Opinion: Political deference to today’s orthodoxy is the UK’s economic problem

All three main political parties in the UK today broadly accept the Bank of England’s (BoE’s) programme of buying the paper ‘assets’ of banks with printed money – worthless and valuable alike (quantitative easing – QE). There are few dissenters, but I am one of them.

My dissenting post-2008 remedy was a managed partial default/bankruptcy of the UK’s insolvent banks with a quick operational reboot, on the grounds that it would be cheaper than a printed-money ‘bankers subsidy’. The quantity of intricately interwoven bad assets was unknown, and thus the UK government was subsidising a pig-in-a-poke, I believed.

But hey ho we are where we are, What now ? When will QE stop and where will the economic crisis management go from here ? The BoE issues confident statements about the future of printing money and now tie a reduction in QE to employment data (as a sign of future inflation), rather than to a time limit or aggregate quantity limit.

However, there is no senior economists’ consensus on the effects of QE or on why inflation is remaining so low. Indeed employment levels may not be a good predictor of future inflation due to technology/outsourcing changes. The truth is that there is no valid precedent for the huge QE which continues on both sides of the Atlantic. The certainty which runs through briefings to UK politicians is not fully justified.

The US Federal Reserve allegedly wished to start to wind down (taper) the $85bn a month money printing in September but pulled back at the last minute, reportedly because of inconclusive employment data. In the US there was a feisty debate in the media about this – on UK QE largely none.

My take is that inflation is not fuelled by QE (yet) because the money is being still being used to rebuild the financial strength (ie balance sheets) of the banks. It is not flowing into the economy – it has not prompted banks to lend more to businesses although it has brought back some of the worst practices that caused the crisis in the first place. Part of the reason for that it has also led to a more concentrated and monopolistic banking sector, less responsive to the needs of businesses large & small.

However, the main outcome from QE has been extraordinarily low interest rates – negative in real terms. With ‘low interest’ cash beginning to slosh around, but not as loans to growing, trading businesses, the purchase of shares has become popular. Thus, a low interest rate policy was supposed to stimulate the economy, but instead it has led to increases in share prices, and some pretty nifty financial engineering (hence the big bonuses).

I believe these QE effects with respect to inflation, interest rates and share prices are one-off and temporary. It may well end with a sudden fall in share prices and another mini-crash, this time with inflation as a fly-in-the-ointment. The UK economy needs a more public plan to escape from QE to avoid such a scenario – it is still not clear how the UK plans to get back to normal with some kind of balance between bank deposits and lending at positive interest rates.

QE has had another negative effect in that it has dampened the need for banking reform in the UK. Further banking reform especially stronger policy towards competition is in my view a prerequisite for tapering down the UK’s QE.

Blocking easy but flaky routes to bank profitability, and ensuring more competition so banks behave in the diverse economy with more precision, are the parallel remedies long overdue.

However, I am arguing against a well-established consensus. I may get the same treatment as that meted out to dissenting North Korean faction-leaders.

* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance. He is a member of the Lib Dem Federal International Relations Committee and an Executive member of Liberal International (British Group).

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  • Its a bit of an oversimplification to say QE has been bad for everyone. Its been hugely successful for the government which has saved hundreds of billions in interest payments as a result of the ultra low interest rates. Imagine the size of the deficit if we were borrowing at 5-6%… Plus anyone with a variable rate mortgage has seen their payments fall through the floor over the past 5 years.

    On the other hand the big losers have been savers and annuity buyers, which have probably been deprived of a similar amount of interest in total. The profligate bailed out by the thrifty :-\

  • Count me in the dissenters camp.

  • ” international economics adviser, who has had senior political roles in Afghanistan, Iraq, and Pakistan ”

    Not everybody would own up to such a record.

