Should we print some more money?

Bloggers have asked me what do I think of printing money (quantitative easing).

It can be necessary when an economy is in slump and there is no danger of a collapse of the currency or inflationary tendencies from doing it. It is dangerous if there are inflationary tendencies, and if the currency is vulnerable.

The recent views of the Monetary Policy Committee continue to alarm me. They should remember their job is to keep price increases down to 2% on the CPI. They have singularly failed to do that, with the CPI still showing 3% despite the general slump in activity. We are now in Slumpflation thanks to the government and them.

Monetary easing could be part of the answer to our current decline in activity. It needs to be accompanied by spending and borrowing less in the public sector. This is easy to do – all they need to do is spend a lot less on subsidies to wayward banks for starters. The future course of sterling matters a lot. Any further decline in the pound would be inflationary. Sterling now responds to news on RBS and the other nationalised or semi nationalised banks, because overseas holders can see the dangers of the UK state taking on too many debts and obligations from the banks.

The MPC should be writing to the Chancellor to point out not merely that monetary growth was too slow at the end of last year for comfort on activity, but also to point out that the sharp decline in sterling is a matter for concern and does prevent them lowering interest rates. Indeed they should not have lowered them as far as they already have. They could add that the government’s policy towards banking support is now one of the forces driving the pound down. In recent days similar fears about continental banks have adversely affected the Euro.

We need government action to control public spending, and to start to sort out the banks problems instead of just paying for the mistakes. We need higher indicative interest rates to encourage savers and debt repayment. Then we would have a safer background for monetary easing to get activity advancing again.

The likely exchange of letetrs with the MPC requesting permission to switch on the presses and the Chancellor likely to say “Yes” is a silly ritual designed to make you think the MPC is independent. If the MPC were truly independent they would tell the Chancellor a few home truths about the runaway borrowing and wasteful spending.

The MPC minutes mainly talk about activity, not inflation, despite their remit. They do acknowledge that the pound has lost one quarter of its value and this could affect inflation, but much of their discussion sounds like Gordon Brown telling us all it is a global rather than a UK problem. They conclude that the pound has fallen to rebalance the economy, and that it “could have been increased risk premia” – so that’s all right then!

They sign off by saying it was crucial “for the Chancellor to ensure that the government debt management policy would be consistent with the monetary policy actions of the Bank of England”. In this unintended side swipe at Brown’s “reforms” of the Bank they are pointing out that it is no use the MPC trying monetary easing if the government decides to sell huge quantities of its own debt! Well I never – why didn’t they think of that when they split up the Bank in 1997 and gave the power of issuing debt back to the Treasury?

In summary, I disagree with the present policy mix and think quantitative easing in these conditions would represent another worrying risk.

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28 Comments

  1. Posted February 19, 2009 at 8:33 am | Permalink

    so, as they say in some places

    dilution is all around, as the printers are flat out

    even the swissie, dont look jolly; its no longer holding hands with the gold price

    where is a simple lad from the north like me, to keep his savings

    in what currency, should one keep ones cash and brokerage balances; that is the crux of the matter

    that should be a simple question to address chaps

    please say and do not be shy

    kindly

  2. Jim Pearson
    Posted February 19, 2009 at 9:06 am | Permalink

    Well said, but will you support the Offord report about Bancrupt Britain. Personally I would shout it from the rooftops, use all available media and force people to confront their future. I want my children to grow up knowing they are not indentured to government debt repayment. I know GB will call the election when he feels like it (May ’10), but surely there is something we can do now? What say you?
    Please keep up the blog, it’s very good
    Jim

    Reply: I do explain everywhere I go that I think the government is risking too much. I have said in Parliament as well, on many occasions.

    • Robert
      Posted February 20, 2009 at 11:18 am | Permalink

      History never repeats itself but in one sense circumstances are similar to those in 1978/79. A Labour government has taken the country to the edge of bankruptcy and a new voice is needed to articulate the importance of liberty and free markets over state oppression and socialism.

