Wednesday, October 13, 2010

In praise of QE

Why printing money makes sense

To better understand this demand problem, suppose that we had a super-effective counterfeiter: someone who could make near perfect copies of $50 or $100 bills. Suppose this person printed up $2tn of counterfeit money and began to spend it on all sorts of items. Our counterfeiter buys up houses and cars. They pay for incredibly lavish parties and trips. They hire all sorts of servants, groundskeepers and investment advisers. What would be the effect of this counterfeiting scam on the economy? In the current situation, it would provide an enormous boost to GDP and create millions of jobs.

Posted by devo @ 06:56 AM (2858 views)
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46 thoughts on “In praise of QE

  • “Behind every great fortune there is a crime.” Honore de Balzac

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  • We think you should print money.
    Regards
    Robert Mugabe, Hjalmar Schacht & Arthur Karasz

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  • From the editor with a btl portfolio no doubt.

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  • I’m waiting for MW to comment and tell us that it’s all a ‘twistation’ of our imagination. They don’t print money anymore, because they have a fancy name for it now. lol.

    I give up!

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  • What he’s really saying is that it would be better if we didn’t cut the deficit and continued to spend our great grand children’s tax revenues. If the nasty Tories refuse to enact his favoured spending option, then his next best option would be for us to print a ton of money, which he thinks could be used to carry on spend, spend. spending.

    It goes without saying that he doesn’t understand QE and he’s very much mistaken if he thinks that the “money” could feasibly be used to continue Gordon Browns glorious spending program. It’s not hard to see through this spending die-hard. There is actually some theoretical economic benefit to his ‘spend in a recession’ philosophy but we can never trust people like this because he would also spend big, before and after the recession

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  • By fracional reserve banking the banks have done exactly the same thing as he wishes the counterfeiter to do already.

    Like any Ponzi scheme it doesn’t work.

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  • I didn’t know that the Onion had changed its name to the Guardian…

    But seriously, when newspapers publish this kind of thing with a straight face you know that it is time to make sure that you are NOT holding dollars – or pounds. Because every unit of currency that is created in the way described will reduce the purchasing power of your money.

    The lifestyle of the counterfeiter described in the article is not and can never be ‘free’. It will come at the expense – in this case – of anyone holding dollars.

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  • It has just occurred to me that the optimum government system for this country might be the Tories during the good times and the Labour party in a recession. The Tories would run a surplus in the boom and the Labour party would spend like crazy in the recession. There would probably have to be some sort of military intervention to remove the Labour party after the recession because overspending in a boom is far more harmful than restrained spending in a recession.

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  • notyethomeless says:

    Flashman @7 – neat idea. Take it further and you have something like Gordon Brown’s (who he?) Golden Rule. Stick with me.

    Permit democracy (i.e. allow people to agree with you or not) but legally enforce spending rules, based on economic growth figures. Allow government spending (including off balance sheet items) to increase by 0.5% less than GDP growth, unless growth is lower than population growth (or 0, perhaps) in which case spending can increase by some amount, possibly unspecified.

    Same effect, but not dictating who’s in power. You get to choose the style of spending, but not the total amount.

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  • My issue is that ‘people’ have become addicted to the good times thinking it was normal and as yet don’t, in general, seem to be having to deal with any hardship.

    It’s as though a crime has been committed but as yet, no punishment served.

    That’s not say I want people to suffer misery, but until a degree of hardship is felt, no lesson will have been learnt.

    I feel the clocks need to reset so we can build from a solid foundation.

    In some ways the best and least painful medicine would be a 35% house price fall over the next 2 years.

    That would obviously lead to some temporary pain for those directly involved in house sales, but once houses are down to this level volume would increase.

    Homeowners would be left with the clear lesson that you just get bailed out.

    Maybe in 2 years if prices were 35% off from here we could then see a steady increase in interest rates back up to the 5% level, keeping the lid on actual price rises and ‘re-loading the gun’ so to speak, for when it’s needed again.

    A perfect scenario ?

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  • Correction

    Homeowners would be left with the clear impression that you just CAN’T be bailed out.

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  • The problem of creating money in a debt money system is that we are really creating an interest bearing debt. The principal exists, but the debt requires more debt money to be created to pay the interest on the original issue of money…. it is the most vicious cycle which guarantees perpetual losers who live with the resulting poverty of the ever present debt.

