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QE Qualities
January/February 2011


A favourite bogeyman of much economic commentary in the last two years has been "quantitative easing" (QE). Controversy has been sharpened by the early November decision of the US Federal Reserve to buy $600 billion of long-dated Treasury bonds and a subsequent statement from Ben Bernanke, the Fed's chairman, that it will increase the purchases if necessary. These operations have been dubbed "QE2" by financial markets because they follow a previous spate of Fed asset purchases in late 2008 and early 2009. 

QE2 has provoked outrage among a large section of the commentariat. The standard characterisation is that it constitutes "the printing of money" and so is necessarily inflationary. In his influential Interest Rate Observer, the American pundit James Grant lamented that QE2 was "the start of a new adventure in money printing". Like many monetary conservatives of the backwoods persuasion, he praised gold for its ability to retain its real value despite the printing presses and other iniquities of the modern world. In Britain, Liam Halligan of Prosperity Capital Management has expressed similar views in the Sunday Telegraph, although his wrath goes back to the Bank of England's embrace of QE in March 2009. In his words, quantitative easing is "a polite, yet intellectually dishonest name for ‘money printing'". 

Of course, the phrase "printing money" is pejorative. The underlying thought — or should one say the implicit prejudice — is that money un-backed by tangible assets is inflationary, irresponsible and bad. Our great-grandparents believed that the convertibility of paper money into a precious metal helped to define civilisation. But modern monetary conservatives — such as Keynes and Friedman — understood that the gold standard left too much to chance. They saw that under the gold standard or indeed any precious metal standard the quantity of money depended too much on the accidents of mining technology and geological discovery. They argued that the best arrangement was for the state to manage the quantity of money. 

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Ralph Mugrave
January 3rd, 2011
3:01 AM
Castigating QE because it allegedly amounts to nothing more than “money printing” is over simple, as Tim Congdon rightly points out. But the article of Liam Halligan to which Congon refers is more subtle than that. For example one of Halligan’s main points is that banks have captured governments, and QE won’t solve that problem. Quite right. Congdon then argues (not for the first or second time) that the money supply declines in recessions, and that since QE raises the money supply, this helps avoid the worst of recessions. While some QE is better than nothing, the latter argument of Congdon’s confuses cause and effect. Private bank created money (as distinct from central bank created money) comes into existence as a RESULT of the private sector’s desire to do business and borrow for the latter purpose. Conversely, this stock of money declines in recessions, as a result of a REDUCED desire to do business. That is, deleveraging takes place. Nothing new there: Walter Bagehot described this process a hundred and fifty years ago. Or as Robert Skidelsky put it in an earlier Standpoint article “….the basic cause of the collapse of the money supply was a collapse in the demand for loans…” Congdon, it seems, still does not understand this point. See: QE consists of the central bank offering the private sector cash in exchange for the latter’s shares or bonds. Now shares or bonds are a form of SAVING. If I get around £X for my £X worth of shares or bonds I am NOT going to run out and spend the money. I am still going to regard that chunk of my wealth as savings. So there is little effect on aggregate demand. To that extent, QE is useless.

ASW Jenks
December 28th, 2010
1:12 PM
Another outstanding analysis by Tim. It's a shame he isn't in office.

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