      According to to John Ranelagh (reported on Wikipedia), shortly after Margaret Thatcher became Conservative party leader she “reached into her briefcase and took out a book. It was Friedrich von Hayek’s The Constitution of Liberty. Interrupting [the speaker], she held the book up for all of us to see. ‘This’, she said sternly, ‘is what we believe’, and banged Hayek down on the table.”

      The crisis for the West today is that such a voice is absent. The US has elected a socialist President who is determined to misallocate capital on an unthinkable scale. The UK is being governed by a man who orchestrated the greatest asset boom/bust in the country’s history and is now determined to tax our children to oblivion in his gambler’s last stand.

      My first chance to vote was in 1979 when I ticked the box for Thatcher. The challenge for the Conservatives today, John, is to articulate again, and with a passion, the importance of liberty and free markets. To explain how the state must be dragged off the backs of us, the people. How wealth creation stands on free exchanges of goods, labour and capital, not on state dispensation. Why it is right that taxes should be cut and regulation pared back. Why self reliance is a virtue, not a sin to be excoriated by statists.

      Does David Cameron have that vision? Does he have the iron will that is vital to fight the rampant client state? Will he, amidst the pork barrrel politics of a parliamentary democracy overcome challenges greater than any Thatcher faced? I fervently hope so, but on current showing I fear not.

      My message is simple: at every opportunity defend free markets, defend liberty and attack any argument that suggests otherwise. And to David Cameron: dig deep and find the steel in your soul.

      • alan jutson
        Posted February 20, 2009 at 7:27 pm | Permalink

        Robert get yourself into Parliament.

  3. Tony Makara
    Posted February 19, 2009 at 9:13 am | Permalink

    The plans for quantitative easing are only going to extend the life of bad debt and prolong the recession. A far better policy would be the creation of new money for short-term loan to solvent business concerns to provide the liquidity to keep good business going while at the same time allowing bad business to fold, as it must.

    There are whole sections of the old economy that have to be allowed to die, the problem is this bad debt is restricting all liquidity and will continue to do so until it is ironed out of the system. The creation of new money for short-term loan to viable business, with the issue later recalled and destroyed is the way to oil the economy while at the same time allowing the bad debt to die.

  4. Kit
    Posted February 19, 2009 at 9:51 am | Permalink

    Printing money will not solve it. John Taylor, famous for the “Taylor Rule”, article in WSJ is well worth reading:

    http://online.wsj.com/article/SB123414310280561945.html

    If the Macro-economists got the diagnosis wrong then we should not have any faith in their cures. Especially if the cure could cause a prolonged period of high inflation and high taxes.

  5. Brian Tomkinson
    Posted February 19, 2009 at 10:05 am | Permalink

    Please be clearer – do you agree that the BoE should print money – yes or no? I say that this has been the agenda all along with the resultant inflation to help wipe out the government debts. The media has been peddling this deflation line for months. Given the mess already created by Brown et al why does anyone really think that these people can print money and it not lead to Zimbabwe or Weimar results? We should demand answers before these people are allowed to completely ruin us all.

    Reply: I am quite clear. I am saying current policy towards public spending, bank support and borrowing is wrong. Change that, then you can add in limited quantitiative easing. You need to withdraw it as it starts to work to avoid inflation resuming.

    • Waramess
      Posted February 19, 2009 at 12:05 pm | Permalink

      So, John, how exactly can you withdraw it as it starts to work?

      When will you know it has started to work and when you know, might it not be too late.

      Government is a cost centre.

      Whoever heard of a cost centre borrowing money to buy its own companies goods in order to save it (and its employees) from a downturn?

      Why then should it work for Government?

      Surely the most sensible policy should be for government to reduce its size and its burden on the economy.

      Quantative easing is an economic confusion and supposes that because deflation is the same as the contraction of money supply, then the answer is to expand the money supply.

