Fears That Cheap Money Is Damaging Fragile Economy

[Guest_GradualCringe_*]

Except monetary policy as it's currently being executed is really just pushing on a piece of string. You can give banks all the liquidity in the world, but if there is no demand from businesses for their loans (say, for investment, in response to demand for a product or service) it just won't work.

QE hasn't been inflationary because so little of it is getting through to the real economy. I also have to wonder why people on a forum who are generally hoping for a house price crash are averse to inflation. A good dose of inflation will reduce the real cost of housing just as effectively as a nominal price crash (provided it is accompanied by corresponding wage increases - and with weak collective bargaining in the private sector, that remains to be seen).

I don't want to come across as a QE apologist - I think the way it has been executed has been ineffectual and simply wrong. Far better would have been to use QE money (although less of it) to fund social house building, which would have a very direct stimulus impact on economic growth and positive social benefits too. Not to mention helping to speed up the correction in house prices.

Banks may, however, have a liquidity problem without QE. I really think full nationalisation of banks who could not support themselves, and the creation of a public sector bank providing essential banking services, would have been vastly preferable. Banking should serve the real economy, not be it's master.

I don't think you are an apologist for QE, I just don't think you understand how QE has worked.

When you refer to "pushing on a string" you are referring to the money multiplier i.e. the process of commercial banks issuing loans from deposits (and from the BOE's own figures lending by commercial banks is currently shrinking). QE has worked quite differently however.

As I already explained in the USA thread, the money printing has allowed the government to run much higher deficits (i.e. issue bonds in greater amounts without having to pay a higher coupon rate. The government has to offer higher coupon rates when investors no longer believe the government are good for the debt and avoid the auctions. It also acts as a break on government spending because it becomes increasingly expensive for the government to run a deficit), and it is through this mechanism that QE money has found its way into the economy, not through the money multiplier.

The BOE swapped reserves for government bonds with various financial institutions. The financial institutions then went on to purchase new issues of government bonds with the excess reserves (more than probably motivated by the fact that the BOE would purchase these bonds too at a later with yet more QE should finances deteriorate further). The government spent this money into the economy which subsequently helped to re-inflate the economy from the deflation seen in 2008/2009.

The bank bailouts also stopped a large collapse of broad money.

The re-inflation has really only helped those holding assets (shares, property, debt based instruments) and the holders of which are whom are generally the more wealthy. Everybody else has struggled, particularly the young.

A deflationary collapse would have significantly reduced the cost of living for wage earners i.e. their earnings would have gone an awful lot further, without the need for the nightmare of militant unionism.

Edited May 18, 2013 by GradualCringe

[wonderpup]

Our prosperity is decided by what we produce, not how many monetary tokens we give to everyone.

But I'm guessing that you would prefer to be paid in monetary tokens rather than with glossy print outs of the latest production figures?

Individual prosperity is entirely dependant on how many money tokens you control- and this could be negatively impacted by becoming more productive if your ability to command such tokens is driven by the demand for your labour.

After all-other things being equal- if a given workforce became twice as productive you could fire half of them and still meet ongoing demand- reducing their bargaining power and ability to demand wage rises in the future.

So it's not that clear to me that a more productive workforce will become more prosperous- they may just succeed in undermining the demand for their labour and thus get worse off as their ability to bargain gets weaker.

[Venger]

Rates of pay are declining because the balance of power needs to be shifted slightly back toward individuals over corporations

Too many of those individuals have pushed up house prices during the boom. At the cost of people who don't own (prices rising against them) and to the benefit of those who have owned for decades. The higher prices paid by younger people via larger mortgage debt, making their own homes ever more times valuable.

I'm not interested in hearing of ways to help non-skilled earners with little to offer earn more, to help them meet their mortgage commitments, when I want house prices to fall. I welcome wage correction, for people earning more than they create in value, in public and private sectors. I want a house price crash, not people competing with me, whilst prices are already so painfully high, via artificial intervention under the banner of some moral wealth redistribution.

