Reply to: Quantative Easing

[TimberWolf]

Yes but as long as Government isn't largely responsible, I would not feel as angry.

I am not naieve enough to believe boom/bust cycles can be eliminated, but for goodness sake, they shouldnt be exacerbated by goverment of all people!

I care less about "The economic cycle" (browns pet phrase through his chancellorship) and more about my taxationaccess to public services and my future childrens taxation/public services.

End of the day government serve a very basic purpose to most people.

Provide essential public services costed by tax, which are fair and reflect what we PAY as tax.

You would rather blame the queen

[Solidec]

It doesn't matter how much you legislate, we will still have boom and bust. It will just manifest itself in some other way.

Yes but as long as Government isn't largely responsible, I would not feel as angry.

I am not naieve enough to believe boom/bust cycles can be eliminated, but for goodness sake, they shouldnt be exacerbated by goverment of all people!

I care less about "The economic cycle" (browns pet phrase through his chancellorship) and more about my taxationaccess to public services and my future childrens taxation/public services.

End of the day government serve a very basic purpose to most people.

Provide essential public services costed by tax, which are fair and reflect what we PAY as tax.

[Doggy Styles]

There needs to be legislation preventing governments going beyond certain thresholds of % borrowing and %deficits in budgets.

Only over-rideable by a mandate from Her Majesty.

And GOvernment should NOT be EVER allowed to take debt off balance sheet such as what they have done with PFI.

and for god sake, good accounting practices please. Independant ONS, accountbale NOT to the government but to Her Majesty also.

I am sick and tired of all the lies and cloak and dagger tactics employed by government. We deserve to know the true state of affairs with the public finances.

And ANY government spending project needs to have a success criteria to justify it's implementation.

What true value will any expenditure add, and if it does not, then its deemed a failure and a black mark on its brain child.

In short, balance the books, with auditors answerable to the Queen.

Worth considering, but suppose there's enough cack in the accounts for her to refuse to sign them off? Some will point out that we elected the government, we didn't elect the Queen.

Also, the government is busy taking over previously independent estates (such as the House of Lords, the Judiciary) so I can't see them relinquishing any powers to implement this.

[TimberWolf]

It doesn't matter how much you legislate, we will still have boom and bust. It will just manifest itself in some other way.

[Solidec]

There needs to be legislation preventing governments going beyond certain thresholds of % borrowing and %deficits in budgets.

Only over-rideable by a mandate from Her Majesty.

And GOvernment should NOT be EVER allowed to take debt off balance sheet such as what they have done with PFI.

and for god sake, good accounting practices please. Independant ONS, accountbale NOT to the government but to Her Majesty also.

I am sick and tired of all the lies and cloak and dagger tactics employed by government. We deserve to know the true state of affairs with the public finances.

And ANY government spending project needs to have a success criteria to justify it's implementation.

What true value will any expenditure add, and if it does not, then its deemed a failure and a black mark on its brain child.

[Cyberman]

I don't know if common sense is correct, isn't the system more complicated than that when you take into account all the various nations and the interplay of interest rates, currencies, etc? With so many different ways that money exists (e.g shares, gilts, commodities, etc) aren't some aspects of world economy going to be counterintuitive in the same kind of way that some parts of physics are - another subject which is intuitive at a large scale but totally weird when you examine it in detail?

I don't for a second claim computers can model everything due to the human factor, in the same way we can't possibly model the weather systems in any detail... but compared to what we had 50 years ago can't we at least make some useful predictions about what changing interest rates or printing money will do? Or are you saying they simply have rules of thumb "I dunno, reducing interest rates does X, 1.5% sounds about right to me"?

Economics is much about commonsense. The first things are easy, such as employing good housekeeping which basically means keeping revenue and expenditure roughly in line.... ie: If you don't have the money, don't spend it/waste it, and don't borrow more than is necessary and especially if it is going to be difficult to repay. Labour have let spending fall so far out of line that we are building up to a deficit of 150 Billion pounds a year and thus massive problems for future generations as this money will eventually have to be found through taxes.
If good housekeeping is employed the rest falls into place, in that interest rates and currency remain stable because risks are not being taken with the economy. Good housekeeping also involves an element of regulation whereby banks are not allowed to let lending rip, again in order to keep the economy stable. Unfortunately under Labour governments they always seem to ignore commonsense and end up in a situation such as we have today.