    We need to create money by spending it into existence rather than impoverishing ourselves by allowing snake-oil salesmen to lend it into existence. (Inflationary pressures need to be managed just the same which ever way you create it.)

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  • Many sensible homeowners have been having a ball over the last two years, low rates have equated to
    penny demands on their mortgages. The sensible ones have been using the funds that the good savers
    have provided in order to pay down their debt.
    That debt will be further eroded by their good friend, a sprinkling of inflation. If your employment environment is stable,
    and a house move isn’t on the agenda, live ain’t so bad for many of the working class.

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  • Churchill once said:

    “You can always count on Americans to do the right thing – after they’ve tried everything else”

    Today, the right think for the Americans is to live within their means, and balance their trade and budgets.

    Having lived beyond their means for years, with huge trade and budget imbalances; there’s a lot of cold turkey to swallow.

    Meanwhile, we have loads of hacks bemoaning America’s woes, blaming everyone but themselves, and trying to argue that more wrongs can somehow make a right.

    – But once they’ve tried everything else, they’ll probably do the right thing..

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  • Smuggy – there’s sense and sensibility….. i doubt these “sensible” ones exist in the majority. Sure they may not have spent it but may have saved it for something down the line….

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  • mark wadsworth says:

    What a load of drivel. The whole plan will come unstuck the minute that all those garages, vendors and servants try to pay the money in at the bank and the bank tells them it is all forgeries. So these people will end up even worse off than before.

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  • mark wadsworth says:

    Flash at 7 is probably right, but as a generalisation, we’ve always had Tory governments in the bad times and Labour governments in the good times, so we get the worst of all possible worlds.

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  • But isn’t this ultimately what socialists want, they don’t want people building up wealth then passing it on to the next generation, they need to keep people poor and ignorant generation after generation.

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  • “But isn’t this ultimately what socialists want, they don’t want people building up wealth then passing it on to the next generation”

    Too right. Go out and earn it you lazy good-for-nothing. Why should anyone be allowed to inherit and lord it over those who contribute to society?

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  • “we’ve always had Tory governments in the bad times and Labour governments in the good times”

    Because Labour always screws the economy, and the Tories have to put it right again.

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  • mark wadsworth says:

    UT, yes, history since 1945 shows that there is a lot of truth in that.

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  • When I asked my mum 20 odd years ago why she didn’t vote labour, the answer was that they always get the country in trouble through overspending and debt.

    How true that turned out to be.

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  • Why not spend 90% of government revenue keeping 10% back for hard times. Build up this pot in the good times and spend it in the bad.
    Hopefully the country could avoid what’s been forced upon it by Labour in the future. Surely it can’t be that hard to stick to a budget?

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  • Agree entirely with [email protected] I think the problem is that public opinion lags the economic cycle, so we vote for the party we need several years after we really needed them to come to power. Hence also agree with [email protected] – we need there to be some legislation about what can be spent and what must be saved, depending on where in the cycle we are. According to Labour, we had an unprecedented period of economic boom, so how come we exit that with the biggest deficit in our history? Of course we all know the answer to that – the boom wasn’t real, but legislation forcing Labour to save would make our current situation far more bearable.

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  • Guys – when it comes to economics this man generally knows what he is talking about, and in this case is correct …in theory (although they’d need to remove a little more than $2tn at the end of his plan due to interest and the attraction of foreign capital) – of course theory and practice are very different, however.
    The main problem with carrying it out is whether, when times are good again, people can trust that the central bank (and politicians?) are really going to destoy the money it has in it’s reserves.
    Take note that he knew that the US housing market was in a bubble way back in August 2002 – see his paper on it.

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  • bah. close bold tag

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  • better?

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  • damn better now??

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  • ok, so as it was meant to be:

    Guys – when it comes to economics this man generally knows what he is talking about, and in this case is correct …in theory (although they’d need to remove a little more than $2tn at the end of his plan due to interest and the attraction of foreign capital) – of course theory and practice are very different, however.
    The main problem with carrying it out is whether, when times are good again, people can trust that the central bank (and politicians?) are really going to destoy the money it has in it’s reserves.