Corporate profits may be at highs, to some extent because of the massive policy intervention. There are some companies that would have gone bust without the stimulus and reinflation (house developers with all their landbanks for example), there to be bought by people who had savings, to restructure them and have their change. Or even by new co-ops. That's the unfairness of it.

Deflation is better for the younger professional people I know in their 30s, some of whom work 12 hour days, 6 day weeks, in very demanding roles, and can only save £5Kish a year whilst renting. The top older bosses having bought homes decades ago, seen them go up in value x20, whilst also having over-extended their companies massively into debt at peak of the boom. They can afford to lose value in their homes, rather than graduates being pushed towards Home-To-Buy. They should be fired and younger people can take their £100K+ jobs, and be happy when the same job only pays £60K in contracting economy that is restructuring, when housing costing less to buy with less debt to service.

Why should the same people also want Joanna the beautician and Mike her electrician boyfriend to be redistributed more of an income, nearing their own, to make them competition to buy housing at higher prices? Too many Joannas and Mike's already massively in debt, having chosen to outbid others with big mortgages, and they are one of the triggers for a house price crash. Not to be given more income via redistribution whilst keeping house prices high. Best for Sarah the beautician and Matt the electrician in rented, that the over-indebted meet the consequences too, so they can buy a house at value, even on lower wages in a market that has had some deflation.

[Venger]

A deflationary collapse would have significantly reduced the cost of living for wage earners i.e. their earnings would have gone an awful lot further, without the need for the nightmare of militant unionism.

Exactly that.

[goldbug9999]

Our prosperity is decided by what we produce, not how many monetary tokens we give to everyone.

Precisely, in lieu of a productivity increase wage rises just feed though into higher prices and become self-cancelling.

[Dr_Mibbles]

Precisely, in lieu of a productivity increase wage rises just feed though into higher prices and become self-cancelling.

Please explain how it is better for corporations to sit on large cash piles, because that literally is the alternative.

Wage increases don't create new money. They simply re-direct some of the profit an organisation makes, taking it away from unproductive speculation and hoarding, and moving it into the real economy which generates demand and growth.

[plummet expert]

They've been saying more or less the same thing for the past 5 years - QE will lead to runaway inflation, etc.

Hasn't happened. We're in a liquidity trap where monetary policy alone is like pushing on a piece of string. How many times do they have to be proven wrong before they just shut up or change the record?

They're not wrong. As soon as the velocity of money picks up with any growth worth discussing, then the inflationary genie will reurn from its corked bottle. The damage and distortion to the economy quoted is very real and happening now. Enforced low rates for yrs and yrs is a very bad policy indeed. Sadly far too many sit back with a cheap mortgage and can''t see the problem.

[Dr_Mibbles]

The way to speed things up is there should be no government intervention to try an advert a correction. The market should be allowed to sort itself out naturally.

The flaw in your logic is that there is nothing "natural" about markets, they operate according to a complex set of rules which we have designed. They are an artificial creation and one we have, more or less, total control over through policy decisions and laws.

You also can't have zero intervention or totally "free" markets, because that would be anarchy. Some people want that, but most sensible people don't, and recognise that anarchy would not lead to stability and prosperity.

I agree that the government should not try to prop up the housing bubble, but I also think that the government must be interventionist in it's approach to the wider economy when the private sector is de-leveraging, or we will experience total economic collapse.

[Dr_Mibbles]

They're not wrong. As soon as the velocity of money picks up with any growth worth discussing, then the inflationary genie will reurn from its corked bottle. The damage and distortion to the economy quoted is very real and happening now. Enforced low rates for yrs and yrs is a very bad policy indeed. Sadly far too many sit back with a cheap mortgage and can''t see the problem.

Except all evidence points to the opposite occuring for the last 5 years, in spite of constant warnings and predictions to the contrary.

Will there be a problem in the future? I don't know. I don't think so, but my hunch is as useful as yours (i.e. not very). However, if we take an evidence-based approach then we can say quite categorically that inflation hasn't been the problem that some predicted. They've been wrong consistently for 5 years now, so I really think it's time to stop listening to them.

