Why is printing money always equated with more prosperity?

The credit crunch has seen an extraordinary relaxation of past limits for monetary policy as central banks have marched forwards into the breach. However for some and this includes the Senior Fellow at the Institute for New Economic Thinking Adair Turner they have not done enough. Baron Turner is regularly featured in the media with such views and he has written a piece for the Financial Times which in terms of monetary policy has him singing along to Luther Vandross.

Never too much, never too much, never too much
I just don’t wanna stop.

This is far from the first piece of writing by Lord Turner suggesting such matters as we wonder if he gives it another go every six months or so. Of course if he really had the answer to economic policy one might wonder why he did not deploy it when he was the Chairman of the UK Financial Services Authority (FSA) from September 2008 to 2013. After all he cannot claim to have been dealing with the LIBOR scandal can he? His reputation for prescience must have taken a knock from him having been one of the major proponents of the UK joining the Euro being a joint author of the paper below.

Why Britain Should Join the Euro

The very prospect sends a chill down my spine and I am not indulging in a Eurosceptic theme here as anybody can see that the UK’s housing-sector would have boomed and then bust just like Spain and Ireland. In fact maybe worse. Also you may have spotted that this would have provided a monetary boost to the economy (before the inevitable bust) which seems to always be on Baron Turner’s playlist. Although you see in his world back then we had apparently ended boom and bust. How did that end up?

What is he suggesting this time?

There is no great surprise in that for monetary policy for Baron Turner we always need to sing along with this.

More, more, more
How do you like it?
How do you like it?

Get the cameras rollin’, get the action goin’

So what is his policy prescription?

the best way to do that, particularly in Japan and the eurozone, would be to deploy a variant of Friedman’s idea of dropping money from a helicopter. Government deficits should temporarily increase, and they should be financed with new money created by the central bank and added permanently to the money supply.

 

Actually Japan did give such a policy a go some time back when it gave individuals a tax rebate which at the time was equivalent to £142 if my memory serves me right. Baron Turner does not mention this however. Perhaps he is unaware of it or perhaps what happened next -they saved it- is an inconvenient answer. After all it hints at failure before he starts.

Let us continue with his policy prescription and the emphasis is mine.

Money-financed deficits would increase demand without creating debts that have to be serviced. This would lift either real output or inflation and allow interest rates to return to normal more quickly.

 

It is hard to overstate the intellectual bankruptcy at play here. So the outcome may be good (more output) or bad (more inflation). That narrows it down doesn’t it? Tucked in with this is the hint that perhaps Baron Turner sees inflation as not being all bad as it would help the economy deal with the problem he identifies.

The global economy is suffering the hangover from many decades of excessive private sector credit growth. In 1950 private credit in advanced economies was 50 per cent of gross domestic product; by 2007 it was 170 per cent.

 

As you can see higher inflation would at the aggregate level help with the debt problem he has identified. But if you are polite he glosses over and if you do not wish to be so polite ignores the fact that this would have economic casualties. This is quite common for the UK political and economic establishment which has always tried to cast a fog around the fact that the inflation the Bank of England “looked through” was in fact a major cause of the UK real wage crisis where the exact fall depends on the inflation measure you use but is of the order of 10%. Of course the UK establishment has also mounted quite a campaign against measures of inflation which give higher results such as the Retail Price Index. The minute they started such a campaign I was on my guard for further inflationary policies as it was a move that the apocryphal civil-servant Sir Humphrey Appleby of Yes Minister fame would make.

If we move now to the apparent consequence of higher interest-rates I am afraid that we are at joke levels here. So Baron Turner whose solutions in the credit crunch era (and indeed his Euro advocacy) always involve a loosening of monetary policy is now promising a tightening of it! Oh but it comes via a loosening.

Also if we are on a good path and getting growth why would we want to do this?

True, banks might amplify the stimulus by creating additional private credit, but they can be restrained with higher reserve requirements.

 

After all we would want a boom would we not? Or does Baron Turner think that a statist government deficit driven boom is the only way forwards? That is a bit awkward if one considers the place with big deficits and public-sector debts is the Japan that he criticises.

