Economics Essay 30: Quantitative Easing

 Discuss whether a reversal of QE is likely to be economically beneficial.

Quantitative Easing (QE) is an unconventional monetary policy tool used by central banks to stimulate the economy when traditional monetary policy measures, such as lowering interest rates, are insufficient. It involves the central bank purchasing government bonds or other financial assets from commercial banks and injecting liquidity into the economy. The goal of QE is to lower borrowing costs, increase lending, and encourage spending to stimulate economic growth.

When evaluating the potential economic benefits of reversing QE, several factors need to be considered:

1. Economic Growth: Reversing QE has the potential to impact economic growth. As liquidity is withdrawn from the economy, it may lead to tighter financial conditions, higher borrowing costs, and reduced consumer and business spending. This could result in a slowdown in economic growth or even a contraction in some cases.

2. Unemployment: The impact of reversing QE on unemployment is complex and depends on the specific circumstances. Tightening liquidity may lead to reduced business investment and hiring, potentially leading to job losses. However, if reversing QE is undertaken to control inflationary pressures, it can help maintain price stability, which in turn can support long-term economic growth and employment stability.

3. Inflation: Reversing QE can be used as a tool to control inflationary pressures in the economy. If the central bank perceives that inflation is becoming a concern due to excessive money supply, reversing QE can help tighten monetary policy and prevent inflation from spiraling out of control. This can contribute to price stability and maintain the purchasing power of consumers.

4. Balance of Payments: Reversing QE may have implications for a country's balance of payments. As liquidity is withdrawn from the economy, it could result in a stronger domestic currency, which may impact export competitiveness. A stronger currency can make exports relatively more expensive and imports cheaper, potentially leading to a deterioration in the trade balance and a higher current account deficit.

5. Financial Markets: The reversal of QE can have significant impacts on financial markets. Selling off large amounts of assets acquired through QE may lead to market disruptions and increased volatility. Investors and market participants may need to adjust their investment strategies and asset allocations in response to the changing liquidity conditions, which could impact asset prices and overall market stability.

6. Confidence and Expectations: Reversing QE requires clear and effective communication from the central bank to manage market expectations. Changes in monetary policy can influence investor and consumer confidence. If the central bank successfully conveys a sense of stability and a well-managed transition, it can help maintain confidence in the economy and minimize disruptions.

It's important to note that the effects of reversing QE can vary depending on the specific economic conditions, the timing and pace of the reversal, and the effectiveness of the central bank's communication and policy implementation. Careful assessment and consideration of the potential impacts on growth, unemployment, inflation, balance of payments, and financial markets are necessary to ensure that the benefits outweigh any potential drawbacks.

While the reversal of QE may help address inflationary pressures and promote long-term economic stability, it also carries potential risks. The withdrawal of liquidity can tighten financial conditions, leading to slower economic growth and potential job losses. Additionally, the impact on financial markets and investor confidence should be closely monitored to mitigate any disruptions.

Furthermore, free market fundamentalists argue that the market should be left to correct itself without excessive government intervention, including unconventional monetary policies like QE. They believe that market forces should determine interest rates, asset prices, and economic growth without central bank intervention.

In conclusion, the reversal of QE should be carefully evaluated, taking into account its potential impacts on economic growth, unemployment, inflation, balance of payments, and financial markets. The timing, pace, and communication of the reversal are crucial to managing market expectations and minimizing disruptions. While QE can provide short-term stimulus, its long-term effects and potential risks should be carefully considered in the context of specific economic conditions.

Economics for Non Economists 2 – Quantitative Easing Explained

by Girish Menon

Pradhip, you have asked for an ‘Idiot’s guide on Quantitative Easing and how it affects the economy’. Let me try:

The Bank of England (BOE) has been practising Quantitative Easing (QE) since 2009. The amounts are:

Time	Amount in £ Billions
Nov. 2009	200
July 2012	375
Aug. 2016	435
Mar. 2020	645
June 2020	745

Ref – The Bank of England

What exactly did the BOE do when they said they were doing QE?

The BOE created additional digital money and used it to buy financial assets (especially government bonds) which were owned by the privately owned banks, pension funds and others.

How did they create this additional money?

Unlike you or me who would be arrested if we did this; the BOE has been conferred with monopoly powers to conjure up any amount of money from thin air by typing the necessary numbers into its bank accounts. It’s as simple as saying, ‘Let there be £745 billion and it appears in the bank’s accounts.

Why do they do QE?

Post the 2008 financial crisis there was a liquidity crisis (see below for explanation of liquidity crisis). The BOE by buying the government bonds from local banks transferred cash to them thus enabling them to start their lending activities in the economy.

In 2020 too they have done the same, but this time I suspect that even if the commercial banks are willing to lend there may not be enough borrowers and so this policy may not have the intended effect of stimulating economic growth.

How does QE affect the economy?