[Harry Monk]

I believe that energy costs are up by around 50% in four years. Given that energy costs are probably one of every households main three expenses then I'd say that was fairly problematic. I'd also say it's likely to have future impact on inflation in food production etc.

[Guest_GradualCringe_*]

Except all evidence points to the opposite occuring for the last 5 years, in spite of constant warnings and predictions to the contrary.

Will there be a problem in the future? I don't know. I don't think so, but my hunch is as useful as yours (i.e. not very). However, if we take an evidence-based approach then we can say quite categorically that inflation hasn't been the problem that some predicted. They've been wrong consistently for 5 years now, so I really think it's time to stop listening to them.

The governent do not have carte-blanche to print money and defict spend without causing serious consequences, there's no debate to be had.

Historical precedent shows us that money printing to cover deficits in revenue of greater than 20-30% per year, over several years will cause hyperinflation.

The money printed by the UK government so far has been enough to re-inflate, the government have printed about 12% of revenue, over 4 years.

You fallaciously answered this by saying that "QE will not cause inflation, because monetary policy is pushing on a string". However it does not stand up to scrutiny and you haven't answered my previous criticism of this point (and yet you still continue to assert to others that QE will not cause inflation)

I'll repeat that critiscm once again (do you care to respond?):

I don't think you are an apologist for QE, I just don't think you understand how QE has worked.

When you refer to "pushing on a string" you are referring to the money multiplier i.e. the process of commercial banks issuing loans from deposits (and from the BOE's own figures lending by commercial banks is currently shrinking). QE has worked quite differently however.

As I already explained in the USA thread, the money printing has allowed the government to run much higher deficits (i.e. issue bonds in greater amounts without having to pay a higher coupon rate. The government has to offer higher coupon rates when investors no longer believe the government are good for the debt and avoid the auctions. It also acts as a break on government spending because it becomes increasingly expensive for the government to run a deficit), and it is through this mechanism that QE money has found its way into the economy, not through the money multiplier.

The BOE swapped reserves for government bonds with various financial institutions. The financial institutions then went on to purchase new issues of government bonds with the excess reserves (more than probably motivated by the fact that the BOE would purchase these bonds too at a later with yet more QE should finances deteriorate further). The government spent this money into the economy which subsequently helped to re-inflate the economy from the deflation seen in 2008/2009.

The bank bailouts also stopped a large collapse of broad money.

The re-inflation has really only helped those holding assets (shares, property, debt based instruments) and the holders of which are whom are generally the more wealthy. Everybody else has struggled, particularly the young.

A deflationary collapse would have significantly reduced the cost of living for wage earners i.e. their earnings would have gone an awful lot further, without the need for the nightmare of militant unionism.

Edited May 18, 2013 by GradualCringe

[Guest_GradualCringe_*]

They've been saying more or less the same thing for the past 5 years - QE will lead to runaway inflation, etc.

Hasn't happened. We're in a liquidity trap where monetary policy alone is like pushing on a piece of string. How many times do they have to be proven wrong before they just shut up or change the record?

Stop repeating this over and over, it's wrong.

QE so far has been enough to re-inflate, not cause runaway inflation (printing 12% of revenue over 4 years is not enough, it need 20-30%, over several years).

You clearly do not understand the money multiplier, nor QE:

I'll repeat my critiscm once again (do you care to respond?):

I don't think you are an apologist for QE, I just don't think you understand how QE has worked.

When you refer to "pushing on a string" you are referring to the money multiplier i.e. the process of commercial banks issuing loans from deposits (and from the BOE's own figures lending by commercial banks is currently shrinking). QE has worked quite differently however.

As I already explained in the USA thread, the money printing has allowed the government to run much higher deficits (i.e. issue bonds in greater amounts without having to pay a higher coupon rate. The government has to offer higher coupon rates when investors no longer believe the government are good for the debt and avoid the auctions. It also acts as a break on government spending because it becomes increasingly expensive for the government to run a deficit), and it is through this mechanism that QE money has found its way into the economy, not through the money multiplier.