    Take note that he knew that the US housing market was in a bubble way back in August 2002 – see his paper on it.

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  • IMO this exposes yet another argument for a market in monetary issuance.

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  • @flashman – couldn’t put it better myself.

    @timmty t et al. The problem with legislation forcing Labour to toe the line, is that Labour will just ignore it. Witness Gordon Brown’s Golden Rule. Do everything you can to off-balance and defer your expenses, and then when your mess is so large it can no longer be hidden, blame the bankers/Americans/global economy/Maggie, ignore the law, and carry on spending as before!

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  • 19. Sarah said…”Too right. Go out and earn it you lazy good-for-nothing. Why should anyone be allowed to inherit and lord it over those who contribute to society?”

    Ones contribution for the good of society should be to step out of it altogether. Society was hijacked long ago.
    Such lordly wisdom is rare. 🙂

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  • 22. str 2007 said…”When I asked my mum 20 odd years ago why she didn’t vote labour, the answer was that they always get the country in trouble through overspending and debt.”

    A job well done everytime.

    Welcome to the rollercoaster ride and to the operatives who are now teaming up to further confuse all.

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  • The most interesting bit is yet to come – when QE stops being effective at reinvigorating demand. After all as MW says and as the article’s odd analogy goes, the bank doesn’t cotton on to the fact that the newly printed notes are fakes, but when they do, it won’t matter how many the counterfeiter prints any more.

    Already happened in Japan some time ago …

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  • I think the author is largely right, but for the wrong reasons. What’s not clear is why the money needs to be withdrawn from circulation once we hit full employment – ex hypothesis, there would then be insufficient spending power. It would suffice that the expert forger is shut down. To those who are harping on about government borrowing and living beyond our means and all that deficit hysteria being used to trash our country (goodbye NHS and welfare state, hello Dickensian squalour.) – the argument put is about printing money, not borrowing it, in a situation of deficient demand. However, he’s not inquiring into the cause of deficient demand, which is credit contraction (disappearance of money), which is why an injection of money makes sense.
    Deficit hysterics please see here: http://www.redpepper.org.uk/Countering-the-cuts-myths.
    Nick

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  • mmm… I’m very basic on economics, but I feel that the guy is nuts.
    1. Every dollar in the system is leveraged through fractional reserve accounting. So 2 trillion will become 2 * 9 (or whatever the reserve ratio is).. That would be a ridiculous amount of inflation… I dont think any economy could cope with that.

    2. How do you take back this injected money when reaching full employment? You cant, because its already multiplied itself to the point where you cant even keep track of it. To reduce the money in circulation banks would need to call in their debts but its absolutely impractical.

    The fact is that as long as banks can create money exponentially through the fractional reserve system any money injected with no asset to back it is asking for trouble. You eventually devalue every REAL asset and eventually smother any increase in GDP gained. Why do you think the BOE is so cautious about doing QE?

    Finally, even if you put the money individually in to every member of the publics hand so that they would actually spend on consumer goods etc.. the money will still end up in the banks. Money is like energy.. once its there, it never disapears.

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  • mark wadsworth says:

    Paul 32, that’s an even better analogy.

    The problem is, it’s not “the people” forging the bank notes (all the waiters and servants and car salesmen might be in cahoots with the master forger, who I think would be played by Ian McKellen when we make the film) and fobbing them off on the banks, what the banks have been doing is forging money and fobbing it off on us.

    We’ve now wised up to this and are refusing to honour forged bank notes (also known as “shares” or “bank bonds”) so the government is charging us extra taxes (or cutting public spending, same difference) in order to reimburse the banks for the losses they have suffered by not getting away with it.

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  • 18.redtop mrmickey said…

    But isn’t this ultimately what socialists want, they don’t want people building up wealth then passing it on to the next generation, they need to keep people poor and ignorant generation after generation.

    passing it on……. me me me, mine, and f%ck you, you mean.Feudalism in other words.

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  • It seems to me that he is describing what has already happened.

    The boom in credit in the last ten years was the production of worthless money that is now being pulled out of the system.

