Saturday, April 5, 2014

ECB to do QE?

European Central Bank might do Quantitative Easing.
That raises a question as follows. Stimulus can be implemented by, 1, cutting interest rates (the favoured ECB tool to date), 2, by standard fiscal policy (borrow and spend) or 3, combining fiscal and monetary policy, i.e. simply having the government / central bank machine print money and spend it (and / or cut taxes) – advocated by Positive Money and others.
So there must be some optimum combination of the above three. So what is that optimum?
Well strikes me the optimum rate of interest is the free market rate, which casts doubt  on No.1. Moreover, interest rate adjustments if they work at all are DISTORTIONARY: that is the bring stimulus just via or primarily via investment spending. You might as well boost an economy just via extra car production and expenditure on restaurants. Moreover, the evidence is that interest rate adjustments don’t actually work. See here and here.
So interest rate adjustments are a farce.

Fiscal stimulus.
That consists of borrowing and spending. Now what’s the point of implementing a stimulatory measure (more spending) and then partially negating that with more borrowing? Isn't that the definition of lunacy?
Moreover, there is much disagreement as to how big the latter “self negating” effect traditional fiscal stimulus is (often referred to as “interest rate crowding out”). But (and here it all gets even more farcical), assuming stimulus is needed, the last thing a central bank will do is to let interest rates rise: indeed it will probably cut them. And that is effected by printing money and buying some or all the debt just created by the above fiscal stimulus…….which comes to the same thing, or much the same thing as No.3. Speaking of which…..
That leaves No.3: simply having the government and central bank print new money and spend it, and/or cut taxes. And that was suggested / advocated by Keynes.  Plus that policy comes to the same thing as fiscal policy followed by QE. Conclusion: the ECB is moving in the right direction.

Political and technical questions.
Of course the latter “print and spend” wheeze seems to raise a problem as follows. Those in charge of quantifying the amount of stimulus are often a bunch of professional economists (e.g. the Bank of England’s Monetary Policy Committee or the Office for Budgetary Responsibility). But deciding exactly what any stimulus money should be spent on is an obviously POLITICAL question.
Well the answer to that little problem isn't difficult: have the professionals do the technical stuff, like quantifying the amount of stimulus needed, while politicians do the strictly political stuff, like deciding exactly what stimulus money is spent on.
In fact that was all thought out by Positive Money, Prof. Richard Werner & Co. three or four years ago.

Reversing stimulus.
A possible defence of pure monetary policy is that it is easy to reverse. Well dollar for dollar it certainly IS EASIER to reverse than fiscal policy (that is, having the central bank buy or sell government bonds does not involve political problems, whereas reversing fiscal policy, e.g. by raising income tax or sales taxes or cutting public spending can involve political problems).
Well the answer to that is that “print and spend” is far more effective, dollar for dollar, than monetary policy. Thus while reversing monetary policy is relatively easy, each dollar of monetary policy is relative ineffective. So the “difficult to reverse” criticism of “print and spend” is not much of a criticism.
Moreover, the UK lowered and then raised it’s sales tax (VAT) during the crisis, and no one turned a hair.

Applying that to the Eurozone (EZ).
Applying the above “print and spend” policy to the EZ as a whole (i.e. a collection of national governments which are not averse to quarrelling with each other) would be more difficult that applying it to a monetarily sovereign country like the UK. But it wouldn’t be impossible.
It would be a case of saying to each individual EZ government, “you can’t borrow any longer, and you can only net spend what we, the Euro authorities (ECB in particular) say you can net spend”. That would cause some resentment in some countries, but then there’s no shortage of resentment at the moment in periphery countries at the austerity being imposed on those countries.

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