Monday, 26 July 2021

OMG: Mervyn King opines on QE.

Danny Blanchflower, former external member of the Bank of England's Monetary Policy Committee, recently described Mervyn King on Twitter as “the clueless clown who missed the great recession and supported failed evil reckless austerity”. Can’t say I flatly disagree with Blanchflower.

At any rate, King and his fellow members of the House of Lords Economic Affairs Committee make four main points in their recent report of QE – see Bloomberg article by King entitled “Quantitative Easing is a Dangerous Addiction” for more detail.

King’s first point is that central banks are not taking inflation seriously enough. Well that happens from time to time even in the absence of QE!  So it’s not a SPECIFIC criticism of QE!

His second point is that not all problems merit a monetary response, e.g. QE. Well true. But the main alternative response is FISCAL, and central banks can’t do fiscal.!!!  So what are central banks supposed to do given what they see (rightly or wrongly) as inadequate aggregate demand?

His third point reads thus. “QE poses risks for central-bank independence. The committee looked closely at the relationship between QE and the public finances. QE has made it easier for governments to finance exceptionally large budget deficits in the extraordinary circumstances of Covid-19. But when the central banks reduce this support, will they come under pressure to help finance ongoing budget deficits or to keep short-term interest rates close to zero? It’s possible they will. Central banks today operate in a more difficult political environment than 20 years ago.”

Now why exactly has QE made it “easier for governments to finance large deficits”? Of course if the relevant central bank is in thrall to politicians who aren’t too bothered about inflation, then clearly there’s a problem. But that’s a problem that often arises even in the absence of QE!  I.e. a central bank can always be pressured (and indeed central banks often are pressured by politicians) into not doing anything about the inflationary effect of an excessive deficit. Donald Trump tried that trick.

Again, Mervy King and his fellow doddering Nobel Lordships seem incapable of distinguishing between problems which are SPECIFIC to QE, and problems which are of a more general nature and which can and/or do arise ANYWAY.

And their fourth point starts thus: “. QE tends to be deployed in response to bad news, but isn’t reversed when the bad news ends. As a result, the stock of bonds held by central banks ratchets up…”.

Now wait a moment: QE was only implemented for the first time between five and ten years ago, so how can anyone make generalisations about it along the lines that it tends not to be reversed? I.e. if there were instances in say the 1960s, 70s, 80s or 90s of it not being reversed, then that generalisation might be valid. But there were no such instances!

Moreover, if a central bank thought there was a clear need to damp down what it saw as excess demand and excess inflation, then the first step would be to reverse QE, i.e. sell debt back in to the market and mop up excess money.  But central banks just at the moment (rightly or wrongly) do not think there is excess demand and inflation, so they aren’t doing that.

That’s what explains the lack (so far) of any “QE reversal”, not the fact that there is some sort of reluctance on the part of central banks to ever reverse QE.


While Mervyn King has produced some worthwhile material in the past, he seems to have gone a bit soft in the head in recent years, as I’ve noted before on this blog. Looks like Danny Blanchflower’s opinion on Mervyn King isn't wholly inaccurate.

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