In the first comprehensive report it has conducted into the impact of its Quantitative Easing (QE) policies on the UK economy, the Bank of England says that QE has “prevented a deeper recession” but that the policy “benefits the top 5% of households”.
It is the contention of this article that the central bank is broadly correct on both of those points-which begs the question, why is the Bank of England intent on pursuing the policy in the future?
I have previously written that QE has had the effect of preventing a deeper recession by effectively ending the credit crunch, but that it is limited in its capacity to deliver growth.
The Bank of England’s assessment is that Quantitative Easing has benefitted the top 5% of households because it helps to inflate the price of assets, and the top 5% hold a greater proportion of assets than any other group. Again this is accurate, and it helped to end the credit crunch because those assets have tended to be used as collateral, so there book value rises, and banks balance sheets look healthier. However, achieving growth will not come from increasing the paper value of assets held by the better off-as the better off have a lower propensity to consume than the less well off.
Another factor to consider is that while QE inflates asset prices and thus lessens the impact of the credit squeeze, this inflation also serves to squeeze incomes, thus reducing demand from those (the 95%) whose means of survival comes from work rather than the return on assets.
Government policies such as increasing the income tax threshold for the lowest earners and restoring the index link with pensions, should have the effect of increasing the amount of purchasing power in the hands of those more likely to spend it, but with every fresh bout of QE undertaken by the Bank of England this becomes less effective as the extra purchasing power becomes inflated out of existence.
Its also interesting to note that the Liberal Democrat proposal of a ‘Mansion Tax’ deliberately tries to counter the problem of purchasing power becoming passive as it gets stored in assets, then often leveraged against to purchase more assets-creating an asset price bubble which must surely burst.
With policy of yet more QE, the central bank is simply trying to re-inflate this bubble, with the aim of developing the same sort of placebo growth which was the hallmark of the Brown years in the UK and the Clinton years in the US, Vince Cable was very strong in opposing this placebo approach to growth in opposition, and Liberal Democrats must maintain that approach whilst in government.
* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election
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16 Comments
“why are we still doing it? – Because the Bank believes doing so prevents a deeper recession.
@ tim
only if the credit crunch were the cause of the current recession-which IO dotn believe it to be-and creating an asset price bubble is not the way out of it-even medium term
The big question, which has still to be addressed scientifically and honestly, is: “Has the Coalition Government’s programme to date widened or narrowed economic inequality, and do they plan to do anything about it? It is arguable that most of what happened in 2010/11 was down to the previous Labour administration, and there is a reasonable ‘lag’ in trying to measure the Gini index but it is arguable that we should be beginning to measure the results of Osborne’s ‘cure’ about now and should be able to see whether or not we are carrying on the Thatcher/Blair/Brown programme of increasing inequality orif we really are ‘all in this together’.
Dave,
what do you think of the assessment from David Blanchflower in the recent Independent article The MPC didn’t have a clue and still doesn’t
where he concluded “It is blindingly apparent that the MPC should have done much more monetary stimulus a while ago, including unconventional asset purchases, as suggested by my old friend Adam Posen. On that subject, I was particularly impressed by the recent speech by Adair Turner, who unlike Sir Mervyn King seems prepared to think out of the box in terms of activist fiscal-monetary co-ordination, purchasing a wider range of assets and debt restructuring. Adair has suddenly jumped to the top of my list of candidates for the Governor’s job. The King is dead, long live the king.”
You don’t have to believe that the credit crunch is the cause the recession to believe that loose monetary conditions may reduce the depth of the recession. Diagnosis and prognosis…
That is a very good question. The present system seems like a very inefficient as well as unfair and unimaginative way of preventing the recession from deepening. However, letting the BofE loose to buy wider assets looks dangerous to me – do they know what they’re doing? Some other management structure would seem to be needed if this path is to be followed – but where would we get managers and how would we know who to appoint?
It is worth recalling Martin Wolf’s recent conclusions to his series of posts on balance-sheet recessions, which I only wish were the wording of a conference motion on Liberal Democrat economic policy:
1. First, if an economy is to escape from the legacy of excessive accumulations of private debt without a prolonged depression and permanent damage to productive capacity, it is vital that policymakers sustain the growth of nominal GDP. Macroeconomic policy should be devoted to that end, provided the country retains the necessary policy freedom, as the US does.
2. Second, an active fiscal policy will help by offsetting the long-lasting surpluses generated in a private sector hit by a balance-sheet contraction. Monetary policy, either on its own, or in conjunction with other policies, should aim at steady growth of nominal GDP. The most effective ways of achieving this are likely to be highly unorthodox. This may well require close co-operation between the fiscal and monetary authorities, if possible. In the US , alas, it now seems impossible.
3. Third, it is also necessary to restructure debt directly. Yet when gross private debt may need to be lowered by as much as 100 per cent of GDP, restructuring cannot be achieved painlessly or swiftly. Again, it will be easier to do this, the more dynamic is the overall economy. Debt restructuring and other such policies should be regarded as complementary to fiscal support for deleveraging, not substitutes for it.
4. Fourth, we should not focus our attention on arbitrary ceilings for public sector debt. An attempt to cut deficits, to keep debt below, say, 90 per cent of GDP, may be costlier than letting it rise above that level. Policymaking is always about choosing the best of bad alternatives.
5. Fifth, people must also not focus on the allegedly immoral bequest of fiscal debt to future generations. They must also consider the assets we bequeath. If the result of temporary fiscal deficits is a larger economy both now and in future … it is well worth accepting them.