The dominant worldview is that debt drives the world. So QE ensures that lenders have enough money to lend to prospective borrowers. Borrowers borrow money to produce and sell goods at a profit; enabling them to repay their loans with interest while creating jobs in the economy.

The above borrower will use his loan to buy machinery, employ labour…. One man’s spending is another man’s income, so the money begins to circulate among citizens in an economy and a positive spiral will push economic growth and create employment.

However, all this theory hinges on the citizens’ confidence about the future. In the current Covid climate, with firms downsizing at will and people worried about their future, I doubt if there will be a critical mass of borrowers to re-start the stalled economic activity.

Pradhip, thus the BOE does indeed have a magic wand to create money out of thin air. You may ask why is it that in a free market I am not allowed to create my own money? Now that question will be considered seditious!

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What Is a Liquidity Crisis?

A liquidity crisis is a financial situation characterized by a lack of cash or easily-convertible-to-cash assets on hand across many businesses or financial institutions simultaneously. In a liquidity crisis, liquidity problems at individual institutions lead to an acute increase in demand and decrease in supply of liquidity, and the resulting lack of available liquidity can lead to widespread defaults and even bankruptcies. (Ref Investopedia)

---Also watch

Crime, terrorism and tax evasion: why banks are waging war on cash

Paul Mason in The Guardian

Governments would love to see the end of banknotes. But what would a cashless society mean for freedom?

 

Will contactless payment help usher out cash? Photograph: Bloomberg/Bloomberg via Getty Images



I can remember the moment I realised the era of cash could soon be over.

It was Australia Day on Bondi Beach in 2014. In a busy liquor store, a man wearing only swimming shorts, carrying only a mobile phone and a plastic card, was delaying other people’s transactions while he moved 50 Australian dollars into his current account on his phone so that he could buy beer. The 30-odd youngsters in the queue behind him barely murmured; they’d all been in the same predicament. I doubt there was a banknote or coin between them.

The possibility of a cashless society has come at us with a rush: contactless payment is so new that the little ping the machine makes can still feel magical. But in some shops, especially those that cater for the young, a customer reaching for a banknote already produces an automatic frown.

Among central bankers, that frown has become a scowl. There is a “war on cash” in the offing – but it has nothing to do with boosting our ease of payment or saving trees.

Consider the central banks’ anti-crisis measures so far. The first was to slash interest rates close to zero. Then, since you can’t slash them below zero, the banks turned to printing money to stimulate demand. But with global growth depressed, and a massive overhanging debt, quantitative easing (QE) is running out of steam.

Enter the era of negative interest rates: thanks to the effect of QE, tens of billions held in government bonds already yield interest rates that are effectively below zero. Now, central banks such as Japan and Sweden have begun to impose negative official interest rates.

The effect, for banks or long-term savers, is that by putting your money in a safe place – such as the central bank or a government bond – you automatically lose some of it.

Not surprisingly, these measures have led to the growing popularity of cash for people with any substantial savings. Bank of England research shows demand for cash has grown faster than GDP in many countries. So the central banks face a further challenge: how to impose negative interest rates on cash itself.

Technologically, you can’t. If people hold their savings as physical currency, it keeps its value – and in a period of deflation the spending power of hoarded cash increases, even as share prices and the value of bank deposits fall. Cash, in a situation like this, is king.

But the banks are ahead of us. Last September, the Bank of England’s chief economist, Andy Haldane, openly pondered ways of imposing negative interest rates on cash – ie shrinking its value automatically. You could invalidate random banknotes, using their serial numbers. There are £63bn worth of notes in circulation in the UK: if you wanted to lop 1% off that, you could simply cancel half of all fivers without warning. A second solution would be to establish an exchange rate between paper money and the digital money in our bank accounts. A fiver deposited at the bank might buy you a £4.95 credit in your account.

More radical still would be to outlaw cash. In Norway, two major banks no longer issue cash from branch offices. Last month, the biggest bank, DNB, publicly called for the government to outlaw cash.

Why would a central bank want to eliminate cash? For the same reason as you want to flatten interest rates to zero: to force people to spend or invest their money in the risky activities that revive growth, rather than hoarding it in the safest place.

Calls for the eradication of cash have been bolstered by evidence that high-value notes play a major role in crime, terrorism and tax evasion.

In a study for the Harvard Business School last week, former bank boss Peter Sands called for global elimination of the high-value note. Britain’s “monkey” – the £50 – is low-value compared with its foreign-currency equivalents, and constitutes a small proportion of the cash in circulation. By contrast, Japan’s 10,000-yen note (worth roughly £60) makes up a startling 92% of all cash in circulation; the Swiss 1,000-franc note (worth around £700) likewise. Sands wants an end to these notes plus the $100 bill, and the €500 note – known in underworld circles as the “Bin Laden”.

