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Dialogue: Quantitative Easing

The controversial strategy of increasing the money supply by ‘quantitative easing’ (QE) is being applied both here and abroad in a bid to stimulate stagnant economies. But aside from the practical question of whether QE works, Steve Baker MP and Austin Mitchell MP disagree about its moral and social consequences

 

Steve Baker < @parliament.uk                                                 
Sent: Fri 09/03/2012 14:52                                                                                                                                                    

Dear Austin

I have always wondered why anyone on the left would support quantitative easing (QE), which is an obvious wealth transfer from the poor to the rich, and one bound to store up problems for the future. Public debate focuses on aggregates like the total money supply but new money always goes to someone first, giving them a purchasing power advantage. QE is bound to benefit those who receive new money from the Bank of England.

This means, of course, financial institutions, including banks, not working families, pensioners and the poor. Between 1997 and 2010, the broad money supply (M4) tripled in a massive credit boom. That caused an asset bubble, raising house prices out of people’s reach and distorting the economy towards the financial sector and the South East. Those economic dislocations were unjust in themselves but surely QE is perpetuating and extending the very source of our present difficulties?

Meanwhile, QE is being used to suppress long-term interest rates through artificially high bond prices. That’s hitting savers and new pensioners while inflating a bubble that is bound to burst, suddenly raising interest rates. With this in mind, why support, in principle or practice, quantitative easing?
Yours ever,
Steve (Steve Baker is Conservative MP for Wycombe)

 

Austin Mitchell < @parliament.uk
Sent: Fri 16/03/2012 10:33                                                                                                                                                    

Dear Steve

I’m surprised by your opposition to quantitative easing. Any sensible pragmatist should see it as any port in a storm, but there is a strong economic case for it. We’re in such a mess, and demand is so low, that it’s the way to go. Note that the US is doing it on a bigger scale than here, as is the EU through its Central Bank (shabby creature that it is) and the Bank here.

Monetarists will be worried by it but monetarism was not only disastrous in the Eighties but intellectually disreputable. Monetarists believe that the money supply is exogenous and can be controlled. In fact it’s endogenous and the economy, like a plant sucking in water, sucks in what it needs. So when the velocity of circulation is down, the corporate sector hangs on to its money, the people are hung down with debt, the banks are building up reserves instead of lending and the government won’t spend to stimulate the economy as it should, but maintains a disastrous deflationary squeeze instead. Printing money by quantitative easing is the only way out. The Bank is right to prime the pump and do what it can to save the situation, when everything else fails.
Yours sincerely
AUSTIN MITCHELL (Austin Mitchell is Labour MP for Great Grimsby)

 

Steve Baker < @parliament.uk                                                 
Sent: Mon 19/03/2012 22:48
                                                                                                                                                 

Dear Austin,

I agree with your points about monetarism, which is, from my perspective, as mistaken as Keynesianism in its failure to articulate a good theory of capital and interest. However, I am staggered that you are prepared to support this punk monetarist experiment, which reminds me of John Law and the Mississippi ruination. That is what I want to avoid.

Monetarist theory tells us to adjust money supply, as you say, when demand to hold money rises and velocity falls, in an attempt to keep the price level and spending up. This is the policy of the mystic and witch doctor. It is like warming a thermometer, sticking it in the patient’s mouth and saying, “The patient is cured! He has the right temperature!” Having more money units in circulation means money is worth less in relation to goods and services. No more goods and services are produced by entrepreneurs when new money enters the economy.
Only prior production and real saving to fund investment will provide greater wealth sustainably. That is what we need. QE will impoverish us. And I note with sadness that you are silent on the subject of QE being a wealth transfer from the poor to the rich.

 

Austin Mitchell < @parliament.uk
Sent: Tue 20/03/2012 17:58                                                                                                                                                       

Dear Steve

You’re missing the main point about QE. It’s not perfect. It transfers the risk that interest rates will rise on the debts acquired from the banks to the Bank of England. Yet it’s certainly not the inflationary horror you and other piggy-bank thinkers suggest. You’re talking morality, not economics.

There are only two weapons against recession: fiscal and monetary. If the government is obstinately headed down a disastrous deflationary path with massive spending cuts and unemployment certain to rise because our chancellor will not use fiscal stimulus, is obsessed with debt, and doesn’t realise that the real problem is lack of demand, then what alternative does the Bank of England have to using its monetary weapons of keeping interest rates down and printing money? The money could be better directed than by buying back debt and allowing the banks to stash the money in their reserves. We could drop it from helicopters as Simon Jenkins suggests, and I wouldn’t mind that if it dropped on Grimsby, but a much better way is to use QE money to finance big contracts for housebuilding, infrastructure work, or to set up a state investment bank. All of this could be authorised by the chancellor, though not the Bank of England. So the basic fact remains we must pump out money to the people to spend, to generate demand and growth. Growth is, in the last analysis, the only way we’ll ever pay off debt as Labour did from 1997-2000.
Yours in Keynes, Austin Mitchell.

 

Steve Baker < @parliament.uk            
Sent: Tue 20/03/2012 23:21
                                                                                                                                                    

Dear Austin

I desire a stable, sustainable economy in which everyone has the opportunity to participate in growing real prosperity. That is a moral aim. I want justice in our social processes, and that too is moral. You apparently reject moral considerations in economics. No wonder you can support producing brand new money and giving it to favoured groups!

I referred to the tripling of the money supply under Labour, years of rapidly increasing public spending. That created an illusion of prosperity based on capital consumption, misallocation of resources and unjust wealth redistribution. State overspending covered by currency debasement got us into this mess but you propose more of both as the solution. Creating new money and giving it to a state investment bank is merely taxation. Investment requires the prior production of real resources in excess of consumption: that is, saving, not new money. Keynes himself wrote, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.” Yet still you propose the same policies of illusory boom, inevitable bust and finally impoverishment. The public deserves better.
Yours sincerely,
Steve Baker MP

 

Austin Mitchell < @parliament.uk
Sent: Wed 21/03/2012 07:54
                                                                                                                                                       

I don’t know whether you want to become an English Jacques Reuff or the reincarnation of Montague Norman but the only way you’re going to get stable money is by returning to the gold standard. You can’t really be suggesting that. Read Keynes on the economic consequences of Mr Churchill.

We’re hovering on the brink of recession, facing three years of flat lining, like Japan’s lost decade. The only way out is growth. To get that we either use the monetary weapon as the Bank of England is doing or the fiscal. The government won’t use that because they’re obsessed with debt. Yet only growth can pay off debt and the only way to get that is to spend and rely on the Keynesian multiplier to work its wonders. QE certainly isn’t as effective as fiscal expansion. Yet I hate to think the kind of mess we’d be in if the Bank of England hadn’t done. Investment doesn’t require the “prior production of real resources in excess of consumption.”

That’s gobbledygook. What it does require is the prospect of demand for the products produced. Only that can generate profits and they’re what investment needs. It’s daft to oppose a boost to demand because of a moralistic and wholly hypothetical fear of inflation. We’re in 2012 not 1925.

 

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