大象传媒

No, I am not confused by QE - seeing as you ask.

It is yet another example, of the many examples, of irrational and theoretically daft things that central bankers do, and these things are those they were told they must not do under any circumstances throughout their entire education. Somehow this time is always different! It is not, but they will have retired/died before they are found out!

PS Mervyn King still needs sacking for getting policy so dramatically wrong in the time before the credit crunch (BCC). We must not let him or anyone forget that it was his insanely cheap money policy in the last decade that got us where we are in this country - and now his only solution is to make money even cheaper! Absolute madness.... and not even a rational or valid short term policy!

Fictitious capital!

This enables profits to be made (rising asset prices again, shares, oil, etc) without there being any true profits based on production.

Ultimately, without productive profits being made, capitalism will come to an end.

PS can anyone tell me if bankers are receiving bonuses based on their ability to get given QE money?

How is "quantitative easing" a new idea? Wasn't it called "open-market operations" when I was an economics undergraduate long ago?

I don't understand why the sterling is going up when the BoE is printing money. It would seem to mean that someone is hording it.

House prices are going up but interest rates aren't so we must assume there really is no joined up thinking going on.

It seems that QE has so far been a waste of effort. The theory was that the extra money would eventually get into the hands of businesses and individuals via the banks, thereby stimulating the economy. But all that's happened is that the banks have held on to this extra liquidity and they continue to show little or no enthusiasm to lend, unless at cripplingly high interest rates with attendant rip-off arrangement fees and other charges. And to compound the misery, they're still reducing overdraft limits with only day's notice, calling in other loans, repossessing property and generally acting more like loan sharks than responsible lenders.
Time and time again the government, MPC and commentators have stressed the pivotal role of the banks in priming economic recovery through reasonable lending. But time and time again the banks instead look after their own interests, using taxpayer's money and profiteering tactics, with no concern over the UK economy.

鈥淏ut arguably, the single most important channel is also the most nebulous: its effect on confidence.鈥�

Who鈥檚 confidence, the general public, business, finance.......?

Confidence is directly linked with expectations and these, along with the economy, have been over-inflated through the past decade.

There is a generation out there who know nothing other than feckless lending and borrowing. And talk of house price recovery (to unsustainable levels) and consumer spending (off the back of record credit card debt) does nothing to address this fundamental imbalance in an economy and population, that has become too reliant on credit

Some idea of what the rules for borrowing might be and the likely levels of credit (both business and personal) as a percentage of what was available through pre-crash years may help resetting the bar

At the moment the idea that throwing money at something and hoping it comes out right in the wash.... and in particular throwing money at the people who were stupid, or greedy, or naive enough to get us into this mess in the first place..... could be seen as a little naive in itself..... but good PR is not one of the strengths this Gov possess!

Stephanie I love your blog and you are a marvellous woman. I find all of this stuff fascinating but I am confused. You're blog today doesn't clear things up for me. It could be summed up as "things might be getting better, but we just don't know yet". It seems that everybody else is confused too, especially the MPC. Keep up the good work though. You are the only voice trying to make sense of all this.

Here's an unrelated article about consumer spending in the US that made me laugh (and added to my confusion). It seems consumer spending is up... and down. Please post this for your readers' enjoyment:



p.s. are you free friday for dinner? or a movie?

This comment was removed because the moderators found it broke the house rules. Explain.

Good Morning Stephanie

To answer your question,no I am not confused by QE.

However it has been operated in an unnecessarily complex way because they were afraid of being accused of printing money. Monetary policy has all sorts of lags and to my view the Bank of England has added to them. So we need to wait a bit I think.

In America there is a lot of talk that the Fed's buying programme has had a side effect of boosting bank profits. Do you think that is something which has happened here?

Also I know you thought originally that the Bank of England could not lose money from QE, now that hopefully you have abandoned this illusion how will the losses it makes be accounted for?

I wonder if Stephanie could explain to us what would have been required for the UK to have been able to sell the huge flow of gilts issued since March without the market understanding that the BoE would at the same time be repurchasing gilts through QE? Maybe she could also explain why the UK was not able to take the more straightforward route of direct purchase by the BoE of new gilts?

