Monday, March 09, 2009

Easy Like Sunday Morning ...


A Bank of England supremo said it would be "easy" to stop inflation from racing ahead despite "printing" £75 billion of money to boost the economy.

Writing in the Daily Mail, the bank's deputy governor Charlie Bean said although it sounded "too good to be true", the extra money was needed to help save the country from a "particularly nasty recession".

The cash injection - technically known as quantitative easing - happens through the central bank buying up a range of financial assets from the private sector. It is designed to bolster firms' spending power for other goods and services, helping to drive up economic activity.

Mr Bean said: "In normal times. an injection of extra money of this magnitude might be expected to lead to too much money and spending in the economy and a rise in inflation.

"But right now, there is not enough money and spending in the economy and that is what we need to rectify.

Funny. Wasn't the ostensible reason to prevent deflation last week ? (Inflation is currently 1% higher than HMGs 2% target).

Now the problem is that "there is not enough money and spending in the economy".

It's a long long time since I studied economics and I'm sure it shows. But if there's not enough spending (aka the money's velocity is too low) will adding more improve things ? Will the dosh go to improve bank balance sheets ?

And when the velocity does pick up, won't prices take off as that extra dosh emerges ?


Furry Conservative said...

It was always the Government's plan to reduce the value of their debt by letting inflation rip. It has been done in the past and will be done again. To do so, though, they had to convince everyone that deflation was looming. Hmm, how to do that?

Well, the obvious way is to get the inflation figures down, and claim a trend towards negative figures. The best and quickest way of getting inflation down is to reduce prices, but in a free-market economy the only way the government can do that is to reduce VAT. Knock 2.5% off VAT, and you'll get 2.5% off inflation.

You can then run around screaming that prices are collapsing and we need to re-inflate the economy. You splurge in the cash, and then 18 months - 3 years later the resulting inflation swamps us, but you are by then either (i) out of office, and it is someone else's problem, or (ii) in office, so in power. Incidentally when the VAT cut expires inflation will jump with that, too.

Expect inflation in a couple of years of at least 8%, maybe 10%. Interest rates of 6-8% as well to curb inflation. People getting fixed rate mortgages this year or next at 4-5% are going to be totally screwed three years later. Another crisis!

Anonymous said...

Its a long time since I did economics as well.

Instead of channeling this cash through the institutions, instead cut them out of the loop and dole it out to tax payers at a flat rate?

Lets say there are 30 million UK tax payers, thats £2,500 a head.

Tell me I'm wrong...

Anonymous said...

Printing money and inflation go together as day follows night.

The deal is this:

If you have savings (or investments) and the interest rate (or earnings) is greater than the rate of inflation is less than the rate of inflation then you are better to spend your money now rather than see its value vanish.

The hope is that once the economy gets moving the short term stimulus can then be switched off and the "little harm" can be absorbed by future earnings.

Of course the effects will not be felt equally by everyone. Those who are profligate anyway will not change their behaviour. Those who are currently controlling their spending, because they foresee a raining day or two ahead, will get creamed.

Anonymous said...

Why does it somehow not comfort me to learn that the Deputy Governor of the Bank of England is called Mr. Bean?

Anonymous said...

IANAE but I think the quantity theory of money has it that:


So if you increase the money supply you increase GDP independently of velocity.

It seems, however, that people disagree about how to measure M. Liam Halligan reckons it's already shooting off the graph, whereas Andrew Lilico says that it is the "adjusted" M4 which is important and this is dropping fast.

Friedman (and Bernanke) blames the contraction in money supply for turning a recession into the Great Depression in the US.

(Has anyone got on-line copies of the graphs accompanying Halligan's article?)

Anonymous said...

Printing money does not create wealth.
So it must be redistributing wealth from somewhere?

Inflation is a tax, they are devaluing your money and taking the difference for themselves.

"Printing might prevent a depression when defining it in nominal terms, it would do absolutely nothing (and in some ways would destroy trust in the system which is never good) in real terms."
Mish has done a very good job of educating all of us on this fact.

Some of my comment is a quote from another site.

Martin said...

Printing mony is a form of debasement of the curency identical to reducing te volume of gold in a coin.

Quantitative easing is monetary policy as practiced by Nero and Frederick the Great.

And economics is bunk.

Matthew said...

"Knock 2.5% off VAT, and you'll get 2.5% off inflation."

No, this isn't true. VAT is not applied to all goods, and anyway 2.5/117.5 is not 2.5%. Furthermore in a free market pre-VAT prices will rise somewhat, depending on elasticities etc.

"Expect inflation in a couple of years of at least 8%, maybe 10%. Interest rates of 6-8% as well to curb inflation. People getting fixed rate mortgages this year or next at 4-5% are going to be totally screwed three years later."

But this doesn't make sense. Why would people on fixed rate mortgages be worse off than those on variable? They'd be better off. Even if you mean the fix would expire, they would be no worse off than if they were on a variable.