Thursday, 16 October 2014

We need permanent QE?

Ambrose Evans-Pritchard suggests as much in a Telegraph article entitled “World economy so damaged it may need permanent QE”.
Evans-Pritchard is clued up, but he doesn’t distinguish between QEing government bonds and other assets, which is a significant omission from his article.
I have no objections to continuing to QE, and up the point where there is no government debt left: i.e. all government debt is replaced with base money. Indeed both Milton Friedman and Warren Mosler argued for the abolition of government debt ANYWAY, i.e. quite apart from that being a way of imparting stimulus. (See para starting “Under the proposal..” in Friedman’s paper and the 2nd last para of Mosler’s article.)
As to taking QE even further, and having the central bank buy up loads of OTHER ASSETS (including your car and house) that’s pointless, isn't it? Granted market monetarists believe in having the central bank buy up just about everything, but that just proves market monetarists have lost the plot. (See comment by Scott Sumner (leading market monetarist) here for what I think is a total “loss of plot”.)

We’ve had “permanent QE” for at least a century!
A further reason for not getting excited about permanent QE is that we’ve had permanent QE, at least on a small scale, for decades if not a century or more, and for the following reasons.
QE (where it consists of the central bank buying government debt rather than other assets) has the effect of increasing the monetary base, as pointed out above. Indeed that’s the only way the base can be increased under the present set up (i.e. unless you give the Treasury the right to print it’s own money).  But the monetary base has to be increased (in nominal and real terms) every year ANYWAY, assuming the monetary base is to stay constant relative to GDP, which over the long term it does. Ergo we’ve had “permanent QE” for a long time.

What if stimulus is needed given no government debt?
That all raises the question as to what to do if having disposed of all government debt, stimulus is still needed. Well that’s easy: the solution has been spelled out by Positive Money and advocates of Modern Monetary Theory. The solution is to continue printing base money and spending it (and/or cutting taxes) till the average household has a sufficient stock of money or net financial assets that it is induced to spend at a rate that brings full employment. Plus Milton Friedman said exactly that in the above mentioned paper of his.
No problem.

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