And finally perhaps she could explain to us why, amongst all the implications of QE that she has chosen to mention as reasons for its introduction, she has not mentioned its part in overcoming the extreme difficulty we would otherwise have faced in funding the major fiscal deficit of recent months?

Come on Stephanie! Is QE really a voluntarily selected strategy, introduced for all the positive reasons you mention, which just happens to have the side-effect of helping with gilt issuance? Or is it more the case that the programmed gilt issuance would just not have been possible without the BoE being in effect the major purchaser, and that therefore QE, or something similar, was an action into which we were forced?

We're not all five-year-olds, you know.

QE? *yawn*. Irrelevant.

Just been by the BoE and there seems to be a long line of bankers with wheelbarrows collecting money - trousering some (their bonus) and then going off with the rest!

(Answer to my own question in 3 above!)

Someone must know the real answer? Are bankers getting paid a bonus for receiving free money from us!????

I'm sure the photo above was used for a reason;
No-one of the MPC lot look like they are up for a fight, so don't look for them wielding the heavy fist that the financial system needs to sort itself out. How many of them have ever worked in the real economy (and big accountancy or multi-nationals doesn't count.

Setting the interest rate now seems a pretty timid weapon; Libor seems to take not too much notice, and the High Street banks don't seem to use it any more.
You have only a handful of weapons to manoeuvre the economy in any given direction. Interest rates, exchange rate (imports), unemployment, taxation and inflation. How many of these affect the City without much more pain on the general public? Not many.

The regime-change we all know is needed will not come about over Earl Grey tea & cucumber sandwiches, we need some battle-scarred rotweillers in the BofE. Some of them should show up on the MPC.

(er, I am available Tuesdays & Thursdays).

Regards,

Just how much of the QE monies have left the UK?

QE along with the MPC is a dispensible overhead in economic management. Will it help companies to borrow - not much use if to just survive. We want them to invest but where are their customers? It is demand that the government needs to stimulate. QE seems to be good for the banks. Public works and increased benefits (especially jobseekers alowance OA pensions etc) But dont forget where we came from - very high levels of personal debt some of which is now cheaper to service but in a context of much diminished income security - signs of new bubbles of confidence and stocks and shares.

Post 9 - It just goes to show how we as individuals can see things very differently ... take a look at my recent post for instance ... /blogs/thereporters/stephanieflanders/2009/08/unexpected_challenge.html ...

IMHO, and in my 'book' (which I plan to call 'DIRE WORLD: The DNA of Failure and the Path to Oblivion'), Stephanie (and the 大象传媒 in general) are destined for a 'special mention' ... as they have been thoroughly 'weighed, measured and found wanting'.

IMHO the 大象传媒 are part of the establishment that's gone wrong, and they are not a part of the solution that will fix it.

Let's call it what it is please - printing money.

No, it won't work. We're in a situation where banks have quite a lot of bad loans and assets on their books and there simply isn't the money in the financial system to back them up. Governments then need to throw in money to try and back it up in some way. 拢150 billion will get eaten in no time and nothing will happen until that money ends up needing to be taken out of the economy in the form of higher inflation. There is no evidence whatsoever that anything has improved as a result of printing money.

I really do worry about how this is being portrayed by a lot of 'economists', because we aren't getting the truth.

#2 duvinrouge

Re: Fictitious capital!

Hmm.... not delved much into Marx but am fast becoming convinced of the concept of fictitious capital (I seem to recall this was a working title for Michael Hudson's latest book?). After doing a bit of digging, am thinking of laying my hands on "The Limits to Capital" by David Harvey for my easy introduction to Marx.