      It isn’t. It is just another piece of Keynesian junk

      Reply: Buying bonds from the private sector to release more cash into the economy may be needed in deflationary slump conditions. There is no need when a government is spending too much – it can merely monetarise its own spending for a b it, and often does. We are in slumpflation, so I am recommending something very different from current policies.
      It would be difficult to judge when to change tack after printing money which is why it may not be a good idea. Please read what I said – I certainly did not endorse printing money on top of everythign else currnetly underway.

      • Acorn
        Posted February 19, 2009 at 4:12 pm | Permalink

        REDWOODIANS, HOLD UP A BIT, LET’S EDUCATE OUR PREFERENCES.

        I sense there is some confusion here, as to what exactly is “quantitative easing”. QE has been going on for some time; it is not just printing five pound notes and dropping them out of Helicopters. The US Fed is reluctant to use the term. They say this because they claim the Japanese (who invented the term) concentrated on the “liabilities” side of the Bank of Japan balance sheet. The US Fed, claim, it is concentrating on the “asset” side of the Fed’s balance sheet. Don’t ask me to explain the difference. But have a look at the Ben Bernanky video on my post below.

        When the central bank “target” interest rate gets near zero; to effectively go “negative interest rate” you employ base money supply expansion, that is QE.

        I am not teaching anyone to suck eggs here but please have a look at the following; highly recommended for your sixth formers doing economics.

        http://vimeo.com/2606496

        When you have done the QE video; have a look at some of the other “Marketplace” videos, particularly the ones on CDO’s; CDS; Short Selling etc etc.

    • Brian Tomkinson
      Posted February 19, 2009 at 2:58 pm | Permalink

      John, Thanks for your reply. I now know that you are AGAINST printing money or quantitative easing or whatever other phoney name they want to call it. However, you and your colleagues, assuming they agree with you, seem very reticent to go public in a major way to point out the catastrophic perils of this action. There must be a campaign to stop this because the government, despite all its denials and lies, is determined to do it. There is no opposition to this calamity being clearly expressed. What are you afraid of? I am afraid that this will go through and will destroy this country. Don’t you feel the same?

      Reply: I think the banking nationalisations are already doing great damage, and I have gone hoarse warning about them.

  6. Posted February 19, 2009 at 11:19 am | Permalink

    Many thanks for fulfilling our request so quickly and interestingly! As one reads your prescription (less public debt and less spending on bank-bailouts), it’s chilling to read that the rescue of Lloyds and RBS will send the national overdraft sky-high.

    http://business.timesonline.co.uk/tol/business/economics/article5764793.ece

  7. Posted February 19, 2009 at 11:21 am | Permalink

    Given the mess already created by Brown et al why does anyone really think that these people can print money and it not lead to Zimbabwe or Weimar results? We should demand answers before these people are allowed to completely ruin us all.

    —————————————
    Why, oh why, is no one talking about the real problem. We, individually and as a Nation, have become insolvent. Ergo, cutting expenditure (“investment”, now there’s a useless word,) and buliding reserves is the only but very painful way out of this nightmare that is Labour stupidity. Print money? NO!

  8. Acorn
    Posted February 19, 2009 at 11:50 am | Permalink

    Your last paragraph is the crux of the matter but the process of a government issuing debt via its own Treasury, in our case the Debt Management Office is, I would suggest, correct.

    There must be a clear separation of duties between the Treasury and the Central Bank and again I would suggest that the Central Bank has to be the banking sector supervisor.

    It is the politicians who are responsible for the size of the Treasury debt as they are for the trade deficit and the current account balance. If politicians should learn anything from the crunch, it is that you cannot run a country with a permanent fiscal deficit and expect foreigners to permanently finance it for you.

