More money goes east

 

              This week’s main economic  event will not be the US elections, but the decision of the Fed to print more dollars. In expectation of more electronic greenbacks government  borrowing rates have been driven lower, assets generally have risen a bit in price, and money has flowed strongly into the emerging market economies of the world. Today’s US quantitative easing – or the prospect of it – seems to do more to speed the growth of China, Brazil and India than it does  back home.

                Money growth is expanding a bit anyway in both the US and the UK. The banks are less distressed than a year ago. They have made some profits, paid off some debts and reduced the size of their liabilities. Both economies are still digesting the large sums printed in QEI. In the US it has not yet proved inflationary, partly because a lot of it has not been lent on to the private sector, and partly because high levels of unemployed labour and excess property and capital is keeping domestic prices down. In the UK QEI did add to the high inflation we have, as it drove the pound down further, adding to imported inflation.

             There is a case that  neither the US nor the Uk should carry on with their money printing policies. There is arguably enough high powered money around. Instead the authorities need to allow a sensible amount of it to be lent on to the private sector, to pay for the next round of infrastructure, R and D and capital investment we need. Company profits and cashflows are much stronger in both countries now, making business lending a better risk again.  

                   The authorities claim to be relaxed about the prospects for inflation. Many others are not. Many are buying inflation linked bonds on tiny or even negative real yields. Others are buying gold and commodities. Emerging market economies are keeping controls in place to prevent large inflows of money or are thinking of erecting barriers.  They have to raise interest rates to control their inflations, whilst at the same time not wanting to make it more attractive for people to deposit hot money with them.

                  Quantitative easing is  in danger of not helping the adjustments the world economy needs. It needs the west to borrow, spend and print less, and export, save and invest more. It needs to east to save and export less, and spend and import more. If the US decides to print too much it could drive the dollar lower and exacerbate the rows over currency rates with China and the other emerging markets. The US might find that even their economy in the end suffers inflationary consequences from too much money printing. That is a nice call for them to make.

                       Meanwhile,I am sure  the Uk should not be considering any more quatitative easing. We have quite enough inflation to be getting on with. Our open economy is very vulnerable to imported inflation as soon as the authorities let the pound slide. Money supply is expanding anyway. We do need more investment capital including  bank financed capital, but that is a story about regulation and bank management, not about the need to buy government bonds with created money.

                      The Uk needs a supply side revolution to power faster growth. That is not abour printing more money, but following pro enterprise policies. We will return to  these soon.

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13 Comments

  1. lifelogic
    Posted November 3, 2010 at 7:15 am | Permalink

    Pro enterprise policies that would be nice but:

    1. So much anti-enterprise policy comes from EU and is unstoppable. Agriculture, the nonsense renewable energy policy, landfill, and countless silly regulations almost everywhere.

    2. There is little sign that “Dave” actually knows what a pro-enterprise small government policy actually is. He cannot even get the state owned banks owns to lend sensibly to sound UK businesses. He has done virtually nothing on easy hire and fire, reduced regulations, finance availability, smaller government and lower business taxes.

    The only positive was the (only part) removal of HIP packs and even then he still left the absurdly silly and childishly pointless energy certificates as compulsory. I conclude that he actually does not know the first thing about running a business in a competitive world market?

  2. lifelogic
    Posted November 3, 2010 at 7:47 am | Permalink

    Cameron/Clegg have a choice they could (against all indications so far) actually take a pro business, less regulation, lower tax, smaller government approach. Thus reviving the economy, attracting new investment and perhaps winning the next two elections. Or they could take the socialist Heath, Brown, Major route, as they seem to be, with doubtless a similar end in store for them. Clinging desperately on to power until finally relieved of it in May 2015 latest.

    I would have more faith if either of them had ever started off poor or had ever had a real job – even a paper round or similar job as a child would have been good experience (doubtless this too is virtually regulated out of existence now).

  3. Nick
    Posted November 3, 2010 at 8:44 am | Permalink

    Inflation nearly 5%

    Target 2%

    BoE action nothing.

  4. The ESSEX GIRLS
    Posted November 3, 2010 at 9:20 am | Permalink

    Our simplistic take on the economy having followed what the learned have to say is:

    1. That it grows when the housing market is fertile

    2. Inflation is well under control to the benefit of all when the £ is strong.

    Get these 2 factors right and a lot of the rest falls into place.