The advantages of a digital-only payment system to the user are clear: you can emerge from the surf in only your bathing shorts and proceed to buy beer, food, or even a small car, providing your balance is positive. The advantages to banks are also clear. Not only can all transactions be charged a fee, but bank runs are eliminated. There can be no repeat of the queues outside Northern Rock, nor of the Greek fiasco last summer, because there will be no ATMs, only a computer spreadsheet moving digital money around. The advantages to governments are also clear: all transactions can be taxed. Capital controls are implicit within the system.

But there are drawbacks, even for governments that would like to take absolute control of money transactions. First, resilience. If a cyber-attack or computer malfunction took down a digital-only payment system, there would be no cash reserves in households and businesses to fall back on. The second is more fundamental and concerns freedom. In most countries, the ability to take your cash out of the bank and to spend it anonymously is associated with many pleasurable activities – not all of which are illegal but which exist on the margins of society. How tens of thousands of club-goers would pay for their drugs each Saturday night is a non-trivial issue.

Nevertheless, the arrival of negative interest rates for banks, together with new rules allowing governments to bail-in – ie confiscate – deposits above a protected minimum, are certain to increase savers’ awareness of the value of cash, and will prompt calls in earnest for its abolition.

If it happens, it would be the ultimate demonstration of the power of finance over people. As for resistance? Go ahead and try. It may be the Queen’s head on a £50 note but the “promise to pay” is made above the signature of a Bank of England bureaucrat.

We’ve been conned by the rich predators of Davos

Aditya Chakrabortty in The Guardian



Davos: ‘This week, some of the richest people on Earth will gather high up a snowy mountain in the world’s biggest tax haven.’ Photograph: Ruben Sprich/Reuters


As metaphors go, this one takes some beating. This week, some of the richest people on Earth will gather high up a snowy mountain in the world’s biggest tax haven. Most will have paid big money to attend the three-day meeting in Davos: the most exclusive memberships cost somewhere in the region of £100,000 each. From there, they will relay thoughts on global risks and opportunities to the ski-jacketed press corps. They will talk about gender inequality and technological innovation. The message will go out: however turbulent the global economy, it is being capably stewarded.

These are our economic elites as they want the rest of us stuck on the flatlands below to see them: big-thinking, well-intentioned, hard-working – and thoroughly meritocratic. This is also how they justify the mammoth rewards they enjoy: we sweat for it; we’re worth it. The follow-up is usually only implied, but it is the one that underpins the entire system: put in enough hours and this could be you. 

Set against that promise the finding from Oxfam that 62 billionaires have more wealth than half the world’s population – 3.5 billion people – share between them.

Ponder those numbers for a moment because they make up possibly the most grotesque ratio in the world economy today. Go through the 62 richest people and plenty of names jump out to show that any notions of meritocracy are a big fat lie. None of those 3.5 billion men, women, boys or girls will be born into a fortune such as that enjoyed by the Waltons of Walmart fame, in which just six people own $149bn. Nor will they ever get to be a Saudi royal such as Prince Alwaleed bin Talal, worth $26bn.

I could pull out plenty of other names giving the lie to the complacent notion that this is the era of the self-made plutocrat. The top of the money tree is still festooned with inheritances. Just look at the widow of chocolatier Michele Ferrero, Maria Franca Fissolo, who at 98 is the fifth wealthiest woman on the planet; the offspring of the Lidl and Aldi dynasties and the three Mars siblings who are worth $80bn. One doesn’t need to be a Bolshevik to see that many of the world’s super-rich are recipients of dumb luck, born into the right family at the right time.

But that grotesque index tells us that something else has gone badly wrong. At the start of this decade, 388 billionaires owned as much as half the world. By 2011, that number had plunged to 117. Last year, it had fallen to 80. In other words, in the five years since the world recession, the very richest have grown inexorably wealthier. And that’s not because the global economy is booming, as every worker on a pay freeze and every family seeing their benefits cut knows. It’s because we are living in a period of trickle-up economics, in which the middle- and working-classes have handed over money to those right at the very top.

The 80s were the decade of trickle-down economics, with Thatcher and Reagan cutting taxes for the richest and promising that everyone else – from Easington to Port Talbot, Pittsburgh to Milwaukee – would soon feel the benefits. By contrast the past half-decade has been about trickle-up economics, in which the world’s most powerful central bankers have launched policies that have been explicitly about boosting the fortunes of the richest. The disbursement of thousands of billions in quantitative easing both in the US and the UK from 2009 onwards was meant to raise asset prices – and assets are by definition in the hands of the wealthy.

No wonder the Bank of England admitted that 40% of the gains from its £375bn QE programme went to the top 5% of British households. No wonder Stanley Druckenmiller, the billionaire hedge fund manager, labelled QE: “The biggest redistribution of wealth from the middle-class and the poor to the rich ever.”

The figures prove him right. According to the Berkeley economist Emmanuel Saez, between 2009 and 2012 the top 1% of American households took 91 cents out of each extra dollar that the country earned. The other 99% of Americans had to share the remaining 9 cents between them.