6. Sixth, the danger remains of economic collapse and deflation. That danger would be particularly severe if policymakers went for premature retrenchment. A rapid shift towards fiscal balance in the US would surely generate a big downswing in the economy. The results could be politically and economically catastrophic. Timing is everything.
7. Finally, the relatively benign outcome is more likely if the government finances investment and uses its fiscal policy to encourage private sector investment. In other words, assets matter. So does the overall size of the economy. Not least, people who are alive right now matter. Too often, fiscal conservatives sound just like the revolutionaries who were prepared to sacrifice present generations for what turned outto be imaginary future benefits.
Joe anyone else missing their target in the way Mr Blanchflower’s graph illustrates (in the post your point to) would be sacked (and not knighted). For a really interesting examination of how this has occured, have you seen Britmouse here: http://uneconomical.wordpress.com/2012/08/11/monetary-policy-stance-under-inflation-targeting/
Inflation targeting has severe weaknesses, especially in a time of supply shocks such as rising commodity prices. So the target is wrong, the operations by the MPC and the Bank are derelict and the oversight by HMT ministers is incompetent.
The problem with the current QE programme is the delivery mechanism, a helicopter drop would be more effective.
another thing to bear in mind-as acknwledged by people such as paul mortimer lee from bnp paribas that since QE on this scale has never previously been implemented-no on is sure of the consequences of unwinidng it.
Joe-I think hte problem is earlier stimulus looks like the right thing to have done at this stage-but at the time Im not sure it did-one would have had to have anticipated the euro crisis-which mr blanchflower certainly didnt.
Mr Blanchflower also has a record of getting predictions wrong-such as his forecast that thanks to government policy unemployment would hit 3million by mid 2011. It obviously didnt.
@ tim
Accomodative monetary policy is the rightt hing to do if there is a recession caused by suppy side factors-such as the credit crunch-i BELIEVE this recession is caused by demand side factors-and that while the government can address demand side issues-these will be negated in the immediate term by the impact of the QE and longer term by the jolt caused by unwinding the QE poistions.
@ bill
I agree Im not a particular fan of inflation targeting-and I know thorugh my day job that central banks in emerging market economies are giving serious consideration as to whether its appropriate for them
“A helicopter drop would be more effective”. Nothing demonstrates the silliness of most discussion on monetary policy than this statement. A helicopter drop is infeasible, for all sorts or reasons, so why do people even talk about it? Just try thinking about it for a moment or two. The central bank does not create money in modern economy – commercial banks do, and the levers of control over them are very weak. And it is by no means a law of nature that in modern economy increasing money supply necessarily leads to increased demand. It really isn’t helpful to think about “money supply” as an economically meaningful variable at all. Instead central banks have available to them a series of policy instruments that may or may not help the national economy. Interest rates are now a busted flush, which leaves QE.
I share the author’s reservations about QE. One of the awkward symptoms of an economy with too much debt is that, looked at the other way, much of that debt is held at inflated values. Everyone hopes that you can grow your way out, but in most cases deleveraging occurs mainly through write-offs. The better progress of the US over deleveraging as a gainst Europe is because they have been writing off mortgage debt faster, because house prices have fallen faster. So inflating asset prices may simply prolong the agony rather than help as resolution. On the other hand it does seem helpful to keep public expenditure going in the absence of private sector investment – and QE does reduce the cost of this.
They are still doing QE because that is the only tool left in the box. It seems to me that QE is a bit like pulling the pullcord of an outboard engine. QE1,… QE2,… still no engine start. They are gambling that QE3 will start the economic engine. But that gamble, is with the lives and wellbeing of future generations.
Truth is that they would rather put all the ‘gambling chips’ on QE3 than accept that the postwar boom (GDP of around 4%) based on cheap abundant oil, industrialization and globalization is over; and that the financialization bubble of the past 30 years cannot be re-inflated.
Sorry, but that’s the way I see it, and no amount of magic money from thin air is going to change it.
@ mathhew
thanks for that-thopugh Im not sure it does make the cost of public spending cheaper-if it has an inflaionary impact then it potenmtilly makes that which you are spending public moeny on more expensive
An old stick-in-the-mud like me finds it very difficult to accept that debt has no significant future consequence – which seems to underlie some of Martin Wolf’s thinking.
Debt is a way of moving consumption form tomorrow to today – going into debt today (having a deficit, particularly an increasing one) means that we will have to reduce consumption tomorrow so that some of tomorrow’s production goes into paying off the debt. And of course things would be worse if this just prolongs the savings trap.
Similarly, I find it Wolf’s fifth conclusion is dangerously worded, and needs further explanation. The thing we bequeath to future generations is the difference between viable/usable assets and the liabilities to repay fiscal debt. The debt certainly is immoral if it reduces the net bequest more than some other strategy would.
Is there a place where Wolf’s proposals are analyzed mathematically? Some of them seem eminently amenable to validity testing through differential calculus and comparisons with historical data.
In 2007 and 2008(?) some of the top 10 percent effectively had negative earnings (i.e. they lost money) as their shares lost value. As the economy starts to look like recovering or at least stabilising, they are making that money back as shares rise in anticipation. The bottom 10 percent mostly have guaranteed incomes from benefits (or minimum wage jobs) so they are not as dependent on economic cycles (would we actually want to cut benefits almost to zero in a recession or double them in a boom? ). If QE works to help the economy recover then those who have the most invested in non-fixed return investments will be the biggest winners, but the same would go of any policies helping the economy recover..