 0%. Economists claim to be scientists. Normally, when a scientist’s premises produce such spectacularly non-predictive results, the scientist begins working on a new set of premises. Saying “but can you prove it didn’t happen sometime long long ago where there are no records?” is a classic example of special pleading. In fact, I can’t prove it didn’t. I also can’t prove that money wasn’t introduced by little green men from Mars in a similar unknown period of history.

Read it all, very interesting.

Filed under: Economics, History, Anthrology, Austrians, Barbarians, Barter, Bureaucracy, Credit, David Graeber, Debt, Economics, Ireland, Mesopotamia, Money, Punishment, State, Sumerian, Truck, Wales