This didn’t happen in a fit of absent-mindedness. Rather, decades of burgeoning inequality – of the Davos set scooping more and more of the gains from growth – have enabled the super-rich to pretend that their narrow sectional interests are what’s good for the world economy. Policies as manifestly unfair as QE would never have happened in a fairer economy – the UK and US would have relied instead on public investment and government programmes.

Massive inequality has allowed the 1% to buy political influence as never before in postwar history. Indeed, the super-rich now practically write their own tax laws – such as the way senior executives of Britain’s biggest businesses were invited by George Osborne to advise on overhauling corporation taxes. They get to ensure that tax havens are treated with due leniency, all the better to hide their trillions in them. They buy their own politicians, as with the shadow-bankers who funded the Conservative election campaign or the billionaire Koch brothers using their fortune to tip the US presidential contest. Indeed, the more ambitious decide to become politicians. Think not just of Donald Trump but former bond trader turned media mogul turned mayor of New York Michael Bloomberg.

The great mistake made by the mainstream left and right, even by NGOs such as Oxfam, is in imagining that the super-rich, now enjoying such massive riches, are somehow playing by the same rules as the rest of us. That they are “wealth creators” providing jobs and investment for the rest of us, or that they might give up their tax havens. If that ever were the case, it isn’t now. A tiny minority has gained from massive tax cuts and legislative leniency about where they shove their money. They have siphoned off gains in salaries and profits wherever possible and enjoyed hundreds of billions flowing into their asset markets. Meanwhile, the rest of us who provide the feedstock for their revenues see our welfare states hollowed out, our wages frozen and our employers failing to invest. But none of that matters very much in Davos.

You can print money, so long as it’s not for the people

Zoe Williams in The Guardian

In its broadest sense, the phrase “there’s no magic money tree” is just a variation on “money doesn’t grow on trees”, a thing you say to children to indicate that wealth comes not from the beneficence of a magical universe, but from hard graft in a corporeal reality. The pedantic child might point to the discrepant amounts of work required to yield a given amount of money, and say that its value is a social construction.

Over time, that loose, rather weak-minded meaning has ceded to a specific economic critique; Jeremy Corbyn – along with anyone who challenges the prevailing fiscal narrative – is dangerous and wrong, since he wants to print money. Money cannot be created from nowhere, because there’s no magic money tree. End of.

The flaw in that argument is that all money is created from nowhere. In normal circumstances, it is created from nowhere as credit, by private banks, and lent to us, usually (85% of the time) in the form of a mortgage on an existing residential property. Decades of credit extension have perverted the housing market to turn a mortgage into a lifetime’s bonded servitude. The economists Jordá, Schularick and Taylor argued convincingly last year that the causes of this economic crisis, the next and the one before are all, fundamentally, the extension of credit and its impact on house prices. So the magic money tree isn’t gushing cash in a socially responsible fashion (if it were used responsibly, it wouldn’t be magic) but the idea that we have a centrally planned, carefully stewarded monetary policy, with finite creation and demonstrable long-term aims, which some loonie leftie wants to come along and unravel, is simply wrong.

In abnormal circumstances, such as the ones we’ve lived through since the financial crisis, central banks are also magic money trees. In the bizarre construction of current economic orthodoxy, you’re not allowed to say so, even though the Bank of England has created £375bn in quantitative easing (QE); theFederal Reserve bought $1.25tn worth of mortgage-backed securities in its first round of QE; the European Central Bank had as a core principle that it couldn’t create money until, suddenly, in awesome amounts, it could; the Bank of Korea has a stimulus package, as does the People’s Bank of China; and Japan started it. Central banks typically justify money creation on the basis that it’s temporary, it’s unfortunate, it’s driven by the crisis and it will ultimately get back to normal.

None of that alters the fact that no bank had that money in savings. I recently said out loud, “we do have a magic money tree, it’s called the Bank of England” in a Newsnight debate with a former adviser to Blair, John McTernan. He made a face like a politician accidentally talking to a member of the public but what the camera didn’t catch was Evan Davis, who stuck his tongue out, like a cat taking a pill. It was days ago, and people are still tweeting me pictures of the Zimbabwean dollar and the Weimar Republic, saying “is this what you want? IS IT?”

Quantitative easing is bizarrely unapproachable, even though it’s happening right across the world and its unwinding will dominate the economic picture for years to come; one is allowed to reference QE, so long as one maintains at all times a technocratic tone, to indicate that one understands and approves of it as nothing more than a lever to create stability. It was the best idea ever, until you suggest something similar could be done for a social purpose, and then it’s the most perilous idea ever. To interrogate why the benefit must always go to the existing asset-holding class, why human ingenuity can’t devise anything more productive and equitable, is to reveal the shaming depth of your incomprehension. It’s not that you don’t understand money; it’s that you don’t understand the exigencies of the debate, which are that you sign up to a number of false principles before you start.

