QE – The Greatest Monetary Non-event – Do The Brits Get It?
I’ve spent a huge amount of time and effort (see here) trying to show how QE is really nothing more than an asset swap that exchanges reserves for bonds and ultimately has very little impact on the private sector since it doesn’t alter net financial assets and has only a marginal impact on interest rates. But the message has been largely lost in the mix of sexier ideas like “money printing”, conspiracies, debt monetization and wealth effects. But maybe, just maybe someone is starting to get it. Lord Turner, chairman of the Financial Services Authority says in a recent interview (via the FT):
“There are some dangers that QE, if the only policy deployed, might suffer from diminishing returns, with the economy facing a liquidity trap in which replacing private sector holdings of bonds with private sector holdings of money has little impact on behaviour and thus on demand,” (emphasis added)
That sounds an awful lot like my concept of QE being nothing more than a simple “asset swap”. Could it be that the people who matter are finally starting to understand that QE isn’t the silver bullet that so many think it is? Probably not, but one can dream, right?
* Thanks to reader Ross Thomas for forwarding this on!
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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17 Comments
Don’t overstate your case man, I think plenty of people ‘get it’; I’d say the Market Monetarist types are in a major minority here. I mean this is essentially what most have been saying, from Chicago Types (see here: http://www.voxeu.org/article/sense-and-nonsense-quantitative-easing-debate) to obviously the left wing post Keynesian.
edit: I’m not counting the crazy hyperinflationist Austrians here, by most I mean most sensible people
The difference is that this particular guy just floated the notion of his running for governor of the Bank of England. What with this and Carney using the term “Minksy moment” a while back, I’m starting to feel a little spark of hope…
I wish he’d spelled “Minsky” right, but baby steps.
Oh I think most on the board at the BoE probably already knows this but for PR/political reasons don’t want to admit to their possible impotency.
Cullen, Isn’t Bernanke right when he told us what QE is for? He said it “keeps asset prices higher than they otherwise would be”. This makes sense for someone who is focused on the solvency of banks, because their solvency is directly related to the value of the collateral that is pledged for loans. Maintaining collateral value prevents bank failures. QE isn’t really all that stimulative, but it does keep the banks alive, doesn’t it?
Isn’t swapping cash for bonds the reverse of the sterilization process? If sterilization is done to control inflation, why wouldn’t the reverse of it increase inflation?
1) I am a Brit !
2) IMHO Andrew P is completely correct …. it is all about holding up asset prices …. to allow our broken banks to survive.
3) The most striking feature of the UK economy today is that, in and around London, property prices are significantly ABOVE the levels of 2007. Most Brits know that this has been (at least in part) a consequence of QE.
Only time will tell whether this is A) a “good” thing and B) sustainable
But… isn’t with the transfer of assets to the central bank risk also transferred and the losses on the assets WOULD amount to ‘money printing’. Am I getting this right?
Hmm, seems the Bank of England are a bit more honest about where the ‘new assets’ come from, from their crappy little video on the subject:
‘The Bank of England’s MPC has been purchasing assets financed by new money that the bank creates electonically’
http://www.bankofengland.co.uk/education/Pages/inflation/qe/video.aspx
It’s a devaluationary/inflationary policy, also designed to make it look as though the UKGov is solvent, which it isn’t.
But at least they are honest about what they are doing…electronically creating new sterling.
I just watched BBC’s This Week, where QE was openly talked about as a useless ‘asset swap’. ON TV!!!
Simon Jenkins of the Guardian advocates ‘printing money and giving it to people’ = deficit spending for a one-off citizen’s income supported by QE to take the new bonds onto the books of the Bank of England and then saying that any bonds held by the BoE are not part of the government deficit or debt.
Simon Jenkins article in the London Guardian saying QE is just an asset swap:
http://www.guardian.co.uk/commentisfree/2012/jul/12/qe-bankers-swindle-liquidity-crisis
Cullen, I saw this from Ms Pomboy. She definately has an opinion on QE! Many investment professionals who blog have mentioned her research as excellent (I wouldn’t know). Any thoughts on her stuff, if you’ve followed it?
http://online.barrons.com/article/SB50001424053111904346504577531052271788084.html?mod=BOL_hpp_mag
Anybody peddling the gold standard has as much credibility with me as big foot chasers, or creationist. The idea that we need a precious mineral sitting in a vault somewhere to give our currency value is beyond stupid. There are better ways to control the supply of money. …I stopped reading the link after the first sentence. Life is too short to read another gold bug article.
Steve, our currency has no value.
It is simply a method of exchange.
Things that have value (in no particular order): gold, property, land, food, water, oil, diamonds, fine art, silver, forests.
Currency is just a debt until you swap it for something real. And it’s a debt that loses value every single year.
Central banks need gold because they know eventually other countries will refuse to sell their goods for worthless pieces of paper, that can NEVER be converted for real things because there are too many of them. When that time comes, gold will settle trade imbalances, as has been the case through the ages.
Some don’t like gold because they don’t understand why man values it so highly. That’s a shame people can’t see why: because gold is simply the best wealth reserve.
Money demands to be an asset when it stops flowing, that is, when it is no longer currency. For example, when it goes into somebodies savings, and demands interest, money is most certainly an asset during that period. If the fiat system doesn’t allow money to perform its functions, that is a failure of the law.
During transactions, money is an exchange medium that acts as a token. Money also transmits information about the market by virtue of its velocity and volumes.
Gold stood in for money because in the past, it was easy to find and durable. It was made into jewelry, and then donated to the religious temples. Confusion between commodity value and money value make metals a poor choice for money.
These kinds of arguments are why MMR theorists need to define what money is. I’ve defined it here before in detail. Otherwise we go around in circular arguments, and we hear about money as debt, etc., which does not comport with reality or history.
Conventional definitions of money tend to specify three functions that it provides:
A medium of exchange.
A unit of account.
A store of value.
I think your definition would cover all three functions, but correct me if I’m wrong. With fiat money, the third function seems to be of particular concern – it seems like your argument for 100% reserve banking addresses this.