  • Eddie Sammon 13th Dec '13 - 6:12pm

    I support pretty much any article criticising QE. It pains me when I hear our politicians repeating the scare stories from lobbyists about how we need to keep interest rates low. We don’t need to keep them low at all, inflation is too high and we could do with a bit of deflation. It just seems like class warfare to me because inflation allows us to squeeze those on benefits. Why are we printing money and basically giving it to the banks? Then lending at 0.5%? Who in their right mind would lend to a risky bank for a negative interest rate? I agree, just let them go bust and bail out the policy holders individually.

    I agree it feels arrogant to criticise QE, but we should believe in things because they make sense, not because someone with authority has said it is a good idea.

    Thanks for the article.

  • Eddie Sammon 13th Dec ’13 – 6:12pm
    ” It pains me when I hear our politicians repeating the scare stories from lobbyists about how we need to keep interest rates low. ”

    It pains me when I hear politicians and pundits and the BBC repeating anything from lobbyists but it happens all the time.
    It is done every day by MPs, MEPs and that disgraceful 800 in the unelected, undemocratic cesspit of lobbying known as “The Lords”.
    It is done every day in the press when what is dressed up as editorial content would be more accurately described as advertorial.
    It is done every day on the BBC when people posing as “experts” are nothing more than PR prostitutes who speak the words of whoever is paying them.
    Check out –

  • Eddie Sammon 13th Dec '13 - 8:18pm

    Yes John, you make a good point. Anyway, I know it is easy to carp on the sidelines and I don’t wish to derail from Paul’s article. Hopefully we can build momentum for a campaign questioning QE and negative interest rates. I don’t argue with the claims that tightening up the money supply now would risk the recovery, what I argue is that if we don’t risk the recovery now then we’ll be risking another big crash in the future.

  • Hi Eddie,

    Agree with you 100%. This peculiar time in economics of super low interest rates needs to come to an end, I just hope we can return to a normal situation of 3-4% interest rates and 2%ish inflation gradually over the coming couple of years. With the cost of living so high, many families would fall off the cliff if interest rates on their mortgagee went up quickly.

    While this is happening its going to require some seriously good management not to spook the markets into another crisis, I hope for all of us our leaders are up to it…

  • This is a first-rate article by Paul Reynolds on QE. The central observation from the piece is this :
    “My take is that inflation is not fuelled by QE (yet) because the money is being still being used to rebuild the financial strength (ie balance sheets) of the banks. It is not flowing into the economy.”
    Was this not the unspoken intention of QE.? It was never intended, to flow into the general economy. QE was designed purely, and solely, to keep banks solvent until such time as the economy began to improve, whereby QE could then be tapered off, to let the banks stand on their own feet again.
    Unfortunately, it has not worked out that way. Real economic growth, could have solved the dilemma of when QE (i.e. bank solvency support money), could be phased out. But instead, we’ve gone for the consumer driven growth, which frankly, is the wrong growth. In other words we have learned nothing from 2008.

  • Eddie Sammon 13th Dec '13 - 10:39pm

    Thanks Gareth, yes there are serious questions to be answered. I agree QE has been good for the government’s borrowing costs, but it hasn’t been distributed on a balanced basis and that is causing problems.

  • Paul Reynolds 14th Dec '13 - 5:48am

    So far I have escaped my North Korean style dissident’s destiny. For the record, (ref John Tilley’s first point ), I was always a strong opponent of the Iraq war, a skeptic over the invasion of Afghanistan & an opponent of the 2008 UK surge, and a strong opponent of international drone attacks in tribal Pakistan. Working in the melee of a conflict does not necessarily imply support for the West’s military or foreign policy in that country.

  • Paul Reynolds 14th Dec ’13 – 5:48am

    Paul, I was thinking about the economic performance of those countries in recent years.
    I did point specifically to your description of yourself as – ” international economics adviser, who has had senior political roles in Afghanistan, Iraq, and Pakistan ”

    I am not an expert on the economic performance of any of the three countries you mentioned.
    However, they all seem to be under-performing.
    Iraq is an oil rich country. So why is the economy in such a state?

    I hope you see my original point? Nothing to do with military invasion by the West.

