Wednesday, August 7, 2013

Why politicians pushed central banks into doing QE.

Charles Goodhart says in this video that politicians pushed central banks into cutting interest rates and doing QE. Well you can see why, can’t you?
Reason is that politicians are deficit-phobes. So they prefer central banks to bring stimulus because that doesn’t involve deficit. And here’s an illustration of the logic involved.
If government borrows and buys some office blocks, that counts as deficit. In contrast, if the central bank prints money and buys the shares of the firm that owns the office blocks, that doesn’t count as deficit. (Cue, finance minister wets his pants, and dances around his office in delight.)
But in both cases the government / central bank machine becomes the owner of the office blocks, so there is no effective difference between the two scenarios.
Raving bonkers, innit?

Hat tip to Mike Norman re the video.

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