    Now, if we had a Parliament that spent more time questioning the budget and had the equivalent of the US Congressional Budget Office to help it; Joe Public might understand how we got into this mess. See:-

    http://www.parliament.uk/documents/upload/P05.pdf

    If you missed Ben Bernanky at the NPC the following is the link to the video. It is well worth a watch, particularly the Q&A session at the end. I expect Gordo and Darling were taking notes.

    http://npc.press.org/video/player.cfm?type=lunch&id=17066

  9. Steve Cox
    Posted February 19, 2009 at 11:51 am | Permalink

    QE is bound to end in tears and hyperinflation. Even if the BoE knew when to pull back from the QE policies (which is doesn’t know and won’t know), it will face intolerable political and industrial pressures to continue with its easing policies. Whether we are facing “merely” the 15%+ inflation of the 1970’s, which “only” destroys the fortunes of savers and the elderly, or whether it will be Weimar-Zimbabwe style zillion% inflation (which will destroy the country), I do not know. I’m afraid that I have no faith in the BoE or its non-independent MPC to do the right thing. In my humble opinion, they have messed-up almost every single move they have made to date, so why should their track record change now?

    We need to accept the beneficial pain of deflation, and shrink the economy back to the realistic and sustainable level at which it would have been if there had not been foolish and unsustainable booms in financial services, property prices, and government spending. Quantitative easing is merely a dishonest attempt to reflate the economy back to its previous Disneyesque state.

    Thank you for the opportunity to air my views on your interesting and intelligent blog.

    Reply: Yes – and I did not say Yes to QE in our current conditions – it is dangerous

  10. Adam Collyer
    Posted February 19, 2009 at 12:06 pm | Permalink

    “Monetary easing could be part of the answer to our current decline in activity” – only in the sense that it could help prevent deflation. I agree it needs to be accompanied by higher interest rates and lower government borrowing. In fact, the proposed “quantitative easing” process will see the BoE buying gilts out of the market. Which kind of represents an admission by the government that its flooding the market with gilts in the first place was part of the credit crunch problem.

  11. Matthew Reynolds
    Posted February 19, 2009 at 12:21 pm | Permalink

    My solution is to sell banking shares & print enough money to fund giving all basic rate taxpayers £1,500 cheque. That would get things going by getting money to people with debts to pay thus cutting the number of firms & people going broke while putting a cushion under demand in the economy.

    Then public spending should be frozen in real terms for at least five years with the Tories devising reforms that would wring out the £100 billion p/a of wastage as identified by The Tax Payers Alliance. Ruth Lea & The Adam Smith Institute could produce the reform plans that The Institute For Fiscal Studies could vet to make sure that the maths was water-tight. The changes could be phased in quickly with a view to slashing public spending growth to zero in real terms right away. By freezing state spending for five years the twin drags on any economic recovery high public borrowing & Big Government could be curtailed without any upswing in GDP being destroyed by tax increases.

    Any money left over from the reforms could be redirected towards defense & law order and the security services with a view to funding the need to tackle terrorism & crime while being in a position to curb Iran’s antics.

    Cutting public borrowing in 1990’s Britain put the recovery on a sound footing and deep public spending cuts in 1980’s Eire paved the way for tax cut induced prosperity. I rest my case !

  12. Adrian Peirson
    Posted February 19, 2009 at 12:55 pm | Permalink

    Is Brown Printing it free of charge, or Borrowing it from the Global Banks, the difference is important.

    He should have declared all bank loans, credit agreements, and mortgages null and void.

    That would have really helped the British people.

    http://www.youtube.com/user/campaignforliberty

  13. Rare Breed
    Posted February 19, 2009 at 1:00 pm | Permalink

    I’m not usually one for conspiracy theories but why do I get the feeling that we are being put deliberately in the debt of the banking system through our taxation system and the merger of the political and banking machines.

    Taxes accross the world will be so high that very few will be free from debt salvery. I read today of Brown attacking those gracious nations with lower,fairer tax rates (the swiss), whose citizens benefit from tax competition.

    This along with the loss of many of our civil liberties and the loose definition of a “terrorist” has changed our Country. No longer the freedom of Milton, Mill and Burke.

    I fear the coming of a corporatist state with debt as the yoke of control. With the tax rises coming, for many there will be little point of working in the future – only the coersion of big government lead by the political class to force or bribe citizens into it.

  14. Posted February 19, 2009 at 1:41 pm | Permalink

    As usual, a sane and well considered opinion of the current state of the economy.