  • “I hope you see my original point? Nothing to do with military invasion by the West.”

    Like the Afghanistan economy was booming under the Taliban. Not.

  • The political deference to orthodoxy I’d like to end is the ignorant, hostile attitude to public ownership, the most recent classic case being the determination to re-privatise the East Coast Mainline despite the evidence that it was perfectly well run under a publicly-controlled company.

    Vince Cable, shame on you for letting this happen. Why do we still buy into this nonsense about public sector bad, private sector good? We should jettison this received idea immediately.

  • Ken Palmerton 14th Dec '13 - 7:17pm

    All hail to you RC. You are right.

    Because the party in the UK claiming to be Liberal has also joined the “Consensus” they have forgotten that they actually invented the concept of the “Mixed economy”.

    The membership hammered out in detail, over a long period of time, exactly what it was that should be under public control, and what should not. “The market where possible, the State where nessesary”. All this has been ditched in exchange for seats around the cabinet table, and the long held Liberal principles have gone to hell.

    A rigid dogma on the proper ordering of our societies economic life is NOT a Liberal practice that will save us from being tarred with their same brush.

  • Andrew Colman 14th Dec '13 - 11:52pm

    Interesting article

    I have always doubted the wisdom of bailing out banks as was done by Gordon Brown & Bush. I was disappointed at the time of the bailouts c2008 that the media seemed to unanimously praise the bailouts and no one questioned where the money was coming from.

    Since then we have had a right wing conspiracy of bankers, neo-con economists, right wing media and politicians blaming the problems on public servants, benefit claimants and immigrants. The Lib Dems in coalition have not sufficiently denounced this myth. Instead of public sector cuts, it should be the financial sector who should be taking on the debts they caused (including the costs of saving many of them from bankruptcy) and making arrangements to pay it back over the coming decades.

  • Bill le Breton 15th Dec '13 - 12:36pm

    Just a thought: Euro Zone no QE, US lots of QE – who has had the better recovery?

    (And interestingly, the US has had is recovery recovery even with considerable fiscal consolidation thanks to QE!)

    Japan no QE until Abe announced prior to his election that he would conduct QE a l’outrance, since when Japan has beaten its 20 year struggle with deflation.

    Long term interest rates are an indication of the markets’ view on future inflation and growth. What is a 10 year Treasury Bill paying? 2.7%? That remains a bleak bleak future.

    So, is there any evidence available to guess what might happen if we ‘end this (to quote Geoff above) ‘peculiar time in economics of super low interest rates ‘ ?

    Well yes, that’s what the US did in 1937 plunging their economy back into depression.

    He goes on,”, I just hope we can return to a normal situation of 3-4% interest rates and 2%ish inflation gradually over the coming couple of years. ”

    If we had a policy that produced 3-4% interest rates over say a couple of years we’d have severe deflation. Witness Japan 1990-2012. – GIven that even in the UK – we have falling inflation at 0.5% interest rates.

    That is what this economic crisis has been all about – the world wide fight against deflation.

    Remember that it was NOT the Weimar inflation 1921 – 24 that brought Hitler and the Nazis to power – it was the early 1930s deflation that did that.

  • Michael Parsons 15th Dec '13 - 1:01pm

    I don’t know why people call the QE money-printing used to create bank-liquidity a “Keynesian” policy.As I recall the Keynesian revolution was an anti-banker one that favoured social economics. Lowering interest-rates to promote growth is futile, merely pushing on a piece of string – interest rates are only effective when raised as part of the bankers’ favourite destructive trick of “stimulating” (!!) the economic engine by throwing a spanner in the works.. Lowering the rate moves the economy down the liquidity-preference curve (derived from analysis of the third motive for holding money after the transactional and precautional motives) to create vast idle bank-balances, such as we see today in the massive size of corporate bank cash-balances.