[MPwannadecentincome]

"printing money is not the same as printing money"

http://business.timesonline.co.uk/to...cle5488264.ece

From The Sunday TimesJanuary 11, 2009

Tories out of step as Bank wheels out the big guns
David Smith: Economic Outlook
Every day, sometimes on several occasions, an e-mail arrives in my inbox on behalf of George Osborne, the Conservative shadow chancellor.

Issued in response to a minor economic indicator or flaky forecast, these missives, apart from rather demeaning the office of shadow chancellor, are usually harmless enough and can be safely ignored.

Last week, however, came one that summed up the Tory problem: opposition by soundbite. For weeks, a debate has raged about whether central banks should engage in “quantitative easing”, the technique employed by the Japanese authorities in 2001-6 to lift their economy out of stagnation and deflation.

The US Federal Reserve, cutting its Fed Funds rate to a 0%-0.25% range last month, signalled that it would formalise quantitative easing. Once you are at zero, you need other measures. Quantitative easing is often described as “printing money”, though it is not. More on this in a moment.

When, in an interview, Alistair Darling, the chancellor, confirmed that the Treasury and Bank of England were considering quantitative easing, as widely reported in recent weeks, Osborne was on the case.

“The very fact that the Treasury is speculating about printing money shows that Gordon Brown has led Britain to the brink of bankruptcy,” he railed. “Printing money is the last resort of desperate governments when all other policies have failed. It can’t be ruled out as a last resort in the fight against deflation, but in the end printing money risks losing control of inflation and all the economic problems that high inflation brings.”

This was a silly soundbite. Apart from Fed chief Ben Bernanke, the case for quantitative easing is being pushed by most economists who think the money supply matters, which should be the Tory position.

It is favoured, for example, by the shadow monetary policy committee, which meets under the auspices of the Institute of Economic Affairs, the favourite think tank of Margaret Thatcher and her former economic adviser, the late Sir Alan Walters.

Osborne and his leader, David Cameron, have had a bad crisis. Baited by Brown as the “do nothing” party, they have been provoked into small, largely irrelevant initiatives. Even Brown’s enemies do not hold him entirely responsible for the worst advanced-country downturn since 1945. Cameron and Osborne, overplaying the blame card, invite ridicule and allow Brown to get away with things he should carry the can for, such as over-spending in the good times.

A Tory shadow chancellor should be well regarded by the City. Instead, Alistair Darling is winning grudging approval. Oppositions need to make the intellectual case. The Tories, guided by Sir Geoffrey Howe, did so brilliantly during the 1974-79 crisis-hit Labour government. So far this Conservative opposition hasn’t.

I write this with regret. We need a credible, constructive opposition to give people confidence that, come a change of government, the economy will be in safe hands.

Ken Clarke, ranked by readers as best chancellor over 30 years, has been a wasted asset for the Tories since May 1997. John Redwood, a former cabinet minister, appears to understand the crisis and was impressive on the radio the other day.

Economic opposition is a crowded scene. For the first time that I can remember, a Liberal Democrat shadow chancellor has made the running. I do not agree with everything Vince Cable says but he enjoys a high reputation and his manner is of a reassuring doctor — he tells you it is bad but offers prescriptions to make it better. The Tory boys do not have his bedside manner and sometimes appear to relish the gloom, which I am sure is not their intention.

Back to “printing money”. The Bank limited itself to a half-point cut to 1.5% last week, though taking us, as every schoolboy knows, to the lowest rate since 1694. That seemed sensible, despite figures on Friday showing an alarming plunge in manufacturing output. It leaves shots in the locker and time to think about other measures.

“Printing money”, to be clear, is not the same as printing money. This is not a cash economy. The value of notes and coins in circulation is £51.6 billion, less than 3% of £1.9 trillion of “broad” money in Britain, M4, consisting of bank deposits and the corresponding lending. Printing money means getting broad money growing faster through so-called quantitative easing.

