Tuesday, March 16, 2010

Bank of England realizes that QE boosts share prices, and Mish doesn’t realize that wages are sticky downwards.

Well done the Bank of England for tumbling to the fact that Q.E. boosts share prices. If people and institutions are given cash in exchange for their securities, they are going to diversify into other assets. Some of us predicted this before Q.E. started in early 2009.

And Mish in an unusual lapse from his usual high standards claims that the money supply might as well be left constant in dollar terms because when the money supply is inadequate, prices will fall, i.e. the real value of the money supply will rise, until the real value of the money supply is adequate.

The flaw in this argument was pointed out by Keynes: “wages are sticky downwards”.

Obviously if prices AND wages changed rapidly in sympathy with changes in supply and demand, then the “Mish” theory would hold. But wages just don’t fall fast enough: or don’t fall at all. Churchill tried to cut miners’ wages in the 1920s. The result was a year long miners’ strike. And they are trying to shave a bit of bureaucrats’ salaries in Greece at the moment. Same result: riots, strikes, etc.

Afterthough (20th March): The above criticism of the BoE is unfair - it was not 100% clear in early or mid 2009 WHAT the optimum amount of QE was.

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