Quantitative easing: a case of being in the right place at the right time?
6 August 2009
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6 August 2009
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The Bank of England’s decision to pump an additional £50 billion into the economy, over and above the £125 billion earlier this year, has been accompanied by the sound of Keynesians cheering that quantitative easing (QE) has worked.
Robert Peston argues that QE should lead to “lending increases, spending increases, price rises and investors’ appetite for risk returning”. And the BBC duly notes that “there are very tentative signs of a recovery. House prices are increasing… factories are producing more, retail sales have risen slightly and lending is on the increase…”
The problem with this is that it is based on correlation. There is no proven link between the Bank’s policies and the apparent upturn in the economy. Nor should there be. BoE Deputy Governor Charlie Bean has noted that – like interest rates – it takes time for QE to have a discernable effect.
But even if this were not so, it is difficult to tell whether QE is causing the upturn, is merely happening alongside the upturn, or whether it is in fact laying the ground for the next recession (as classical economics would suggest).
Rather, quantitative easing is benefiting from the inherent advantage enjoyed by all interventionists: as any crisis is followed by a reversion to trend (”business as usual”), so any recovery can be attributed to actions taken in response to the crisis, whether they had an effect or not.
Ludwig von Mises argued that economics could not be empirical: one could not treat it as an experimental and evidence-based science (like physics) but should instead consider it a logical science (like mathematics). In something as complicated as an economy, where tens of millions of actors are making countless decisions every day, one cannot have all the knowledge required to draw causal links, nor can one conduct experiments.
Yet the enthusiasm with which Quantitative Easing is being cheered is based largely upon the observation that signs of recovery have followed easing. Recovery may just as well have followed no easing. Recovery may have been quicker, or at least more sustainable, without it. We cannot know. However, what we do know is that reckless expansion of the money supply causes inflation and structural imbalances in the economy and so lays the seeds of the next recession.
The Bank of England, and the rest of us, should take note.
Robert Peston argues that QE should lead to “lending increases, spending increases, price rises and investors’ appetite for risk returning”. And the BBC duly notes that “there are very tentative signs of a recovery. House prices are increasing… factories are producing more, retail sales have risen slightly and lending is on the increase…”
The problem with this is that it is based on correlation. There is no proven link between the Bank’s policies and the apparent upturn in the economy. Nor should there be. BoE Deputy Governor Charlie Bean has noted that – like interest rates – it takes time for QE to have a discernable effect.
But even if this were not so, it is difficult to tell whether QE is causing the upturn, is merely happening alongside the upturn, or whether it is in fact laying the ground for the next recession (as classical economics would suggest).
Rather, quantitative easing is benefiting from the inherent advantage enjoyed by all interventionists: as any crisis is followed by a reversion to trend (”business as usual”), so any recovery can be attributed to actions taken in response to the crisis, whether they had an effect or not.
Ludwig von Mises argued that economics could not be empirical: one could not treat it as an experimental and evidence-based science (like physics) but should instead consider it a logical science (like mathematics). In something as complicated as an economy, where tens of millions of actors are making countless decisions every day, one cannot have all the knowledge required to draw causal links, nor can one conduct experiments.
Yet the enthusiasm with which Quantitative Easing is being cheered is based largely upon the observation that signs of recovery have followed easing. Recovery may just as well have followed no easing. Recovery may have been quicker, or at least more sustainable, without it. We cannot know. However, what we do know is that reckless expansion of the money supply causes inflation and structural imbalances in the economy and so lays the seeds of the next recession.
The Bank of England, and the rest of us, should take note.
11 thoughts on “Quantitative easing: a case of being in the right place at the right time?”
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Post hoc ergo propter hoc. If only they still taught Greek in schools!
Politicians allow themselves to be put under huge short-term pressure. I wonder if all this ‘transparency’ is really such a good idea.
Milton Friedman used to say the monetary hosepipe was two years long (before turning on the tap might lead to inflation), which (being beyond the next election) most politicians seem to regard as the long-term future.
Whenever I’m asked whether the pound sterling should join the euro (a shorthand reference to the UK joining Stage III of Economic and Monetary Union) I like to reply: let’s see how the euro’s first hundred years goes before we decide!
Post hoc ergo propter hoc. If only they still taught Greek in schools!
Politicians allow themselves to be put under huge short-term pressure. I wonder if all this ‘transparency’ is really such a good idea.
Milton Friedman used to say the monetary hosepipe was two years long (before turning on the tap might lead to inflation), which (being beyond the next election) most politicians seem to regard as the long-term future.
Whenever I’m asked whether the pound sterling should join the euro (a shorthand reference to the UK joining Stage III of Economic and Monetary Union) I like to reply: let’s see how the euro’s first hundred years goes before we decide!
There are good reasons to be concerned about QE, particularly in the context of extremely high levels of government borrowing. Nevertheless, it’s important to recognise that the MPC is in a difficult position. It must work within the policy framework set by the government and the options are limited when interest rates are close to zero. Whether the policy framework itself is effective and/or desirable is another issue.
There are good reasons to be concerned about QE, particularly in the context of extremely high levels of government borrowing. Nevertheless, it’s important to recognise that the MPC is in a difficult position. It must work within the policy framework set by the government and the options are limited when interest rates are close to zero. Whether the policy framework itself is effective and/or desirable is another issue.
erm… post hoc propter hoc is yer genuine Latin
erm… post hoc propter hoc is yer genuine Latin
That was meant to be a joke!
That was meant to be a joke!
I’m really glad to hear the IEA expressing scepticism about QE – though does it agree with what Tim Congdon thinks?
The IMF have written a good paper about this:http://www.imf.org/external/pubs/ft/wp/2009/wp09163.pdf
For me, the really telling point is about whether QE can transmit effectively when bank solvency is the issue. I am not convinced that a lack of money, as opposed to a lack of demand and solvent institutions to lend it, is still the issue.
I’m really glad to hear the IEA expressing scepticism about QE – though does it agree with what Tim Congdon thinks?
The IMF have written a good paper about this:http://www.imf.org/external/pubs/ft/wp/2009/wp09163.pdf
For me, the really telling point is about whether QE can transmit effectively when bank solvency is the issue. I am not convinced that a lack of money, as opposed to a lack of demand and solvent institutions to lend it, is still the issue.
@Giles: “Does it agree with what Tim Congdon thinks?”
I can’t speak for the IEA, but my guess is that their (standard) response would be that “The views expressed [by Tim Congdon] are, as in all IEA publications, those of the author and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council members or senior staff.”
Just a hunch!