    If someone were able to audit various political and economic predictions over say, the last five years, it would be very interesting to see the ‘league table’ As a regular reader, I’m guessing this blog would be someway ahead of HM Treasury, Vince Cable, the BBC etc for consistency and accurate prediction.

  15. Posted February 19, 2009 at 3:17 pm | Permalink

    One step in the right direction would be to mobilise the funds of individual savers. The fact that these can expect to receive no more than 1% – 2% return on deposits is absurd when one considers that RBS and HBOS are expected to pay 12% to the Treasury and Barclays 14%to their middle eastern sponsors.

    By offering the thick end of these kind of rates to savers, billions of pounds of non taxpayer funds would flow into these banks, therebye reducing the burden on the national debt, tax revenues would improve somewhat and there would be some incentive at least from savers to go out and spend some cash in our hard pressed economy. This would also enable the government to scrap the unaffordable and wholly ineffective VAT rate cut.

  16. Lola
    Posted February 19, 2009 at 4:07 pm | Permalink

    Mr Redwood, in response to your post and because you are a Jaguar fan you may be interested in this:

    http://mises.org/story/3329

    If you’ve already seen it, which you probably have, I apologise.

  17. alan jutson
    Posted February 19, 2009 at 4:43 pm | Permalink

    John

    Just a thought, as I am as green as grass on International finance.

    But I do run my own very small Company, and have done so for many years without any borrowings.

    Assuming we trade as UK PLC
    How does borrowing what you cannot pay back for years (which will increase your overheads and costs and make you less competitive) work.

    How does printing money which I assume will devalue the very currency you hold (which in turn means you send even more of your own currency abroad) to pay for imports work.

    It all seems a very strange way of moving forward.

    How does our trade deficit with the rest of the World effect the money supply and its value in Sterling in the UK ?.

    If we were capable of running a Trade surplus, then perhaps just perhaps, there may be some merit in trying to increase our exports further by slight Devaluation. But this is pie in the Sky, we do not produce enough in this Country any more our manufacturing industry (added value industry) has been decimated.

    Clearly you cannot run a Trade deficit forever, or can you ???

    I well remember Harold Wilson and “The Pound in your pocket” speech. He was absolutely correct, the pound in your pocket was still worth a pound here after devaluation.
    The problem that he did not admit to was that it bought far less when you were abroad or when you bought imported goods the price of which then increased here, so you needed more pounds for the same goods which thus increased inflation.

    Is this Government/any Government who operates this Policy eventually going to have to go with the begging bowl for even more help.

    Surely we have to bite the bullet now (we should have years ago) and live within our means instead of deluding ourselves that we can simply continue to borrow and spend like its going out of fashion.

    Reply: that is exactly the debate we are now having. Sooner or later we have to earn our livings.

    • Tony Makara
      Posted February 19, 2009 at 11:02 pm | Permalink

      Devaluation would be a disaster as we now import 40% of our food, much of which is made up with staples like milk and meat. The fact that food has to be bought and bought on a daily basis means any devaluation is going to have a huge impact on living-standards, particularly for the poor as the purchase of food makes up a sizable portion of their disposable income. Sterling has to operate at the right level for our economy at any given time. Scuppering our currency just to boost exports would do more damage in the long run.

  18. not an economist
    Posted February 19, 2009 at 6:03 pm | Permalink

    I don’t agree with Quantative Easing (QE) myself, partly because I don’t trust the financial authorities to get the timing right for taking countervailing measures when the demand for money starts to fall off again. If they fail to do this they will simply trigger severe, double digit inflation. There is already evidence of this in America where producer prices in the following stages are on the increase:

    – For December to January finished consumer good prices increased by 1.1% – thats 14% annualised.

    – Capital Equipment prices increased by 0.5% – thats 6% annualised.

    To my mind this is tentative evidence that the monetary authorities are about to launch QE at a time when the demand for money is already falling.

    This is one months figures. They could slump next month and the months after. I accept that. (And I apologise for not having the English stats to hand).

