Sunday, January 31, 2010

Lots of easing, but no follow-through

BANK DILEMMA ON PRINTING MONEY

Peter Spencer, chief economic advisor to the Ernst and Young Item Club, said he expected the MPC to call time on quantitative easing after it failed to boost spending. He said: “The US Fed said it would stopping buying (under quantitative easing) in March. We expect the same thing from the MPC. “Although quantitative easing has had a beneficial effect in terms of capital prices, markets and asset prices, the usual follow-through that might be expected into spending hasn’t happened. “Instead of companies and individuals spending it, it has been used to pay down debt.”

Posted by devo @ 10:04 PM (832 views)
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14 thoughts on “Lots of easing, but no follow-through

  • Question: In the mid-1970s inflation, did the BoE print money? If not what caused the inflation then?

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  • Mervyn King described the current queasing as creating a ‘turtle’s head’ economy, which could easily develop into a ‘touching cloth’ scenario if another £50 billion was to be printed.

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  • Pretty obvious by now that Merv and his henchmen don’t think QE is inflationary (I agree) though they could always get outvoted by Sentance & co. But with the Euro heading south, he has to be worried about what is happening to the exchange rate with our biggest trading partners. Reckon he’ll be itching to print if he can swing it.

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  • fallingbuzzard says:

    @1, no. in the 1970s there were 3 factors; 1. increases in government spending, 2. increased oil prices (and the spike) and 3. higher pay deals drove up inflation. the higher pay deals are critical since they came as a result of the high level of unionisation and union power.

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  • @Drewster

    The conventional wisdom, as I understand it, is that a combination of weak economic performance and spikes in the oil price were the main reasons. I presume that the point of your question is to implicitly criticise those who worry about loose monetary policy?

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  • Oops. Didn’t notice FallingBuzzard had already addressed the oil issue.

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  • @FallingBuzzard

    I like your answer to Drewster’s question and it reminds me of an idea I stumbled across recently. A few years ago, the assertion that ” the higher pay deals are critical since they came as a result of the high level of unionisation and union power” would have been pretty much taken for granted.

    Today, whenever we criticise excessive union pay demands, we have have to compare the higher unionised labour costs against the public cost of the bank bailout. I have no idea how the numbers compare and I’m no fan of unions but that said, who did the most damage to our economies – inflexible unionised labour or the banksters?

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  • But QG / others, surely if there isn’t more money in the system then those higher wages simply can’t be paid? How could companies and government afford to pay higher wages if there wasn’t any newly-printed money in the economy? Was it just through massive borrowing (i.e. an increase in M3/M4 rather than M1?) Was it simply the velocity of money that increased dramatically, and if so how?

    Prior to 1997 the BoE wasn’t independent. Did that make a big difference?

    I know we’re always told that the oil spike pushed prices up. However I can’t understand where the money came from to pay higher wages too?

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  • Muffinthemule says:

    Printing money is highly inflationary in the long run, but the picture is complicated by credit creation/contraction which drive the total amount of money out there.

    The central banks always used to print money in the 70´s as part of their normal operations (which they still carry out today) its just not called quantitative easing when done on a day to day basis. The normal process of printing money is required to keep interest rates at the targeted level.

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  • “if there isn’t more money in the system then those higher wages simply can’t be paid?”

    Why not? You just have to take the money away from some other party in the economy. Aside from QE, we’re taking money away from savers and giving it to borrowers and banks by interest rate policy. In the 70s, if union negotiators successfully negotiated a claim for higher wages then there was less money available for others. I just see it as dividing up a cake; I’ll take the big bit!

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  • Quiet guy,
    Which other party was the money taken away from? The 1970s inflation affected everyone, everything – it’s not as if half the country was seeing pay-cuts and deflation?

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  • Drewster,

    Sorry if I’m missing the point but what I was trying to express was the idea that different parties in the economy might achieve different pay rise rates. If I’m getting 1% a year rise and you’re getting 5% a year pay rise then it’s obvious who’s doing better even though we’re both seeing our pay packet rise. Trying to identify exactly where the (relative) pay cuts impact if (say) unions are achieving higher wage rises is pretty much impossible but I see no reason to doubt the basic principle. That’s what I was trying to getting across by my ‘dividing up a cake’ analogy.

    Now if you want a technical explanation for inflation w.r.t. M3/M4 then I’ll surrender and be quiet. My understanding is that money supply normally expands in a debt based monetary system and there seems to be plenty of history that records fiat currencies being overwhelmed by inflation.

    Lastly, I tried a bit of Googling to your question and stumbled across this:
    http://www.publications.parliament.uk/pa/ld200809/ldhansrd/text/90508-0001.htm
    Fast forward to the paragraph starting “The economic orthodoxy”. To my surprise, the theory of the “Phillips curve” offers an explanation to your question: the people experiencing wage deflation were the ones losing their jobs.

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  • fallingbuzzard says:

    Another reason why inflation isn’t an easy way out for the UK.

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