Currency Wars

It was only yesterday that I analysed this subject and it is relevant when we are considering a subject such as debt monetisation. Whilst Baron Turner skirts the subject this is what he really means. When I looked at Ghana in the summer its central bank had tried this earlier in 2014 and the currency had plummeted. Now we never have simple cause and effect in economics but we have to ask the question which is what happens if Japan tries this and the Yen replaces it current decline (116 to the US Dollar today) with an outright plummet in response to such a move? Let me pick 150 to the US Dollar and just to keep the numbers round 190 versus the Euro.

But the Euro area needs it too and so it responds and the Euro plummets and we are back in the competitive devaluations which so marred the 1920s and we hoped to have the intelligence not to repeat. Another way of putting it is that they would be exporting deflationary pressure.

Comment

This hits straight on two fault-lines in economic theory. The first is whether monetary stimulus creates economic growth or inflation? If the growth case was clear-cut we would not still be debating the matter would we? After all we have had six years of extraordinary stimulus. If we look at my own country we have had this.

1. Base Rates cut to 0.5%

2. Major banks bailed out by the taxpayer to protect the precious banking system

3. Supplementary Liquidity Scheme as an implicit bank subsidy.

4. Some £375 billion of purchases of UK Gilts (government bonds) by the Bank of England.

5. Funding for Lending Scheme by the banks as a way of subsidising our banks via the housing and mortgage markets. The government added to this with Help to Buy.

Unlike some countries we did have a consumer inflation episode which many now want to gloss over. But the major inflation issue has shifted to asset prices or if I am more precise has been allowed to continue in asset prices. We see many stock markets at all-time highs and UK house prices have not fallen as I hoped they are now as an aggregate higher. If we return to the UK establishment they went to a lot of trouble to exclude house prices from the version of our official consumer inflation measure which is supposed to include housing. How did that go?

The National Statistics status of CPIH has been discontinued pending work by ONS to investigate and improve the method for measuring owner occupiers’ housing costs in this index.

 

If you read my past blogs you will see that this was perfectly predictable and of course no-one in authority is to blame.

So the success if we are being generous is patchy and even Baron Turner admits there are plenty of failings.

But there are dangers. Sustained low interest rates create incentives for highly leveraged financial engineering. They make it easier for uncompetitive companies to survive, which could stymie productivity growth. And they work by restarting growth in private credit – which is what led to our current predicament.

 

But never mind put your minds into neutral and turn up Elvis Costello on the radio.

Pump it up until you can feel it.
Pump it up when you don’t really need it.

 

The alternative of a reset to our economic system is always ignored. Indeed even yesterday’s headlines about Mark Carney and “ending Too Big To Fail” apply to something which at best will not be in force until 2019.

 

My campaign on rail fare inflation

This reached the BBC website yesterday which was nice to see.

http://www.bbc.co.uk/news/blogs-magazine-monitor-29934599

 

I was kind of hoping for a mention but at least the RPICPI User Group got one.

 

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25 thoughts on “Why is printing money always equated with more prosperity?

  1. Yes, your analysis seems spot on to me.
    Turner is one of the great and the good who has had a talentless ascent.
    Osborne is fairly useless but at least he didn’t pick Turner to be Governor of the BoE!
    On the other hand, Brown was fairly useless, but at least he kept us out of the Euro (for political rather than economic reasons, of course)!

    • I could write a 4″ thick book about Gordon “Bodger” Brown disastrous running ( or is that ruin ) of this country …… not just gold and pensions , the man was economic WMD in himself!!

      I suspect it was just by chance he didnt pick Turner 😉

      Forbin

  2. Thanks Shaun for another fantastic blog post, very succinctly outlining the extent of the corruption in this country to support the banks and TPTB. The continual effort to increase inflation which has no benefit for the masses.

    If only these messages were shared by the main stream media outlets (and that people were interested).

    • Hi Matt and thank you

      In essence the establishment in the UK have plan A and er plan A . As to the main stream media I think that they have mostly lost their way and have little stomach for publishing research and thought. They find it easier to in essence to copy and paste the official line.

      In my opinion that is why the conventional media is in decline as more and more of their readers/viewers realise this.

  3. All we know for sure is that six years of stimulus failed to generate much economic growth. We obviously don’t know what would have happened without the stimulus. The stimulus might have been a necessary but not sufficient condition for sustained economic recovery.