How? One way is for the Bank to buy government bonds or commercial securities from banks or their customers. This creates a credit in the central bank’s reserve account, which can then be the basis for increased bank lending. It also drives down interest rates throughout the economy.

Or, in a situation where the government is borrowing large amounts, as now, it can “underfund” its budget deficit by issuing fewer gilts than needed, or by selling them direct to the Bank. The effect is to boost broad money, M4. Or, if none of this works, the central bank can lend directly into the economy, using the banks as its agents.

None of this is easy, or inevitable. The Tories have proposed a £50 billion loan guarantee scheme for small firms, which Cameron wants to “shake the prime minister” to introduce. But Treasury officials fear that losses under such a scheme could amount to £12 billion, making guarantee costs prohibitive.

Guaranteeing issuance of new mortgage-backed and other asset-backed securities, recommended by former HBOS chief Sir James Crosby, would work a lot better if other countries did it too; the closure of these markets is a worldwide phenomenon. So far, however, there has been little discussion about co-ordinated action.

The truth is that there are many helpful things that can be done but no single silver bullet. In the meantime, we should not forget one thing. The Bank has wheeled out some pretty big guns in cutting rates from 5% to 1.5% since October. Barack Obama sketched out his huge fiscal plan last week.

As the Bank put it when cutting rates on Thursday: “The committee noted that the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed.”

Policymakers need to be imaginative. But they also need to have faith in the fact that, in the end, policy will work.

[BrilloPad]

I don't know if common sense is correct, isn't the system more complicated than that when you take into account all the various nations and the interplay of interest rates, currencies, etc? With so many different ways that money exists (e.g shares, gilts, commodities, etc) aren't some aspects of world economy going to be counterintuitive in the same kind of way that some parts of physics are - another subject which is intuitive at a large scale but totally weird when you examine it in detail?

I don't for a second claim computers can model everything due to the human factor, in the same way we can't possibly model the weather systems in any detail... but compared to what we had 50 years ago can't we at least make some useful predictions about what changing interest rates or printing money will do? Or are you saying they simply have rules of thumb "I dunno, reducing interest rates does X, 1.5% sounds about right to me"?

I think its more a (dark) art than science. And quite alot is down to pyschology and how people will behave.

e.g. in 70s inflation 25% so people should spend money as no point in saving. but they saved more to compensate.

Alot of the points SG makes are very valid : e.g. most people dont understand basic probability. So with a run of 20 coin tosses : what is probability of 5 consecutive (heads or tails)? Most guess very low : in fact it is about a quarter.

[d000hg]

You don't need models. An element of commonsense is what has been needed but that has been decidedly lacking. Letting borrowing get out of control, letting taxes get out of control, letting spending get out of control, etc etc etc,,,,,, all avoidable and all down to Gordon Brown !!

I don't know if common sense is correct, isn't the system more complicated than that when you take into account all the various nations and the interplay of interest rates, currencies, etc? With so many different ways that money exists (e.g shares, gilts, commodities, etc) aren't some aspects of world economy going to be counterintuitive in the same kind of way that some parts of physics are - another subject which is intuitive at a large scale but totally weird when you examine it in detail?

I don't for a second claim computers can model everything due to the human factor, in the same way we can't possibly model the weather systems in any detail... but compared to what we had 50 years ago can't we at least make some useful predictions about what changing interest rates or printing money will do? Or are you saying they simply have rules of thumb "I dunno, reducing interest rates does X, 1.5% sounds about right to me"?

[d000hg]

...

I don't have any arguments to make right now but wanted to thank you for taking the time to explain rather than lambast.

[Sysman]

You could argue the opposite...the imposition of the poll tax in 1989 was timed so it wouldn't impact the results of the 1998 general election election. And you could also argue that it was imposed in Scotland first and delayed in England so it wouldn't impact the 1991 local elections in England.

Cynical? ME??

The Falklands war too. Her popularity prior to that was plummeting.

