So the day I opine about QE in front of 100,000 experts in the FT – and start sending out draft copies for comment amongst a few friends – an MPC member delivers a speech on the same subject. In my nightmares, it starts with the words “Contrary to what some idiot wrote in the Financial Times today …”
In fact David Miles’ speech was as informative and insightful as the one he delivered in September, robustly arguing for how QE could work without boosting money, amongst many other things. It starts with an entertaining and entirely to the point anecdote about currency in 1695. He swipes at critics thusly:
There are very few who would dismiss the downside risks, but more people do believe that monetary policy has become ineffective. I do not think the evidence, which I shall review, supports this. Some suggest the current stance of policy is already dangerously inflationary – a position that should be taken seriously but which I also think is not justified. A third group, whose position I do not think should be taken so seriously, believe that expanding QE is very dangerous but also take the view that QE has little effect on the economy, a uniquely pessimistic view that I find hard to understand.
I am not in that third group. But I do think it is possible for QE to have some effects that are politically difficult, and bring an early end to the policy before it becomes effective. Boosting asset prices without that flowing much into the real economy may be one.
The speech is well worth reading through. It continually re-emphasises that the counterfactual is what counts. I stuck a whole section about this in my report called “Armageddon averted…” I disagree with Prof Miles that credit easing is not necessary because corporate bonds have had a good time: this is too small a part of our financial system. But this from Dan Pimlott about the bad investment figures taught me, a failure of credit is not everything:
While part of the explanation may be that companies are struggling to access credit, the Treasury points out that only 20 per cent of investment is debt financed. Most investment is undertaken by the largest companies, which are less likely to have been hit by credit restrictions.
Ultimately, if we don’t get demand fired up, extra credit, money or whatever won’t do it. This is why I think a NGDP growth target makes so much sense.
PS I was very influenced by David Miles’ presentation to the IFS Green Budget last year. I must admit it now looks optimistic; inflation exceeded, and growth failed to reach, the levels hoped for. Tough year.