It turned out that the “no money tree” brigade meant: “If you create money infinitely, that will cause inflation” That is a really curious argument against Corbyn’s people’s QE, like going up to someone eating a banana and saying: “If you eat limitless bananas, you will give yourself potassium poisoning.” There’s a secondary argument about the independence of central banks from governments, which is actually rather an elegant example of our dishevelled politics: if the government issues no directive to the Bank of England, and all the gains of QE go to the wealthiest, that’s “independent”. If the government had said, invest this in, say, the green economy, that would have been independence lost. It has become normal to see upwards redistribution as a law of the physical universe, and anything else as the interference of a heavy-handed state.

None of this is to say that people’s QE is straightforward and unproblematic; Corbyn is talking about spending on infrastructure (housing, broadband), whereas that phrase as it was coined described helicopter money, or overt money financing, literally getting money into the economy by randomly giving it to people. They’re two discrete propositions – overt money financing and green and social investment – and rolling them into one doesn’t do much to promote understanding on this terrain.

However, the real barrier to debate is, as with so much in the realm of debt and austerity, that it’s conducted in bad faith, with infantilising aphorisms, aimed not at deepening understanding but at shooing away public interest with unavoidable economic realities. As a tactic, this has reached the end of its plausibility.

9 reasons Keynesians aren't winning the argument – and what to do about it

If the 'obvious' failure of austerity is to make way for Keynesian policies, its advocates must confront their critics head on

• 
• • Phillip Inman
  • guardian.co.uk, Friday 7 June 2013 12.20 BST

British economist John Maynard Keynes, at the UN International Monetary Conference, circa 1946. Photograph: Hulton Archive

Keynes is out of favour. In his place are the austerians who mistakenly liken the finances of nation states to domestic budgets. Unfortunately the Keynesians have fallen into the trap of thinking that the case they make is incontrovertible. It would hardly matter, except that their failure to address legitimate concerns – not those of rightwing commentators or the super-rich, but of voters on middle and low incomes – has blunted their sound argument for a stimulus package and allowed austerians to make most of the running. The "obvious" failure of austerity, recent improved figures for the economy notwithstanding, has done little to derail its continued application by the UK, Brussels and to a lesser extent, the US Congress.

Why? Here are nine assumptions that trip the Keynesians up.

1. They think policymakers refuse to change course because they don't understand

Liberal academics believe in the power of argument. If only the other person were intelligent enough to understand, they would realise that Keynesian economics is the only way to view the world. Paul Krugman, the Princeton economist who heads the list of left-leaning thinkers challenging austerity, believes officials in Brussels have opted for austerity simply because they misunderstood its negative effect on growth. Yet officials and politicians in Brussels are well aware of Keynesian theory and the history of the 1930s. The German finance minister, Wolfgang Schäuble, is many things, but being a bit thick is not one of them.

2. They think that everyone agrees austerity is wrong headed

Dean Baker is a left-leaning US economist and regular contributor to the Guardian. He said in a recent article: "We allowed policy to be waylaid by a misplaced obsession with deficits. Now that everyone in the debate recognises this mistake, it is time to focus on getting the country working again." Everyone agrees? In fact, most polls show voters approve of austerity. They want governments to cut annual budget overspends. The governor of the Bank of England believes in austerity. Three eminent mainstream British economists told MPs on the all-party Treasury select committee last month that the government had struck the right balance between cuts and spending. Austerity is bang on the mark, they said.

3. They think Brussels and the IMF have changed their tune

The EU commission boss, José Manuel Barroso, made comments in April that were leapt on by everyone on the left. He said austerity had reached its limits. Liberals said to themselves: finally he understands. But he only meant that in some countries voters were unwilling to accept more salary and welfare spending cuts, not that he agreed with them. He still thinks austerity is the right medicine. Later, a Brussels official told the Reuters news agency that Barroso had "miscommunicated" and there was no alternative to austerity, even if the word was avoided.

4. They make out that a spending boost with borrowed money is risk-free

The risks need to be explained. It is quite possible for governments to spend and find that growth remains elusive. A two-decade long spree by the Japanese has taken borrowing to more than 240% of GDP without boosting growth. To some extent it depends what the money is spent on. For instance, a high-speed rail link built by foreign companies (HS2, anyone?) will create less benefit than an immediate maintenance budget boost for existing lines.

5. They think central banks can carry on printing money with no risk

Quantitative easing involves central banks using their own money to buy government bonds (effectively lending the government money). They mostly buy the bonds from banks, which then use the cash to lend to other institutions and possibly, at some point along the chain, to small businesses. No risk? Not really. First, the banks can hoard the money to satisfy regulators who believe they are unsafe. Second, they can lend it, but factor in huge profit margins and pay themselves massive bonuses as a reward. And the money can be used to invest in property, for an easy profit, bypassing manufacturers.