This recent post refers to the concept of fictitious growth:
/blogs/thereporters/stephanieflanders/2009/07/a_large_sucking_sound.html

P.S. I also need to follow up on Michael Albert & Loren Goldner too that you have mentioned. Suggest that you take a look at Chapter 9 of Entropy Law and the Economic Process. I'm still wading through it, but I think Georgescu-Roegen may have made use of Marx's reproduction model of economic processes:

"It is well known that Marx endeavoured to come up with mathematical representations of his dialectical conception of evolution all through his life. Georgescu-Roegen applied his skills to underscoring the radical difference between the analytical approach and the dialectical approach by means of formalised models. Furthermore, although Schumpeter was never able to present a formal model for his theory of evolution, Georgescu-Roegen was well versed in the problems connected with non-linearities and discontinuities that appear to be necessary to represent the dialectical and evolutionary approaches." Alcouffe et al 2004

Google "Marx, Schumpeter and Georgescu-Roegen Alcouffe lirhe" (mods don't like PDFs!!).

It is impossible to judge whether QE has worked because it was never targetted in a way that could be measured.

Throwing money in the air for people to catch and spend would have been just as productive.

If someone just throws somw my way I would have no trouble in spending it in this country. It 's only fantasy money after all.

They did it in Australia. Every family got a windfall of X thousand dollars.

I find the QE policy unbelievable reckless, they've given in again and extended it by another 50b. Pathetic.

From a layperson's perspective, the biggest problem I have following all this is the politics and the passage of time.

When various government intervention occurs (bank bail out, QE), no-one is really willing to stick their neck out and say what the (measurable) outcome is supposed to be, and in what time scale, just that it is necessary. And no-one on the opposite benches (or 4th Estate) seems to be asking (or at least not getting answers).

This is different from most other government expenditure which (generally) has quantifiable targets and timescales.

This then means that 6 months down the line people can equally declare that it clearly has worked (we're not all reduced to bread and water just yet, which is where we were heading) and that it clearly has not (we are not all drinking cocktails on tropical islands which is what we alternately could have spent the money on), mainly based on fairly convoluted fiscal measures they have concocted to suit their point.

As a journalist, you can't really get away with
Q:"Has QE worked?"
A:"Don't know. No-one is clear on sure what it was supposed to do, and even if we did know, it effects can't be separated from everything else which has been going on".
But I'm not sure what the alternative is.

Certainly, as a stealth devaluation of sterling, it has worked a treat.

All this Quantitative Appeasing is pushing up the stock market nicely.
My share holdings continue to rise in value.

Looks like my hedge against price inflation is working.

#2 More fiction!

In lieu of reading Marx's Das Kapital vol 3, I have stumbled across a recent article that tells a very poignant story:



Recounting Credit Mobilier in France during the 19th C:
"because money was invested in industry through the medium of securities, or fictitious capital, there was an illusion that the capital thus invested was 'mobile,' or to use the modern terminology, 'liquid.' "

The article then goes on to point out the disconnect between the REAL economy and the imaginary world of finance:
"Real capital investment was thus subordinate to securities speculation. It in fact it served to misallocate capital, and to turn real capital investment into nothing more than an accidental byproduct of stock market speculation."

So not only is there fictitious capital, but also a fictitious notion of liquidity! Even from my own eyes I can see that our economy is not that liquid at all:
- most careers are so specialised one would struggle to move into something even adjacent
- we don't have adaptable infrastructure or buildings, all we have are office buildings suitable only for a parasitic service sector

And so I'll end with:
"鈥� everything in this credit system鈥� is transformed into a mere phantom of the mind."

Just another 拢50 billion thrown at the economy to keep the value of sterling pegged so what's left of our exporting companies will be able to sell cheaper if they can keep finding a market.

A short term gain for political reasons. Printing our way out of a recession before an election is an illusion for without real growth and more exporting businesses we will return to square one with an even deeper recession in twelve months time.

The alternative I suppose is just to keep adding more and more money to the economy without carrying out the hard measures and cutbacks needed to balance the budget. Pushing the possibility of that further and further into the future.

The city will be happy because they can keep making their short term gains but for the rest of us as usual it's more pain to come down the line.

The country now appears to be run by computer modelling rather than commonsense.

I'm not confused - I'm pretty sure I know what is going on.