  5. EJT
    Posted November 3, 2010 at 9:55 am | Permalink

    You don’t need pro-enterprise policies. You need to dismantle the anti-enterprise laws and regs. But the government won’t.

  6. StrongholdBarricades
    Posted November 3, 2010 at 10:17 am | Permalink

    What do you think to the current lobbying about the necessity to ensure that the bad assets held by banks need to revalued, and thus forced out of the system?

    Someone needs to take the loss on the property speculation, and until this revaluation takes place the banks will continue to plead that their money is tied up in worthless assets.

  7. Sally C.
    Posted November 3, 2010 at 2:41 pm | Permalink

    Good article, JR. While I agree with a lot of the comments here, at least I feel that we are slowly moving in the right direction.
    On the subject of imported inflation, it does show up very quickly in the shops. I was quite shocked to see that price of a 250gram block of Anchor Butter (imported from New Zealand of course) has gone up from £1.25 to £1.50 at both Tescos and Sainsburys. That’s a 20% increase in a very short space of time. I’m sure there are many more examples. We definitely do not want any more QE!

  8. Alte Fritz
    Posted November 3, 2010 at 4:40 pm | Permalink

    The evidence seems to be that the UK is now inclined to spend less and save more, or, at least, pay off debt. Bad old habits should not be encouraged, so the answer must be to support exports of goods and services.

    It would certainly help SMEs to have a more generous policy on capital allowances; this would engender confidence to invest and at relatively little cost.

  9. waramess
    Posted November 3, 2010 at 5:27 pm | Permalink

    How I wonder can you tell the difference between high imported inflation and high commodity prices resulting from investors seeking a safe haven for their funds? Inflation being always and everywhere a monetary phenomena, are we to assume that the effect USA QE will be imported over here in the form of high commodity prices?

    Surely this ceases to be the issue because higher prices whilst resulting in more discretionary spending will fail to ignite inflation as such unless and until the unions decide to play beggar my neighbour.

    The issue at hand might however be that even more QE will simply feed through to inflating the price of international commodities and ultimately make the case for miitant union activity notwithstanding high unemployment.

    Given the FED and the Bank of England have both given up the pretence of being able to reverse the effects QE maybe both governments should carefully look once again at the prospect of lowering taxes and making more headway in reducing the size of Government, rather than printing more money.

    • Mark
      Posted November 5, 2010 at 1:09 am | Permalink

      Commodities jumped 2%+ today in dollar terms while the pound appreciated 1% against the USD. I guess that says there is a 50% chance of the UK following with QE in the near future. Markets appear to be turning US QE straight into inflation. Cap’n Bernanke should heed Scottie’s warning “I cannae give her any more Cap’n!” The dilithium crystals that are holding the economy together will explode.

      QE drives foreign money away and causes currency depreciation. That is only helpful if you have the potential to create a balance of payments surplus on trade. Otherwise, it simply devalues the assets you will sell to foreigners eventually to plug the financial gaps.

  10. Simple Soul
    Posted November 5, 2010 at 6:04 pm | Permalink

    The B of E has just decided not to put up interest rates which is good. While markets have got their buying boots on, as they plainly have, any further thoughts of QE should be firmly put away. If all goes well, we will have an anaemic recovery which will work on the deficit favourably, and enable us to reflate and cut unemployment in a year or two, with much less risk than if we were to do it right away. If the Chancellor sticks to this line it might be to the disadvantage of the Labour Party – but then nobody’s perfect.

  11. Martin
    Posted November 5, 2010 at 10:53 pm | Permalink

    QE – Let’s see – take a policy that has made little difference and repeat!

    The money would be better spent sending men to the moon – it would boost the USA’s science and technology sector.

    Hopefully our government will not do QE again.

  12. Peter van Leeuwen
    Posted November 10, 2010 at 1:13 pm | Permalink

    P.S. Much as we appreciate the success of our UK subsidiary in sending their best people representatives and government appointees to us last year, to join in this collective undertaking of mutual “economic governance”,- so much better than the institutional wrangling witnessed in the past -, we’re still concerned about the continued use of toy money which has clearly devalued our much beloved UK subsidiary as a whole, in spite of few green shoots of regained competitiveness. We therefore trust that joining the euro will become a new strategic objective in the UK.
    Yours sincerely,
    Chairman

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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