6. They think quantitative easing can be switched off and normality will return

Just three central banks – the Bank of England, the Fed and the Bank of Japan – have created more than £3tn of debt and the figure is rising all the time. The Federal Reserve is creating around £50bn a month and the Japanese have joined in. Can all this money be sold back to the private markets without spooking investors, most of which have bought bonds or shares on the basis of never-ending central bank support? Probably the bonds will never be sold, but held until they mature, or they could be slowly drip-fed back into the international money markets, but the risks should be discussed.

7. They argue that no one should fear inflation

UK inflation fell to 2.4% in April, but remains well above wage rises, which trail at 0.8%. That's a big cut in living standards. Any politician who says inflation at 5% is not a worry will be blown away on election night. But that is what plenty of Keynesian economists, including Krugman, advocate. They have sound reasons for being relaxed about inflation. Most countries are worried about falling prices. And a stimulus package that raises demand is worth the risk of a short-term rise in inflation, even in the UK. Yet fearful middle-class savers and workers suffering pay freezes have legitimate fears.

8. They argue that stock market and house price rises are benign

Krugman is chief propagandist for the "spend now, deal with structural problems later" brigade, which means he simply won't address the issue. The London stock market recently neared its all time high despite a backdrop of static growth across Europe. UK house prices in property hotspots are above their 2007 peak. Is there a danger that some economies, the UK included, are simply repeating the mistakes of the early 2000s and encouraging debt-fuelled spending on unproductive assets like property to make a quick buck? Nouriel Roubini, known as Dr Doom for his pessimistic outlook for western economies long before the 2007 crash, oscillates between the Krugman view and warning of asset bubbles that could become the next economic atomic bombs. There needs to be a closer inspection of asset bubbles.

9. They believe politicians can be trusted to spend stimulus funds in the best way

Liberal economists assume voters trust politicians to spend funds sensibly. Multibillion pound investments in rail, nuclear energy and housing are needed but only a minority of voters trust the public sector to make a good job of it. For the time being, there needs to be an acknowledgment that civil servants and politicians of all political colours failed to spot the crash and are therefore not as smart as people once thought.

Conclusion

Keynesian economics is a valid response to the UK's protracted economic depression. There are always risks, but there were always risks with austerity and it has pushed up borrowing by as much if not more than a Keynesian stimulus would have done. Far from re-establishing confidence and generating growth, the UK has grown by 1.1% in three years. And it has a worsening trade balance and higher debt levels. Unemployment failed to rise by as much as expected, but it could be even lower by now. Economic green shoots are appearing, but can vanish with an early frost, which is possible with banks still strapped for cash and reluctant to lend.

It's important, then, that Keynesians win the argument. But if they want to do so, they've got to face their critics head on, and deal with legitimate concerns about the approach.

Quantitative Easing will never be reversed

Helicopter QE will never be reversed

Readers of the Daily Telegraph were right all along. Quantitative easing will never be reversed. It is not liquidity management as claimed so vehemently at the outset. It really is the same as printing money.

It would be better for central banks to put the money into railways, bridges, clean energy, smart grids, or whatever does most to regenerate the economy Photo: Alamy

By Ambrose Evans-Pritchard

7:49PM BST 03 Apr 2013

Columbia Professor Michael Woodford, the world's most closely followed monetary theorist, says it is time to come clean and state openly that bond purchases are forever, and the sooner people understand this the better.

"All this talk of exit strategies is deeply negative," he told a London Business School seminar on the merits of Helicopter money, or "overt monetary financing".

He said the Bank of Japan made the mistake of reversing all its money creation from 2001 to 2006 once it thought the economy was safely out of the woods. But Japan crashed back into deeper deflation as soon the Lehman crisis hit.

"If we are going to scare the horses, let's scare them properly. Let's go further and eliminate government debt on the bloated balance sheet of central banks," he said. This could done with a flick of the fingers. The debt would vanish.

Lord Turner, head of the now defunct Financial Services Authority, made the point more delicately. "We must tell people that if necessary, QE will turn out to be permanent." 

The write-off should cover "previous fiscal deficits", the stock of public debt. It should be "post-facto monetary finance".

The policy is elastic, for Lord Turner went on to argue that central banks in the US, Japan and Europe should stand ready to finance current spending as well, if push comes to shove. At least the money would go straight into the veins of the economy, rather than leaking out into asset bubbles.

Today's QE relies on pushing down borrowing costs. It is "creditism". That is a very blunt tool in a deleveraging bust when nobody wants to borrow.

Lord Turner says the current policy has become dangerous, yielding ever less returns, with ever worsening side-effects. It would be better for central banks to put the money into railways, bridges, clean energy, smart grids, or whatever does most to regenerate the economy.