The BOE swapped reserves for government bonds with various financial institutions. The financial institutions then went on to purchase new issues of government bonds with the excess reserves (more than probably motivated by the fact that the BOE would purchase these bonds too at a later with yet more QE should finances deteriorate further). The government spent this money into the economy which subsequently helped to re-inflate the economy from the deflation seen in 2008/2009.

The bank bailouts also stopped a large collapse of broad money.

The re-inflation has really only helped those holding assets (shares, property, debt based instruments) and the holders of which are whom are generally the more wealthy. Everybody else has struggled, particularly the young.

A deflationary collapse would have significantly reduced the cost of living for wage earners i.e. their earnings would have gone an awful lot further, without the need for the nightmare of militant unionism.

[Venger]

Please explain how it is better for corporations to sit on large cash piles, because that literally is the alternative.

Wage increases don't create new money. They simply re-direct some of the profit an organisation makes, taking it away from unproductive speculation and hoarding, and moving it into the real economy which generates demand and growth.

Last summer the Bank of Canada was telling corporate Canada that it should invest more and sit on less cash, because in their view the economy was improving. Corporate Canada pushed back, suggesting that there was still a great deal of downside risk to the economy. The Bank of Canada’s economic forecasts proved to be wildly optimistic and the business community’s concerns, in retrospect, look downright prescient.

It is puzzling to me why Mark Carney would continue to tell corporate Canada that their investment decisions are wrong, given how off the mark the Bank of Canada’s forecasts were. I can understand Mr. Carney’s frustration, as an increased rate of investment spending by Canadian business would improve Canadian economic performance. The Bank of Canada would be better served, however, to listen to corporate Canada and the bond market , rather than assuming firms are making mistakes.

Some of us here at hpc are sat on significant sums of savings, because we also expect better purchase value for our savings in the future. Both for housing and commercial purchases.

When more over-leveraged people, and people who didn't realise the world doesn't owe them a good living and are just learning that debt isn't constantly expanding for there comes a point where there is not value in the market and risk of creating further bad debts going forwards - are forced to bring their assets to market, to raise money, and fewer buyers with restricted debt and core money out there to pay for what they bring to market.

Young people borrow, and spend today, "Help-To-Buy" a fortune for a 1 bed flat, and maintain the debt velocity for your superiors. Must keep people in houses massively over-valued and their lives of luxury at the top, and not allow big mortgage debtors to fail so you can buy homes at lower prices, and have more chance of moving up career ladder when failures are brought down from their position in the market.

[Dr_Mibbles]

I believe that energy costs are up by around 50% in four years. Given that energy costs are probably one of every households main three expenses then I'd say that was fairly problematic. I'd also say it's likely to have future impact on inflation in food production etc.

Yes, energy is a good example of a completely dysfunctional market.

The energy sector really should be re-nationalised and run as a not-for-profit essential service for both businesses and households. It currently operates like a cartel, benefiting no-one but energy companies themselves.

[Dr_Mibbles]

Some of us here at hpc are sat on significant sums of savings, because we also expect better purchase value for our savings in the future. Both for housing and commercial purchases.

When more over-leveraged people, and people who didn't realise the world doesn't owe them a good living and are just learning that debt isn't constantly expanding for there comes a point where there is not value in the market and risk of creating further bad debts going forwards - are forced to bring their assets to market, to raise money, and fewer buyers with restricted debt and core money out there to pay for what they bring to market.

Young people borrow, and spend today, "Help-To-Buy" a fortune for a 1 bed flat, and maintain the debt velocity for your superiors. Must keep people in houses massively over-valued and their lives of luxury at the top, and not allow big mortgage debtors to fail so you can buy homes at lower prices, and have more chance of moving up career ladder when failures are brought down from their position in the market.

I'm not sure how that relates to what we were talking about... my point was that it is better for economic growth and our prosperity in general if a larger share of corporate profits is paid out through increased wages, rather than simply hoarded and not being put to productive use.

[Dr_Mibbles]

Stop repeating this over and over, it's wrong.