I don't agree with it, though. I am going to be forced to retire early in the next year, and my accrued pension and savings will be in jeopardy because of QE. Printing money to give to people who gambled away their own is NOT sensible, however you dress it up. This will result in horrendous inflation, so my pension and savings will be worth nothing in ten years. Then I'll be dependent on the basic state pension, like 95% of the rest. The winners will be the few that put away tens of millions in bonuses and pension funds - bankers and the like. It will take Zimbabwe-style inflation to dent their savings. That could happen, but they'll have diversified into property, land, gold bars,...

No more boom and bust? Ptchah! (Actually, maybe he was right: we didn't have a boom, it was a hyperboom. And we're technically not bust - we are pulverised, then vapourised.)

Stephanie

Great blog, as always.

What I can't work out is how QE could have possibly been designed to be objectively evaluated. It seems a policy particularly affected by the blight of all economic science, the lack of the double blind trial.

I find it difficult to understand that senior and respected economists are saying it obviously hasn't worked. The purpose of QE, so far as I can see is to increase money supply *relative to what it would have been had QE not in fact taken place*. We have no idea what the money supply would have been like in that instance, as, so far as I'm aware, there is a dearth of parallels to the current situation. Whilst it is true that banks have been using much of the additional liquidity to shore up their capital, it is far from implausible that sans QE they would have achieved similar levels of capital by reducing lending further.

Obviously if one takes the success of QE to mean rampant money supply growth and a return to a healty economy, QE has, so far, failed. But that is not necessarily a good measure of success. It may be that no policy, however well executed, could have achieved such a goal.

As a coda, doesn't the paragraph from the Bank (below) rather show the absurdity of their pretence to still be inflation targeting? A necessary absurdity maybe but still...

"[U]ltimately, what matters is the degree to which the cash injection boosts the growth of money and spending by households and businesses and so helps to ensure that inflation is close to target".

At 1:04pm on 06 Aug 2009, virtualsilverlady wrote:

"The country now appears to be run by computer modelling rather than commonsense."

Yes, well spotted. I believe this is a Western pandemic called Arithmomania that has been spreading almost undetected for about 30-40 years. Symptoms of the disease include beliefs such as the following:

- Interest rates control human behaviour
- The stock market can grow forever
- Money makes you happy
- Our economy will see a 0% growth next year

However, my favourite suffer of the disease (after Gordon Brown) is childhood hero Count Von Count:

The people said 'We need more milk'.
The politician said 'they need more milk'
The milk seller said, 'They need more milk'
The farmer said, 'I need more cows to produce the milk'
The milk seller said 'then buy some'
The farmer said 'then buy more milk, so I can afford to buy more cows'
The politician said 'dilute the milk to feed more people'
The milk seller diluted the milk, but sold it for less.
The farmer was no better off.
The milk seller was no better off.
The people were no better off.In fact, they wanted greater amounts to compensate.
'But the milk economy is now working harder to feed all the people. Now
more people can drink milk' beamed the politician.

What we need is a completely new type of role that would be named "Financial Engineer" or some such. Money flows and mechanisms should be better documented. We need a whole new type of hack here.

#29 hawkeye

Thanks for that, most enjoyable and very true!

Here is a less enjoyable truth, the ones most likely to benefit from QE are the banks.

Their irresponsible behaviour has been supported on all sides, they appear to be the new 'untouchables' too important to be allowed to fail or be brought to account it seems by the rather pathetic noises made in terms of future regulation.

Are we not simply stocking their confidense even more and setting ourselves up for the next round?

I dont disagree with the QE as such in the predicament we are in, I very strongly disagree with the disproportianately high standing in society the people who manage the money now have.

It is a massive responsibility to be the ones who manage the flow of the imaginery entity we use (money) as a mechanism to exchange the things of real worth (goods and services and innovation to make our lives better) of all kinds, a responsibility which requires great restraint not to abuse it.

What I can not accept is that they have abused that great responsibility terribly, yet by neccesity (not by justice in any sense of the word) they are still being supported so that they do not suffer now and, worse still, I can see nothing in the pipeline to suggest they will be made to take their responsibilities seriously in future either.

The higher ranks of the banks should be populated by modest bean counters with a high sense of responsibility to society as a whole.