The policy can be "wrapped" in such a way as to preserve central bank independence. The Fed or the Bank of England would decide when enough is enough, or what the proper pace should be, just as they calibrate every tool. That at least is the argument. I merely report it.

Lord Turner knows this breaks the ultimate taboo, and that taboos evolve for sound anthropological reasons, but he invokes the doctrine of the lesser evil. "The danger in this environment is that if we deny ourselves this option, people will find other ways of dealing with deflation, and that would be worse."

A breakdown of the global trading system might be one, armed conquest or Fascism may be others - or all together, as in the 1930s.

There were two extreme episodes of money printing in the inter-war years. The Reichsbank's financing of Weimar deficits from 1922 to 1924 - like lesser variants in France, Belgium and Poland - is well known. The result was hyperinflation. Clever people made hay. The slow-witted - or the patriotic - lost their savings. It was a poisonous dichotomy.

Less known is the spectacular success of Takahashi Korekiyo in Japan in the very different circumstances of the early 1930s. He fired a double-barreled blast of monetary and fiscal stimulus together, helped greatly by a 40pc fall in the yen.

The Bank of Japan was ordered to fund the public works programme of the government. Within two years, Japan was booming again, the first major country to break free of the Great Depression. Within three years, surging tax revenues allowed Mr Korekiyo to balance the budget. It was magic.

This is more or less the essence of "Abenomics", the three-pronged attack on deflation by Japan's new premier and Great Power revivalist Shinzo Abe.

Stephen Jen from SLJ Macro Partners says Western analysts have been strangely slow to understand the breathtaking scale of what is under way. The Bank of Japan is already committed to bond purchases of $140bn a month in 2014. This is almost double the US Federal Reserve's net purchases (around $75bn a month), and five times as much as a share of GDP.

Prof Woodford and Lord Turner both think the Fed has already begun to monetise America's deficits, though Ben Bernanke has been studiously vague whenever pressed in testimony on Capitol Hill. These are early days. It is tentative and deniable.

The great hope is that this weird episode will soon be behind us, and that such shock therapy will never be needed in the end. If stock markets tell the truth, the world economy is already healing itself. Another full cycle of global growth is safely under way.

But stock markets are a bad barometer at the onset of every crisis, not least the blistering rally of late 1929, a full year after the world economy had tipped into commodity deflation.

The Reuters CRB commodity index has been falling steadily for the past six months. Copper futures have dropped 10pc since mid-February. This is nothing like the early months of the great global boom a decade ago.

The bull case rests on US recovery, a seductive story as the housing market comes back to life and the shale boom revives the US chemical industry.

Yet the US money supply figures are no longer flashing buy signals. The M2 money stock has contracted over the past three months, and M2 velocity has dropped to the lowest ever recorded at 1.54.

The country must navigate a fiscal squeeze worth 2.5pc of GDP over the rest of the year, arguably the biggest fiscal shock in half a century. Five key indicators have been soft over the past week, with the ADP jobs index coming in much weaker than expected on Wednesday. Growth is below the Fed's "stall speed" indicator, an annualized two-quarter rate of 2pc.

The buoyancy over the past quarter has been flattered by a collapse in the US savings rate to pre-Lehman depths of 2.6pc, and while falling saving is what the world needs, it is not what America needs. Thrifty Asians are the people who must spend if we are to right the collosal imbalances in the global system.

The world savings rate is still climbing to fresh records above 25pc. For all the talk of change in China, Beijing is still pursuing a mercantilist policy. It is still flooding the world with excess goods. It is still shoveling cheap credit into its shipbuilding industry, adding to the glut. It is still keeping its solar industry on life-support.

China remains chronically reliant on global markets. Given that its trade surplus is rising again, it is questionable whether China is adding any net demand to the world.

The eurozone, Britain and an ever widening circle of countries in Eastern Europe and the Balkans are mired in recession. Growth is expected to be just 2pc in Russia and 3pc in Brazil this year.

My fear - hopefully wrong - is that recovery will falter over the second half, leaving the developed world trapped in a quasi-slump, a sort of grey zone of zero growth that goes on and on, with debt trajectories ratcheting up.

The Dallas Fed's PCE index of core inflation has already dropped to 1.1pc over the past six months. The eurozone's core gauge has fallen to 1.5pc. A dozen EMU countries already have one foot in deflation with flat or contracting nominal GDP. Another shock will tip them over the edge into a deflationary slide.

If Lord Turner's helicopters are ever needed, we can be sure that the Anglo-Saxons and the Japanese will steal a march, while Europe will be the last to move. The European Central Bank will resist monetary financing of deficits until the bitter end, knowing that such action risks destroying German political consent for the euro project.

By holding the line on orthodoxy, the ECB will guarantee that Euroland continues to suffer the deepest depression. Once the dirty game begins, you stand aside at your peril.

A great many readers in Britain and the US will be horrified that this helicopter debate is taking place at all, as if the QE virus is mutating into ever more deadly strains.