[PM-Junkie]

Except Maggie

You could argue the opposite...the imposition of the poll tax in 1989 was timed so it wouldn't impact the results of the 1998 general election election. And you could also argue that it was imposed in Scotland first and delayed in England so it wouldn't impact the 1991 local elections in England.

Cynical? ME??

[OwlHoot]

... I put it to you that it has EVERYTHING to do with the fact that there will be an election sometime in the next 12-14 months, and NOTHING to do with economics...

WHS

[BrilloPad]

Over the last 30-40 years just about every PM has done whatever it takes to retain power

Except Maggie

[PM-Junkie]

He has access to, one would expect, a whole team of well-renouned economists, so in that sense he has as much knowledge as he needs.

And, I didn't claim you or others here don't understand economics... only that the government has people who understand them too. I was asking if QE was really as cut and dried a failure as people here like to think. As Gonzo points out there are people here who think it IS worthwhile so I think my question is answered, no thanks to you. You seem very touchy on the whole subject... maybe you should change your signature so everyone can read about how great and wise you are, if you're not feeling enough respect from the community.

Oh, so now your position changes from one of "he is highly educated in economics" to "he has people around him who are highly educated in economics".

Exactly my point. You who do not have the facts, swallow what you are told by the media because you can't be bothered to find out the facts for yourself, and then lay into anyone who has an opinion that differs from yours or who thinks the government are abut to light the blue touch paper (if they haven't already).

As for the claim that any politician in power will do what he thinks best for the nation - how much more evidence do you need that that is palpable nonsense? Over the last 30-40 years just about every PM has done whatever it takes to retain power - that is what it is all about, politics not economics. The game is to have the economy performing at its best over the end of a five year cycle so that they are in the best light when gullible idiots get to put a tick in the box. So anything measure that doesn't positively affect that 5 year cycle is going to struggle to be implemented - and that is one of the reasons we are in the mess we are in.

There is abundant evidence that Brown does not take advice from anyone and often does what he thinks best even when all those around him advise another course of action. He is not the only PM who has behaved like that, Tory and labour...it seems to be a pattern. I do find it quite remarkable though that supposedly educated people can just keep accepting the spin they are fed by politicians that they are doing things for the good of all despite overwhelming evidence to the contrary.

As for QE, again, you will find very few economists who disagree that QE results in devaluing the currency, followed by higher inflation and interest rates in the medium term to longer term...depending on the extent of the QE measures taken. That is a fact. You can argue, and indeed there is considerable debate, that devaluing a currency in the wake of a global downturn is a good thing because, for example, it strengthens the position of exporters. However as Germany is finding, in the event of a global downturn, who exactly do you export to? So that potential benefit is probably a short term thing, while those companies who are still interested in strengthening their inventories take advantage of cheap supplies.

As for interest rates and inflation, higher values in either or both exerts downward macro-economic pressure. In the medium term to longer term, this makes it far more likely that a recession is W shaped rather than U shaped...and for that reason inflationary pressures should always be kept as low as possible during a recession so that the exit from the recession is as smooth and as quick as possible. Measures taken should always be with that fact in mind since the second half of a recession can be far more damaging than the first.

So, as you have done, you have to ask yourself why any politician would do something that goes against that, is clearly risky, clearly increases inflationary pressure, and clearly risks falling back into a downturn after a short recovery.

To answer that, I put it to you that it has EVERYTHING to do with the fact that there will be an election sometime in the next 12-14 months, and NOTHING to do with economics. In my opinion, the evidence is clear - these people will do anything to get elected (remember, when it was clear from the polls that a labour party lead by Brown wouldn't win the last election, they spun the yarn about Blair promising to serve a full term. Another lie just to keep power...so it's not as if they don't have a history). And as for dealing with the economic turmoil if the ploy succeeds and they do keep power, as they have repeatedly done in the past they will just blame someone else for it.

And no, I don't think the mentality of the Tory party is any different - the first past the post system of electing government encourages it.

So instead of "I'm sure Brown knows what he's doing", try debating your position and showing me how wrong I am. There are enough people here who agree with you - I'd love to be persuaded.