Thursday, 13 August 2015

Larry Elliot disapproves of peoples’ QE?

Larry Elliot is The Guardian’s economics editor, and in this article he claims that many governments are out of ammunition for dealing with the next recession, should one arise. He cites for example the fact that interest rates are already at or near zero, so there’s no chance of “ammunition” from that quarter.

He then considers other possible forms of ammunition including “print and spend”, which is approximately the same thing as peoples’ QE, a policy which has recently appeared in the lime light thanks to Jeremy Corbyn’s adoption of that policy. Larry Elliot however doesn’t like the idea.

He claims that “…in some countries, including the UK, the increased spending would result in higher imports and a balance of payments crisis…” and that there’s “risk of hyper-inflation.”

Well as regards imports, ANY FORM of stimulus or increase in aggregate demand tends to suck in imports, so that point is irrelevant.

As to inflation, it is of course true that whenever the words “print” and “money” appear in the same sentence, every economic illiterate comes up with the knee jerk reaction: “inflation”. Indeed, millions of economic illiterates produced that knee jerk reaction when money printing in the form of QE was first mooted. But mysteriously no excess inflation appeared.

Moreover, the basic purpose of any form of stimulus, whether print and spend (P&S), interest rate cuts, QE or whatever, is to create enough jobs to take us up to the full employment level. And at that point, no further increase in demand is possible because the effect will tend to be to increase inflation rather than increase numbers employed.

So . . . if inflation DOES APPEAR as a result of P&S, that simply proves that P&S has been successful: given us full employment – indeed it proves that P&S has gone a bit too far.

Complaining about the inflationary effects of P&S is a bit like saying you shouldn’t put fuel in your car because you might continue pouring fuel into the tank after the tank is full and spill fuel over the garage forecourt. There’s actually a brilliant solution to that problem which you may have worked out: don’t try to put too much fuel in the tank!

Why do I have to explain this bog standard, boring elementary stuff to the economics editors of national newspapers? Sigh.

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