Left Outside

Paging Adam Posen

Look Adam, we have had high inflation, but we’ve also had low (and negative) growth, nominal expenditures just aren’t accelerating in a dangerous way. The UK’s real GDP is a long way from peak because its nominal GDP is a long way from peak, and your job is to take charge of nominal GDP.

So please restate your commitment to a more expansionary monetary policy or we’re all screwed.

Signed,

Everyone.

Filed under: Economics, , , ,

QE is Probably Going to Have to be Paid Back

I’ve already taken a pop at Richie today over QE and now I’m going to have a go at Chris, which is an all the more worrying prospect, intellectually speaking.

1. Richard Murphy is basically right to say that this means that government debt is lower than official figures show, if we consider the government and Bank of England as a single entity. What’s happening is that government borrowing is being financed not by debt sales to the private sector but by an increase in base money. This is entirely consistent with the government budget constraint (pdf). Warren Buffett was quite correct to say that you cannot have a debt crisis if the authorities can print their own money.

I think the collorary to this is that if actual government debt is lower than the official figures then the price level is about to become much higher than it is now. QE is backed by a credible commitment to unwind it to reduce the amount of base money circulating. Taking the Bank and Government as one does not lead us to the situation described above where some debt does not exist. We have a situation where some debt exists in the odd form of a credible promise that at a future date someone will be being burning money.

Evidence for this abounds. The price level is not significantly above where it should be if the Bank of England had fanatically maintain an inflation rate of 2%. According to some rough calculations, since 1997 the price level is about 20% higher than a 2% level rule would suggest. Since QE was initiated in 2009 it is somewhat above even than high trend, but that was the point of QE, there is very little evidence that investors view QE as bound to be inflationary due to it being later monetised.

That low inflation isn’t consistent with a large scale monetisation of Government debt unless there is significant slack in the economy such that nominal increases mostly show up as increased real activity. I think there is room for more monetary expansion, and a little credible commitment to recklessness may be useful at the moment, but I know Chris holds that this is unlikely.  

If markets are pricing in a monetisation of UK debt (and subsequent change in price level) they are pricing in only a very modest erosion of the Bank of England’s holdings. Chris can argue that we don’t need to consider Gilts held by the Bank of England under QE as real liabilities, but he needs to take that up with the markets, not me, it is they who are predicting much lower inflation for the UK ahead.

Filed under: Economics, , , , ,

When there is a shortage of safe assets it is easy to sell safe assets

Argh!

We’ll never sell those gilts back. The IFS says we have £280bn of new gilts to sell over the next three years to fund the deficit. There is not a hope we’ll add £350 billion of resale of gilts on top of that. The only likelihood is in fact of more QE: over that period there is no way the market can absorb £280 billion of new debt.

From Richie via Tim.

If the UK can issue safe assets in the form of Government debt (which judging by our interest rate we can), then we categorically will be able to sell it. There is a global shortage of safe assets as this graph illustrates and large global demand for them.

Asians save lots, but don’t have robust enough state or financial institutions to produce safe assets. That is, they want to be able to transfer consumption from now into the future but lack an infrastructure capable of delivering this at prices which are satisfactory.

The UK can issue lots of debt so long as people believe it will pay it back in full in a currency still worth more or less how much they expect. There is no danger of not finding buyers so long as those conditions hold, and they look like they will for the foreseeable future.

The same is true of nearly all developed economies with their own currency. Look at the US, belching out debt and facing record low interest rates and a market hungry, begging, ravenous for more (via Delong).

 

 

 

 

 

 

 

This strengthens Richie’s case for larger budget deficits but weakens his case for unwinding QE by monetising the debt. I do not know how he can hold both opinions simultaneously.

Filed under: Economics, , , , ,

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, , , , , , , , ,

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, , , , ,

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, , , , , , , , , ,

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, , , , , ,

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, , , , , , , , , , , , , , ,

No, no, no you fucking idiots

Dear Liberal Conspiracy,

We need more demand, of course it would be better if money was given to normal people but that isn’t on the cards. It would be better to target a nominal anchor like NGDP or a specific price level, but we have to work within the realms of reality.