Bondholders across the world may suspect that Britain, the US and other deadbeat states are engineering a stealth default on sovereign debts, and they may be right in a sense. But they are warned. This is the next shoe to drop in the temples of central banking.

Big business has corrupted economics

You know the country is in a financial mess when even establishment figures such as Rachel Lomax are calling for revolutionary thinking

• 
• • Aditya Chakrabortty
  • The Guardian, Monday 26 November 2012 20.00 GMT

Rachel Lomax: 'Where is the revolutionary thinking?' Photograph: David Sillitoe for the Guardian

Rachel Lomax is practically the definition of establishment: Cheltenham Ladies' College followed by Cambridge and the LSE; principal private secretary to then-chancellor Nigel Lawson; deputy governor of the Bank of England for five years until 2008. Which makes what she said on Friday evening all the more startling.

This being a debate on the future of capitalism in the People's Republic of Bristol, the audience were satisfyingly radical – but Lomax was just as bluntly and disarmingly political. The former Treasury mandarin made no bones about admitting that she had been part of a project of "dismantling a version of capitalism" and replacing it with "Anglo-American neo-liberalism". You'd struggle to get scholars of Thatcherism to speak with such straightforwardness, but here it was coming from one of the era's key backroom players.

And now this co-architect of Britain's economic model as good as admitted that the system she had helped create was broken. But Lomax had one question: "Where is the revolutionary thinking?"

You surely couldn't ask for a better measure of the economic mess we're in, that even members of the establishment are now calling for revolution.

Striking as it is, such despair isn't exceptional. Indeed, it now appears endemic among the policy-making elite. Whether you look at Westminster or Threadneedle Street, Britain's economic officials reek of policy fatigue – of having riffled through all the pages in their textbooks without getting a good answer.

Lomax's former colleagues at the Bank of England have chucked £375bn at the economy as part of a quantitative-easing programme – to no great avail. Five years after the collapse of Northern Rock, Mervyn King is warning that the slump may last another half a decade. And as will become clear when George Osborne delivers next week's pre-budget report, the chancellor no longer bothers to pretend that his cuts are working, but simply (and correctly) maintains that things would be about as bad under Labour's existing plans.

For the rest of us, that means all those gloomy warnings about a Japan-style lost decade in wages and economic growth look like coming true. Except that in Britain, with its vast inequality and lack of social cohesion, the effects of such a long and stubborn stagnation are likely to be far worse than those borne by the Japanese. If ever there was a time for new ideas, this is it – yet there's barely even a serious economic debate.

But the giant hole spotted by Lomax is one she and her colleagues have helped cause, by practising a narrow, corrupted form of economics.

In their new book, Economists and the Powerful, Norbert Häring and Niall Douglas trace how the most powerful of all the social sciences became a doctrine for helping the rich – with the aid of huge sums from business. You may be familiar with a version of this critique, thanks to the film Inside Job, which described how some of the best-known economists practising today are in the pay of Wall Street. But the history unearthed by Häring and Douglas is far more disturbing – because they argue that vested interests have slanted some of economics' most fundamental ideas.

Take the Rand corporation, an American cold-war institution that the book describes as closely linked to the Ford Foundation, which in turn was closely linked to the CIA. "It is hard to overestimate Rand's impact on the modern economic mainstream, let alone modern society," write the authors, who tot up at least 32 Nobel laureates with links with the organisation, including some of the biggest names in economics, such as Kenneth Arrow and Mancur Olson. Yet the economics it promoted assumed a society that was highly individualistic and rational. In other words, nothing like society as most of us know it, with its organisations and institutions and cultures. But the Rand researchers got round that problem by producing heavily theoretical and maths-based work, and ignoring empirical reality. From there it was a short step to the neoliberal politics everyone knows today: the kind that argues there is no such thing as society.

By focusing on the economics of economics, the authors describe an evolution of the discipline that barely anyone talks about. It is a kind of corruptonomics: "An effort that was generously funded by businessmen and the military in the name of cementing the power and legitimacy of their selves and their beliefs."

What makes this argument so striking is that Häring started off as a "true believer" in economics. He did his PhD under one of the most eminent academics in Germany, before waltzing off to a highly paid job with Commerzbank. It took him years of delving into the archives to arrive, reluctantly at first, at the conclusion that the subject he had spent years studying and practising was rotten. And while the influence of money on the discipline is largely a US phenomenon, the lopsided subject it produced is now taught at all the leading universities and practised at the major institutions.

The IMF and the World Bank employ economists from all over the world, but it is striking how many of them come from so few universities.

This then is at least part of the answer to Lomax's question. Mainstream economics now preaches a dogma that is particularly agreeable to the elite and has chased most dissenters out of its faculties. Meanwhile the other social sciences lack the confidence or the resources to take on economics. Where's the revolutionary thinking? I suspect Lomax, and others, will be asking that question for a long time.