    Keynes divided bogus “financial investment” such as shares (not a penny of the sales on the share markets goes to the firms concerned) from real investment proper, which must be in capital goods and stock-in-trade: the aim of Government “deficit” spending is direct real investment in manufacturing and trade and ultimately the euthanasia of the rentier. It still remains a wonder to me why the State creates money, gives it cheaply to the banks (QE, Mortgage guarantees), and then borrows it back at higher rates while belly-aching about “deficits”! Since we (foolishly) use private-bank debts as money, if you cleared all debt and ceased being bank creditors the money-supply would vanish. Nor is there any long-run self-balancing macro-equilibrium in the economy: run it as a ‘household’ and save to prosper and you will push economic output (if you stuck to that) towards zero as the multiplier effect goes into reverse. You also need to keep a watchful eye on the international-trade multiplier effect and control trade where necessary, rather than simply bleating about how the weakness of EU is ruining our growth plans (especially as we don’t actually have any growth plans). Above all policy should take in to account that while you can switch equipment off and on, a year of a worker’s life wasted in unemployment is lost forever, not moth-balled. So take work to the workers now.
    It seems as if little Milt’s propaganda has denied the current crop of economists any proper access to this body of analysis and policy-making. Hence all this nonsense about “market prices “(e.g. for energy) where large players make sure no “price discovery” by supply and demand exists, even were such a thing possible among competing price-makers. The futility of absolutebreliance on “free market forces” has long been known, and should never have been allowed to translate into the current futility of policy.

  • RC 14th Dec ’13 – 9:39am
    Like the Afghanistan economy was booming under the Taliban. Not.

    I don’t think Paul Reynolds was economic advisor to the Taliban government.

  • Hear hear, Andrew Colman.

  • Bill le Breton 15th Dec '13 - 4:15pm

    Andrew Coleman, I am afraid I don’t know him but what does he think would have happened had we allowed ‘a couple of big banks’ to ‘go to the wall’. If he were a businessman I doubt that his credit line would have lasted 24 hours

    Nor would there be any difference if he worked for a business because the question would have become, how would his employers owners have done this? …. so how would he have paid back the business’s overdraft within 24 hours? And what would have happened to the outstanding invoices of their suppliers etc etc down the chain like wild fire. He would have lost his job the next day.

    Don’t forget that the Americans did try this – has no one here heard of Lehmanns? – and when they did so they escalated the problem for the reasons above. No bank trusted any other bank being able to repay any loan – ditto any private person. The pursuit of so called ‘safe assets’ would have intensified even further – driving up their price (lowering interest rates). Imagine, no RBS, no Nat West, No Lloyds, No Barclays – and life on your high street??? The financial system would have crashed in hours. It does not bear thinking about.

    Those scrambling to repay their loans/working capital and overdrafts would have sold all their shares, put their homes on the market and laid off as many of their staff as they could as quickly as they could.

    What Governments had to do was create as many safe assets as possiible as quickly as possible to satisfy the demand for them so that their prices did not rise. The demand for money (and near money) to hold out paced supply. In this circumstance Aggregate Demand crashes.

    This is the gateway to deflation.

    Now, there were a number of other ways of creating safe assets (for which I argued back then), ways that would have handed money to people in return for essential services and much needed public infrastructure – so I was never a fan of QE as implemented by central bankers – not least because its power to affect expectations in the way necessary was limited because QE can always be reversed. But not to have had the creation of those safe assets would have been a catastrophe.

    The tragedy is that no one on this forum was taught at school or university about the role of money and particularly the role of money in the creation of the Great Depression. Worse, no one studying PPE and ending up in public office understood it either.

    As someone said to me recently, ‘Those in the Treasury? They still think the Rate of Interest is the price of money’!

  • @Bill le Breton, the USA’s economy is being floated by China, so is not really a same comparison. Plus comparing the fully federalised USA with the highly autonomous state system of the EU is about as pointless as comparing cats and dogs for which one is more cute.

    As for Japan, it problems come from a lack of internal expenditure, an overly homogeneous culture and an rapidly aging workforce with depreciating output. Furthermore, once again, you are comparing cats and dogs by comparing a completely autonomous state with the EU.