QE is a politically feasible way to boost demand, which is flagging and will begin really suffering next year. Attacking Adam Posen, who cares about unemployment and siding with George Osborne, who doesn’t, is always the wrong position.

Yours sincerely,

LO

Filed under: Economics, , , , , ,

Adam Posen WIN

Bank of England increases QE by £75bn

Britain’s interest rates-setting body voted to expand its purchases of gilts in an effort to bolster a badly flagging economy that is already showing signs of stagnation. At the same time rates were left unchanged.

The Bank said it would increase asset purchases by £75bn, taking the total to £275bn.

Good news. Although, I’d much rather the Bank just gave people money rather than swapped one asset for another.

If people want to hold money, and money is free to produce, then we can just give them money – we stop when expected future inflation gets too high and inflation predictions are not looking too high.

The alternative to giving people free money is that they spend less to increase the amount of money they hold. If everyone does this at the same time, we have a recession until people hold as much cash as they want to.

Avoiding this outcome is what monetary policy is for and I’m glad the BoE are taking their job seriously.

I am sceptical of QE because as far as I’m concerned monetary policy works better through expectations than through what a bank does in the here and now. So the £75bn extra doesn’t concern me too much other than as a good sign that Andrew Mellon Sentance is losing and that Adam Posen is gaining the upper hand.

Filed under: Economics, , , , , , , , ,

When NGDP is Depressed, Employment is Depressed

Subscribe to Left Outside

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 8,368 other followers

RSS Lenin’s Tomb

RSS D Squared Digest

  • An error has occurred; the feed is probably down. Try again later.

RSS Bad Science

  • An error has occurred; the feed is probably down. Try again later.

RSS Stumbling and Mumbling

RSS Britmouse

RSS IOZ

RSS Phil Dickens

RSS Paul Sagar

  • An error has occurred; the feed is probably down. Try again later.

RSS Hopi Sen

RSS Owen

RSS Guardian: Global Development

RSS Norm Geras

RSS Steven Baxter

  • An error has occurred; the feed is probably down. Try again later.

RSS Jack of Kent

RSS Suggy’s Blog

RSS Adam Smith Institute

  • An error has occurred; the feed is probably down. Try again later.

RSS Alex Massie

  • An error has occurred; the feed is probably down. Try again later.

RSS A Very British Dude

RSS Thomas Byrne

  • An error has occurred; the feed is probably down. Try again later.

RSS Heresiarch’s Dungeon

  • An error has occurred; the feed is probably down. Try again later.

RSS Paul Krugman

RSS David Beckworth

RSS Kantoos Economics

RSS Duncan Black

  • Overnight July 28, 2014 noreply@blogger.com (Atrios)
  • Another Round? July 28, 2014 noreply@blogger.com (Jay Ackroyd (@jayackroyd))

RSS Modeled Behavior

RSS Noahpinion

RSS Knowing and Making

RSS Ta-Nehisi Coates

RSS Will Wilkinson

  • Free Will Is Back
  • Are Conditional Transfers Paternalistic?

RSS Warren Mosler

RSS Vox

  • An error has occurred; the feed is probably down. Try again later.

RSS Acemoglu and Robinson

RSS Mark Thoma

RSS Overcoming Bias

RSS Econbrowser

RSS Macroeconomic Advisors

Increase NGDP, Put These People Back to Work

Follow me on twitter

July 2014
M T W T F S S
« Mar    
 123456
78910111213
14151617181920
21222324252627
28293031  

Archives

Politics Blogs

Testimonials

Paul Sagar

Left Outside is always worth a read for passionate, and frequently irreverent, analysis and comment.

Sunny Hundal

Oi! Enough of the cheek!

Chris Dillow

Left Outside is, I think, entirely wrong

John Band

This might be the least well informed piece I’ve read on LC, which is quite an accolade.

DEC Appeal

License

Creative Commons License
Left Outside by Left Outside is licensed under a Creative Commons Attribution 2.0 UK: England & Wales License.
Based on a work at leftoutside.wordpress.com.
Permissions beyond the scope of this license may be available at http://wp.me/PvyGQ-gt.

Follow

Get every new post delivered to your Inbox.

Join 8,368 other followers