    That’s just me being a little provocative. I certainly agree with you about Adair Turner’s track record and the tweaks to inflation indexes.

    If the current fall in oil prices is sustained and reflected in consumer prices more generally , how much of an economic stimulus will that provide. As you have mentioned in the past,it will certainly help with the problem of falling real earnings. Any idea of how drop in the price of Brent Crude this year equates to a reduction in interest rates so far as economic stimulus is concerned?
    (I realise that base rates can’t get much lower but I’m really thinking in terms of the old “normal” pre-2007 world.)

    • Hi GO Paul

      It is a good question but I am afraid that the empirical research on the effects of oil price changes has ended up in something of a mess. They decided in the late 90s that the impact of the 70s was over, had a bizarre spell claiming it had little or no effect and then in more recent times discovered it had one. Oh well!

      In my opinion I would rather have oil prices down here (Brent @ US $81 ) than a 0.5% Base Rate cut.

  4. Hello Shaun ,

    Given that the question is

    “The first is whether monetary stimulus creates economic growth or inflation? ”

    If economics was a not politics and a proper science we’d have a bunch of equations that all learned Senior Economists would agree on – we don’t .

    Also we have such alterations to GDP and inflation figures to suit what ever politics require than the actual figures in themselves are , frankly , garbage.

    so garbage in = garbage out .

    And now £375 billion later we still have emergency rates and with all this money sloshing around the system still no real growth ???

    Really ? And we count hookers & coke to boot the figure , ones we have no real handle on ?? The mind boggles

    then to see MSM not even question the learned gentlemen of power ( not Camera-on or Millicent ) on has to resort to astonishment!! Some may think China and Russia are run by Oligarchs , I can see we are too!

    Forbin

    • Hi Forbin

      Actually it is the mathematical equations in economics that scare me most of all. Sooner or later someone turns up with something where a=b=c in his/her equations and off we go. Then we find out not only do they not have to be the same but that via mechanisms such as Goodhart’s Law they can be very different.

      By then though the pack responsible have mostly moved on and the chances of them being called to account are under our current system slim to none.

  5. So 6 years extraordinary stimulus hasn’t brought government finances into surplus. Japan has been trying ZIRP for over 20 years without bringing their finances into surplus. So a question for Baron Turner – “How long will you try this before you admit it isn’t working ?”

    We should estimate odds of success * rewards of said success against the risks of failure * the cost of failure. I’d define policy failure here as being a currency crisis and/or an impoverishing inflationary episode. This is a very high cost outcome. Does anyone want to repeat 15% interest rates ? Hence I think Baron Turner’s very modest current benefits are just not worth the risks being run. He’s throwing good money after bad …..

    • Hi ExpatInBG

      The benefits of being consistently wrong have proved to be very high for Baron Turner! Sadly for the rest of us he has kept finding himself in positions of responsibility and I fear he will find another. But for him personally it has worked so I expect him to keep going until he is absolutely forced to admit defeat like he did over the Euro.

  6. ‘It is hard to overstate the intellectual bankruptcy at play here. ‘

    I really like that line.Sums it up.If QE was such a success why are real wages falling for the 7th year in a row?If QE was so great how come-elephant in the room time-we’ve not been able to sell the £375bn back to the market?

    I sometimes despair when I see what these muppets have done to our country.

    • Hi Dutch

      They are always lauded as “deep-thinkers” when the plans are hatched and as you suggest they head in the same direction. When the results disappoint they have moved on and no-one calls them back to account. Then the same sorry cycle begins again..

    • Actually, given current yields the BOE could sell the £375 billion into private hands or just cancel the bonds on maturity, but chooses to roll them for reasons beyond my comprehension

  7. Hi Shaun,

    I fear that I may have been a little harsh in my criticism of young master Osborne and his oh-so-useful history degree as this whole Economics thing is obviously more complex than I had previously thought.

    Indeed, no less a figure than José Viñals, a senior financial adviser to the IMF would appear to be similarly nonplussed by these matters –

    “I cannot tell you the probability of that happening because, among other things, the information gaps that exist about the nonbank or shadow banking sector are very large and it is very difficult to understand these things,” he said.