    That said the “consensus” these days is that we are headed for deflation. In the States, Bernanke has been prattling on about deflation since around 2001. Banks are collapsing all around us – there was a Telegraph article just the other day about an EC reprot that mentioned that European banks stood in need of a bailout of $25 Trillion (the actual figure was subsequetly taken out of the article – otherwise the text remained the same). In addition unemployent is increasing quite rapidly in the States and the UK. Given these factors and the Keynesian orthodoxy that dominates economic policy it is a big surprise to see these indexes rising at all. At the very least their rise should be giving central bankers and central governments good cause to stop and think again about QE. And if they don’t want to look at this evidence there is always Japan’s failure to reflate in the 90’s/00’s and the consequences of QE in Zimbwabe – for it was Uncle Bob who pionered this policy.

    Links if you want to follow any of this this thru (you may have to copy and paste into your browser):

    Re Gary North and the $25 trillion losses in European banks:

    http://www.lewrockwell.com/north/north689.html

    Re American producer prices – see this link and the post headed “Producer prices Rise Quickly in January”:

    http://consultingbyrpm.com/blog/

  19. PT
    Posted February 19, 2009 at 9:42 pm | Permalink

    Am alone in believing that a policy of driving interest rates as low as possible regardless of long-term inflationary consequences is completely intentional?

    Brown is desperate to get house prices bubbling again, so decimating savings (pensions and pensioner matter little to him) is an ideal way of forcing people to move their money elsewhere – in this instance property. I’ve already seen some cash-rich colleagues at work succumbing and buying up property with their savings. Though I doubt this will last forever.

    But for those like myself who could see the bubble, held off, saved, invested in a pension early and rented. Well, it looks like Brown is gonna f*ck me over once again.

    • not an economist
      Posted February 20, 2009 at 10:07 am | Permalink

      I actually wonder if the government wants to generate the double digit inflation its policies will result in. How else are they going to reduce the public sector debt burden they have created? Repayment would shackle the economy for years to come and outright default would be shameful so reducing it by debasing the currency is the next best alternative.

  20. Dr Dan H.
    Posted February 20, 2009 at 11:29 am | Permalink

    The problem with all of Labour’s policies is that they are mostly driven by the psychology and culture of Labour its self, not by any intellect-driven plan. Labour came to power by means of a cabal consisting of Tony Blair, Peter Mandleson and an assortment of others working out that they didn’t actually need to win an election to get in, but merely prevent their party losing an election whilst permitting the incumbents to lose their own battles.

    Once in, Tony seemingly didn’t really know what he was there to do; he wanted power but didn’t know why, didn’t understand his own mind and desires, and didn’t have a plan of reforms to implement. So, once in power he coasted along and his party returned to Old Labour reflexes equating generating mind-numbing quantities of legislation to doing productive work, and otherwise relying on doctrine instead of rational thought. This worked for a while as credit inflation and a bubble provided seemingly free money to keep the proles in clover, but eventually the cracks started showing.

    A little before this, Tony saw the end coming and legged it, passing the throne to his equivalent of Baldrick the idiot servant who stupidly grabbed it immediately and stood around grinning like the fool he is. Now we’ve got a situation where the Labour leadership has been selectively whittled down to only the politically-correct social climbers and drones; perhaps the only smart one left is Mandleson, (imperfect as he is -ed)

    This miserable shower aren’t going to fix the economy. They never knew they were breaking it even as they sowed the seeds of ruin, and they lack the wit to start fixing the problem now. Worse, since fixing the rot would mean sacking most of the army of wastrels and lackeys their client state employs to push paper around and also forcing the legions of dole claimants back to work, their electoral prospects would plummet to almost nil (no matter how abysmal the party, there’s always some moron who’ll vote for it).

    They aren’t going to fix it. They’re not even going to try. All they are going to do is paper over the cracks and try to export the problem into the future so their party has a chance of limping back into power a decade down the line.

  21. GoldToTheMoon
    Posted February 20, 2009 at 12:30 pm | Permalink

    If you have savings, protect against currency devaluation with Gold.

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