    His assertion that when “the $2tn will be grabbed out of circulation and destroyed” it won’t be too damaging, is clearly wrong. His answer: just print more worthless money and kick the whole thing off again! Even if that works, the next time the even larger amount of money needs to be pulled out of the system, the effects will be even more damaging.

    There is one solution – face up to the mess we’ve made and allow the removal of worthless cash to happen quickly and purposefully. Then pick ourselves up and try to build a more honest system.

    I’m getting sick of ‘clever’ people coming up with ways in which we can all cheat reality.

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  • “Because Labour always screws the economy, and the Tories have to put it right again.”

    uncle tom offers us his deep political analysis once again.

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  • http://www.redpepper.org.uk/Countering-the-cuts-myths: “It is worth remembering that after the last crisis of this scale and significance, and with public debt something like three and a half times the size it is today, we established the NHS, created the welfare state, put in place comprehensive education and built a vast number of public housing estates.”

    Yes – and how long did it take us to pay off the loan for that Labour government’s spending spree?

    “MYTH: Public spending got ‘out of control’ under Labour”
    Given that most of the Labour party seem to be Keynesian now, then surely they should agree that you save during the boom years!

    “In just the same way it is often sensible for governments to take on debt to pay for investments ”
    No one is arguing that! We’re arguing that your running costs should not exceed your average income.

    Other than that, some good arguments.

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  • 34. mark wadsworth

    Now that’s better!

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  • 35. braindeed

    Doesn’t passing it on cut out some of the banking action?

    If only we all passed down our houses to the next generation.

    Another side to the coin, but it won’t happen en masse. I wonder why. :(..

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  • Adam Smith Fan says:

    There’s more to this than meets the eye. To clarify it let’s take a trip into the imagination.

    Suppose that the government informs us that for one year only it intends to print 70 million Mickey Mouse Pounds every week for the next 52 weeks and give an equal share to every citizen every week. These pound notes look just like the ordinary ones except that they have a picture of Mickey Mouse printed on them instead of the Queen. In parallel it announces that a new tax will be payable on land value but that instead of being payable in Pounds Sterling, it will only be payable in Mickey Mouse Pounds. The new tax will be collected at the end of each week and will be set at such a level that it collects 70 million Mickey Mouse Pounds per week. In other words it takes back all the MMPs introduced into circulation during the year. At the end of the year the scheme comes to an end. Anyone not paying their Mickey Mouse tax stands to have their land sold at public auction. All other taxes remain as they are at the moment.

    Now there is no doubt that this combined tax/handout would cause extra economic activity as those with lots of land rush to collect enough MMPs from those with little or no land. This might be as simple as people handing over GBPs to other people in exchange for MMPs at some standard rate (which would quickly emerge) or it might involve people selling items or land to other people for payment in MMPs. It might see landowners offering services to non-land-owners for MMPs. It might even allow some renters and smaller householders to pay down their debts. But it would not cause inflation.

    Now having said that, if we now step back into reality and apply exactly the same scenario – except that the government just prints ordinary GBPs instead of the mythical MMPs, where’s the difference ?

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  • Adam Smith Fan – I think you’ll find the MMP would be extremely valuable in terms of Sterling by the end of the year unless only 70m Pounds Sterling’s worth of land (at end of year) is ‘covered’.

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  • Adam Smith Fan says:

    The MMPs would apply to all the land not just 70m Pounds Sterling worth. And there’s no doubt that the MMP would be extremely valuable in terms of the GBP. But you wouldn’t have to wait until the end of the year. You’d see the value by the end of the week.

    Here’s the thing. At the end of the year as soon as the scheme ends the MMP is both worthless and non-existent since all MMPs should have been removed from circulation and any that might have been missed are now just pieces of paper with nothing more than sentimental/collectible value. So the MMP gave a major economic boost during the year owing to all the work required to exchange them from the original owners to the people who need them.

    The question is “Would it cause inflation during that time?” I don’t see why it would and thus by analogy with that other Mickey Mouse currency, the Pound Sterling, I don’t believe that printing GPBs and handing them out would necessarily cause inflation, provided there was a balancing tax taking them off the streets as fast as they are being dished out.The important thing for any stimulus to work without causing inflation is that that the handout should be balanced by a tax of equal size. And the people receiving the cash should be different from the people paying the tax, so that some form of trading is necessary.

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