    Maybe we shouldn’t be messing with things that we don’t fully understand??

    http://blogs.wsj.com/economics/2014/11/10/todays-financial-market-risk-taking-looks-a-lot-like-2006/

    • Hi Jim M

      Thanks for the link which brought a wry smile. This bit is not exactly cheery is it?

      “Mr. Viñals warned that shocks from the eurozone, the Ukraine crisis or an unexpected rate hike in the U.S. could spark financial market paroxysms, fueling damaging selloffs in emerging markets and rich economies.”

      Apart from that things are fine!

      Congratulations on the performance of your team with Sam Alidiche in charge.. He may even have revived Stewart Downing for England which would return the Hammers to a past role.

  8. Great column, Shaun. It was good to see that you summarized your views as an FT comment to Adair Turner’s article, for the benefit of FT readers.
    Although he doesn’t mention nominal GDP (NGDP) targeting specifically in his op-ed, Lord Turner obviously has NGDP targeting at the back of his mind. This accounts for the strange passage you drew attention to where he notes that money-financed deficits would either increase real output or inflation. If you are targeting NGDP, then you are concerned about hitting an NGDP level or growth rate and don’t care so much whether inflation or real GDP growth does the heavy lifting.
    Lord Turner expressed his admiration for the NGDP targeting approach at least as far back as a 6 February 2013 speech:
    http://ineteconomics.org/sites/inet.civicactions.net/files/Turner%20Cass%20Lecture%202013.pdf
    where he said that “there is a good case for a temporary shift away from a pure inflation rate target: state contingent policy rules such as currently applied by the Federal Reserve, or a policy target which for a period of time takes account of nominal GDP growth rates or levels have attractions.”
    The idea of NGDP targeting has been around since at least the 1980s. Both the Bank of Canada and the Bank of England considered and rejected it before adopting their own inflation targeting regimes. However it was more recently publicized in a series of papers by the American monetary economist Michael Woodford, who favoured targeting a nominal GDP level rather than a nominal GDP growth rate.
    Mark Carney, being the dedicated follower of fashion that he is, was very taken with NGDP targeting as Governor of the Bank of Canada, at least from when he gave his February 2012 speech in New York City. Canadian journalists, who hung on his every word, were expecting that he might try to take the Bank of Canada’s monetary policy in a new direction, but they made a mountain out of a molehill. I notice that Mr Turner, in his February 2013 speech, mentions first Carney, then Woodford, as people who had considered NGDP targeting, as if Carney had inspired Woodford, and not vice versa.
    Shortly after he took over as Governor of the Bank of England, when he announced the August 2013 Inflation Report, Mark Carney decided that NGDP targeting was no longer the flavour of the month, and he went with what Lord Turner calls “state contingent policy rules” instead. This infatuation only lasted for six months, but when it started, it seems Governor Carney totally won over Lord Turner. Now that he is no longer working on Threadneedle Street, Lord Turner seems to be talking like an enthusiast of NGDP targeting once again.

    • Hi Andrew and thank you

      Nominal GDP targeting has had quite a few supporters in the UK too. The usual amount they aim at is 5% per annum and for a while it looked as though that was what the Bank of England was aiming at too. Although much of that was inflation (in early 2010 the implied deflator reached 4%). In the end that is the question are they aiming for growth or inflation or are they not as bothered as the rest of us as some inflation will do?

      Nice the Kinks reference by the way, as someone who was born at Waterloo I often think that I should be more of a Kinks fans for obvious reasons!

      I think we need to watch Baron Turner in future to see if he displays further chameleon like behaviour.

  9. What a superb piece of analysis today. Stunning.

    It is too late with train fares the headlines were grabbed. The grubby tidying up of their intentional deception will not get a fraction of the coverage. It is on a par with ‘a good day to bury bad news’. Maybe they are waiting for such a day to issue an apology. Bah!

  10. “But the Euro area needs it too and so it responds and the Euro plummets and we are back in the competitive devaluations which so marred the 1920s and we hoped to have the intelligence not to repeat. Another way of putting it is that they would be exporting deflationary pressure”.

    I’m not so sure as they paid the increased FX price in dollar terms on oil they bought this would provide a tremendous inflationary boost for them to overcome via “internal efficiencies”.

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