    Finally, saying:

    – this country has QE and is doing well

    – this country does not have QE and is doing badly

    Prove cause and effect you have not.

    Normally, I do agree with you, but here, I feel you have overly simplified the issue.

  • Bill le Breton 16th Dec '13 - 8:48am


    Europe: In your post you write of the EU: I wrote of the Euro Zone and the European Central Bank. There is no EU monetary system! There has been a huge difference in the performance of Euro Zone and Non Euro Zone economies. The latter have been able to use their freedom to create money and have been more successful in countering the forces of deflation and disinflation.

    Here’s a graph at Britmouse showing Eurozone HICP declining to 0.75% (target 2%) – so – no QE and disinflation and decline and social strife http://uneconomical.files.wordpress.com/2013/11/eu-hicp-vs-japan.png

    That graph then contrasts the situation with Japan where since Shinzo Abe announced his new economic policy (unlimited QE until inflation hits 2%) and won the General Election a year ago: showing the triumph over deflation: CPI up from negative 0.5% (where it has been stuck for a generation) to just over 1%.

    Debt deflation is about the destruction of money (M) and an increase in the demand to hold what money remains, i.e. a reduction in the velocity of exchange. MV down, PY (or aggregate demand or nominal GDP) down. [ Or plot that shift in AD on an AD/AS graph]

    People scramble for safe assets to hold because they think (or conclude from erroneous central bank policy, as in 2008) that there won’t be enough safe assets to satisfy their needs.

    To reverse this you have to convince the market that the central bank will create whatever amount of safe assets people require, when they require them. As soon as they are reassured of this more normal behaviour resumes.

    This is the story of the Great Depression – it is the story of Japan’s lost decade(s) – it is the story of Euro Zone stagnation, it was what happened in the UK in 2008 (and happened again in 2011).

    Here’s the counterfactual without the creation of safe assets by the Bank of England: the stock market churns at 3,500, unemployment well above 10%, and nominal GDP declines every year since 2008 (thus worsening the debt to GDP ratio towards 200%).It’s a world where the country’s central bank does not step in to make up for the failure of the markets to create sufficient safe assets to fulfil the demand for them – that is what central banks were invented to do, though (as with the ECB and the Bank of Japan pre Abe) that is not what they always do.

  • Michael Parsons 17th Dec '13 - 10:47am

    Bill le Breton
    You are still using “creation of safe assets” in terms of unbacked paper, using QE to switch cash from the real to the financial economy. However much the stock market booms this is simply a gamblers’ mark-up on ownership paper- the money does not go into the real economy, and government bonds are artificially inflated so that the holders are now trapped facing substantial losses ,and the banks still remain moribund. Now if the tax-payers resources had gone directly into real investment via the State, instead of being transferred to squandered on the floundering finance industry, and if – as we did durng the GreatDepression, – we had separated speculative from retail banking and turned financing away from creation of property bubbles, relying instead on separate Building Society rates and rationing by proved saving-capacity, would have served the general population much better, instead of impoverishing them. . Instead QE has been used to give State support to losers (banks etc) who are off on an endless credit spree anyway via the internatioal credit multiplier (which can rise towards infinity) .
    It seems as if “economics” has been reduced to fiddling about with MV=PT (or PQ?) via totally imagiary speculations concerning “rational expectations” in an irrational world. Would it not make more sense to draw on the wealth of inherited economic analysis and experience to build a better Britain? Rather than just more fiat money?

  • Michael Parsons 17th Dec '13 - 10:49am

    PS: the ratio of the GDP to what (or which) debt, by the way?

  • Michael Parsons 19th Dec '13 - 7:31pm

    So Bill, no reply?
    The Monetarist MV=PT etc assumes money has only transactions and precautionary purposes. The moment we arrive at the “store of value” notion and the liquidity preference analysis that it implies, it ceases to be relevant: since deltaM no longer relates to delta Qor T. To put it simply.

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