QE so far has been enough to re-inflate, not cause runaway inflation (printing 12% of revenue over 4 years is not enough, it need 20-30%, over several years).

You clearly do not understand the money multiplier, nor QE:

I'll repeat my critiscm once again (do you care to respond?):

I don't think you are an apologist for QE, I just don't think you understand how QE has worked.

When you refer to "pushing on a string" you are referring to the money multiplier i.e. the process of commercial banks issuing loans from deposits (and from the BOE's own figures lending by commercial banks is currently shrinking). QE has worked quite differently however.

As I already explained in the USA thread, the money printing has allowed the government to run much higher deficits (i.e. issue bonds in greater amounts without having to pay a higher coupon rate. The government has to offer higher coupon rates when investors no longer believe the government are good for the debt and avoid the auctions. It also acts as a break on government spending because it becomes increasingly expensive for the government to run a deficit), and it is through this mechanism that QE money has found its way into the economy, not through the money multiplier.

The BOE swapped reserves for government bonds with various financial institutions. The financial institutions then went on to purchase new issues of government bonds with the excess reserves (more than probably motivated by the fact that the BOE would purchase these bonds too at a later with yet more QE should finances deteriorate further). The government spent this money into the economy which subsequently helped to re-inflate the economy from the deflation seen in 2008/2009.

The bank bailouts also stopped a large collapse of broad money.

The re-inflation has really only helped those holding assets (shares, property, debt based instruments) and the holders of which are whom are generally the more wealthy. Everybody else has struggled, particularly the young.

A deflationary collapse would have significantly reduced the cost of living for wage earners i.e. their earnings would have gone an awful lot further, without the need for the nightmare of militant unionism.

The problem with all of this is that there is absolutely no evidence to support the notion that QE is causing inflation. We have low rates of inflation, probably too low given a bit of inflation would help resolve many economic issues (not least house prices).

I understand the mechanism by which QE works, however I disagree that in the current economic climate it will cause inflation. The opposite seems to be happening.

[Guest_GradualCringe_*]

The problem with all of this is that there is absolutely no evidence to support the notion that QE is causing inflation. We have low rates of inflation, probably too low given a bit of inflation would help resolve many economic issues (not least house prices).

I understand the mechanism by which QE works, however I disagree that in the current economic climate it will cause inflation. The opposite seems to be happening.

Have a look at the following chart:

UK CPI

Do you see the deflationary dip in 2009? Now look at 2010 and onward, and the subsequent re-inflation. Without QE/money printing the deflationary trend would have continued. QE was initiated to reverse this i.e. re-inflation.

As I explained before, the BOE have not done enough to cause high/hyperinflation, and there is historical precedent to show how much money printing is required to do so, the threshold of which has not been crossed by the BOE, nor any of the G20 central banks so far (of which the BOE has run the biggest, relative to the size of our economy, programme of QE so far).

Are you saying there has been no re-inflation (despite prices being over 10% higher, if compounding RPI figures, than in 2009)?

As for further inflation solving the problem of house prices, I don't see your logic. The money printing and bail outs were specifically initiated to fix prices, particularly of assets such as land. Below inflation pay rises, and negative real interest rates erroding personal savings, have done nothing to help ordinary people afford new homes, and further inflation will make such things worse, rather inflate the paper wealth of those who alreay hold assets i.e. it is only of benefit to the very rich.

Edited May 19, 2013 by GradualCringe

[the shaping machine]

The energy sector really should be re-nationalised and run as a not-for-profit essential service for both businesses and households. It currently operates like a cartel, benefiting no-one but energy companies themselves.

How do you propose the UK government nationalises all those French power stations and Arab oil fields?

[the shaping machine]

It is better for economic growth and our prosperity in general if a larger share of corporate profits is paid out through increased wages, rather than simply hoarded and not being put to productive use.

Profits not reinvested into the parent company aren't actually hidden under the chairman's mattress.

[zugzwang]

Have a look at the following chart:

UK CPI

Do you see the deflationary dip in 2009? Now look at 2010 and onward, and the subsequent re-inflation. Without QE/money printing the deflationary trend would have continued. QE was initiated to reverse this i.e. re-inflation.