I wonder what would happen to bank stocks if it was made law for all bank execs to be psychometrically tested to have those charateristics?

Or we could just nationalise the lot of them while we have the chance of course.

Coming in the near future - inflation!

Sell your pounds now.

The Tax Payers money was given to the wrong people, banks instead of individuals. My plan would been to buy-out all those people who could not afford the mortgage repayments and then rent the property back to them if they wished. Effect: nobody dispossessed, families kept to gether and no need for more social housing. The tax payer would end up owning many small mortgages the banks would get their money back and could then lend to small business's. I would also cap banks bonuses.

Mad... The BoE shells out another 拢50bn of our money to boost the economy and the FTSE goes up...

Given the BoE's action is a sure sign of ongoing economic weakness then surely the FTSE should go down.

#30
"The people said 'We need more milk'."
"The biotech engineer invented a supercow by modifying its DNA."
"The religious lunatic from the USA told the fundamentalist president to bully European leaders into suppressing stem cell research and so on."
"The biotech engineer went to China and became a national hero".

No.32. Jericoa

If the British consumer didn't borrow so much in the first place, the housing bubble would not have happened. Likewise, hedge funds borrowing 20 times the value of underlying assets to invest in derivatives.

Can't trust the banks, can't trust the investment funds, can't trust the politicians, can't trust the British consumer to act in his own best interest.

Therefore, we should nationalise all hedge funds, banks and most importantly, all British citizens.

By that I mean all British citizens should come under direct state control. This would stop us acting stupidly in the future....

The last thing we need is a democracy of useful idiots.

(JadedJean is on holiday....)

#20 Hawkeye_Pierce

Yes, I will in due course read Georgescu-Roegen.

Marx's reproduction schema is useful for understanding the nature of economic reproduction and the capitalist economy in particular.

This is because the schema have an objective basis in labour expended.
Labour to produce the means of subsistence, labour to renew the means of production, and surplus labour.

Subjective theories of value, e.g. marginal utility, are useful in microeconomics, but useless when looking at the economy as a whole.

That said, Marx's reproduction schema are not adequate for understanding the supply side constraints of a finite world.
Although Rosa Luxemburg was able to show using the reproduction schema that a pure capitalist system was unable to grow because capitalism needs to loot.
It needs to loot nature and/or non-capitalist labour, e.g. bringing Chinese peasants into the capitalist system.
Clearly there is an objective limit to capitalist looting (which we may be hitting now or already have hit).
This is why Luxemburg refers to capitalism as being a transient system from feudalism to socialism.

I would like to see an economic model that extends the reproduction schema's labour values to energy inputs.

Does anyone know anyone who has done this?

#30
...The people realised the politician was a waste of space and voted someone in who had the courage to suggest that the people didn't 'need more milk', were already drinking too much and that in the long run it was bad for them.

No, probably not.

#33
I'm not so sure inflation will come. The de facto interest rate as set by profiteering banks and other financial institutions is at least 5% above the official base rate. Apart from the lucky minority on tracker mortgages, everyone else is paying top whack for credit and LIBOR's direct relationship with base rate has become a receding memory. The attitude of the banks, ripping borrowers off with over the top rates, renders base rate increasingly irrelevent (except for savers, of course). In fact the greedy banks may actually be negating any effect of QE because of their interest charges.

I'll admit to being pretty confused, but perhaps someone can help -
Is the point of this (rather than just posting a cheque to every house or lowering taxes etc) that if you effectively give it to the banks they will then lend out a multiple of it, and that this is because of the fact that if they have 1bn they'll lend out, say, 10bn? And then credit is then widely available and crunch averted?
Or is there another mechanism that acts as the multiplier that makes giving it directly to the banks the right solution?
Thanks.

At 2:41pm on 06 Aug 2009, duvinrouge wrote:

"I would like to see an economic model that extends the reproduction schema's labour values to energy inputs. Does anyone know anyone who has done this?"

That request sounds like the one inferred after reading the Alcouffe article I referenced in post 20.

