Friday, 6 November 2009

Quantifying the effect of QE is pointless.


Hundreds of economist and commentators are spending valuable time and your money trying to work out the effect of Quantitative Easing. They are wasting their time. The reason is thus.

QE is taking place at the same time as a budget deficit in the UK. As it happens the size of the deficit in the UK in 2009 is roughly the same as the amount quantitatively eased.

The budget deficit consists of the following. 1, government borrows money from the private sector, 2, government gives private sector Gilts in return, 3, government spends the money. As to QE, this consists of reversing items 1 and 2. So the only net effect is 3: i.e. “print money and spend it”.

Now the effect of 1 and 2 are hotly debated. The majority view amongst economists is that when government borrows and spends, the effect is reflationary or “stimulatory”. But there is a significant minority view that this policy “crowds out” private spending or investment, resulting in a feeble or non existent stimulation.

As to QE, the effect of this is also hotly debated. For example it can well be argued that the effect is around zero because people or institutions holding Gilts regard this chunk of their wealth as SAVINGS. Thus the fact of turning these Gilts into cash will not result in a spending spree.


As pointed out above, in a “deficit plus QE” scenario, these two paras cancel each other out. The question everyone should address is what is actually happening, namely “government prints money and spends it”.

Is anyone interested in the latter reality, or do you prefer arguing about how many angels can dance on a pinhead?

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