As I explained before, the BOE have not done enough to cause high/hyperinflation, and there is historical precedent to show how much money printing is required to do so, the threshold of which has not been crossed by the BOE, nor any of the G20 central banks so far (of which the BOE has run the biggest, relative to the size of our economy, programme of QE so far).

Are you saying there has been no re-inflation (despite prices being over 10% higher, if compounding RPI figures, than in 2009)?

As for further inflation solving the problem of house prices, I don't see your logic. The money printing and bail outs were specifically initiated to fix prices, particularly of assets such as land. Below inflation pay rises, and negative real interest rates erroding personal savings, have done nothing to help ordinary people afford new homes, and further inflation will make such things worse, rather inflate the paper wealth of those who alreay hold assets i.e. it is only of benefit to the very rich.

Nicely summarised. Obviously, asset price inflation can be as pernicious as consumer price inflation or we wouldn't be where we are now. As for QE causing hyperinflation? As you say, impossible with the sums printed thus far. Creating even modest cpi (in other words, growth) in a debt de-leveraging environment is far from straightforward. Despite a unparalleled expansion of the monetary base the US economy is still exhibiting disinflationary characteristics.

[Dr_Mibbles]

Thanks for the responses, however I do still not see any real evidence that QE has caused inflation. I do see variances in inflation, but they are out of step with QE activity, and with inflation now on a downward trend in countries with large QE programmes, such as the US and Japan, there simply isn't enough evidence right now to back up the claim that QE is currently causing inflation.

Let me be clear though: I am not advocating QE. I do not believe it will be effective in stimulating meaningful growth, and it will be very hard to remove the money from the economy when the private sector does pick up. And I am certainly not saying that QE will never cause inflation, only that in current market conditions, and with the way QE is being applied, that it is unlikely to (and there is no evidence to suggest it has).

Do I think there should be more QE? Absolutely not. Unless it was used very directly as a fiscal stimulus, for example funding a massive social housebuilding programme. That would have economic as well as broad societal benefits.

[Dr_Mibbles]

How do you propose the UK government nationalises all those French power stations and Arab oil fields?

It wouldn't have to. A monopoly state energy provider would be able to do two things:

1) Command lower prices in the wholesale market, thanks to it's purchasing power

2) Distribute energy on a not-for-profit basis

The combination of these two things, and the inherent efficiency of a monopoly service (you only need one corporate centre, rather than dozens, and one board, etc) will deliver essential utilities for the lowest possible price, which will ultimately benefit businesses as well as consumers.

[Harry Monk]

Thanks for the responses, however I do still not see any real evidence that QE has caused inflation. I do see variances in inflation, but they are out of step with QE activity, and with inflation now on a downward trend in countries with large QE programmes, such as the US and Japan, there simply isn't enough evidence right now to back up the claim that QE is currently causing inflation.

Fuel prices up by 50% in four years, food prices up by 40% in four years and you can't see inflation?

Should have gone to Specsavers.

[Dr_Mibbles]

Fuel prices up by 50% in four years, food prices up by 40% in four years and you can't see inflation?

Should have gone to Specsavers.

There is a relatively small amount of inflation (the figures you are quoting however are not accurate), CPI/RPI are only slightly above recent trend.

But this can't be linked to QE - inflation jumped in 2008 before a single penny of QE was created, and inflation is on a downward trajectory at the moment, despite large amounts of QE. The thing is, the way QE is being applied is ineffective. If the QE money got through to the real economy, I've no doubt it would actually generate some inflation.

Just because there is a bit of inflation, you can't arbitrarily blame QE, when the evidence clearly shows there is no link between the two things (witness also falling inflation in the US).

[Harry Monk]

Well you will just have to give up driving .... oh wait that's how you earn a living IIRC ... so stop eating (anecdotal but a fish pie that used to cost 4.75 in sainsbury last year is now 5.50 so 18% in less than a year).

Yes, I earn my living by running a small transport company.

When the price of diesel goes up, guess who pays for it.

Me or you?