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.