You could try the following:

J眉rgen Bennewitz: Basis to Survive the Present Century / Application of the Main Laws of Thermodynamics on the Economy
Joan Martinez-Alier: Not read enough but certainly seems to be on the same track

Any others in the field of Ecological Economics. Georgescu-Roegen is the common denominator - but this may reflect a bias (fetish?) on my part!

I can envisage a formal model with somewhat precocious objectives. An Agent Based Model of long term economic growth that is actually grounded in physical reality (i.e. Historical time, and no perpertual motion machines!). The model would hope to replicate cycles of increased sophistication in energy resource use, not unlike Kondratief waves. This would manifest as rapid (self-reinforcing), but unsustainable growth (presuming that there is no adequate replacement for fossil fuels). The following post explains the main premise of it:

/blogs/thereporters/stephanieflanders/2009/07/what_will_it_all_cost.html

But quite frankly, I'm a bit out of my depth on this, mainly 'cos I have a day job completely unrelated to such matters, and wouldn't know where to find either the money to fund a PhD, nor anyone mad enough to supervise it. I'm just a curious amateur who is trying to piece together the economic jigsaw puzzle in my lunch hour.

As some of the UK banks are still not playing ball - either calling in certain loans or reissuing them at exorbitant interest rates to struggling businesses, major corporations could force their hand by doing French-style EDF loans (it sought recently to raise Euros 1bn by offering punters 4.5 percent gross interest, provided the capital lent by the public is left in EDF's hands for five years. In the event EDF raised not E1bn, but E3bn and in a nation famed for hiding cash under or in the mattress, just how successful is that??
So part of the answer to the current impasse may be to by-pass the banks and in tthe above way and in so doing force down their usurous loan rates in order to compete.

Hawkeye Pierce/Duvinrouge

I was briefly mixed up with Militant types in the early 70s and quickly became allergic to the various versions of Marxist theory thanks to the Dave Sparts that tended to spout it!

Now, David Harvey has always been a bit out of the ordinary. He brings a Geographical perspective into economics, politics and history and ends up with something quite special.

davidharvey.org has a lot of interesting recent articles and is definitely worth a look.

#20 Hawkeye Pierce

Alcouffe article - an interesting read, thanks for making me aware of it.

I've often argued that today's Marxists neglect the supply-side.
It was understandable that Marx did 150 years ago, when the main task was to understand how capitalism worked and why there were crises.

In trying to understand today's crisis we need to try and work out how much of it is Marxist overproduction and how much is supply side (e.g. higher energy prices and raw materials due to scarcity).
The two are not mutually exclusive as Marxist crisis theory takes account of labour constraints, which is supply side.
But I agree it needs to put much less faith in the capitalists finding a solution to the energy/ecological crisis.
I strongly believe capitalism is the problem and cannot provide a solution.

The article does somewhat oversimplify Marx's position though.
Marx was fully aware of the role of productive forces shaping productive relations and that more than the capitalists influenced the productive forces, i.e. environmental factors play a major role.

I have seen it argued that if it wasn't for the Black Death plague of the 14th century wiping out a third of Europe's population, that the exhaustion of the forests would have provided the incentive to finding a solution to mining coal sooner. That is, without the plague the steam pump would have been invented centuries earlier, the industrial revolution would have happened earlier, and from a Marxist perspective capitalism would have been confined to history.

I haven't read Harvey's book.
I'll be interested in what you think.

#45 Duvinrouge

It may take a few weeks to get round to reading Harvey鈥檚 book 鈥� I鈥檓 getting bit of a backlog of reading now!!

Just finished National Economy by Arian Nevin. In this is an example of a War Economy that sounds along the lines of what you are looking for. It talks about abstinence of consumption needed to build production capacity (a theme heavily emphasised by Frederick Soddy). Reminded me a bit of 1980s World War computer stragegy games (acquire resources and build factories 鈥� if you invest resources in factory building, you don鈥檛 reap the benefit of the tanks for a few rounds):



On the topic of Marx just seen this link posted:



Rare to see a Business School lecturer talking about Marx! Don鈥檛 know too much about Bowman, but did track down this article which I may skim read in the next few days:



P.S. Not sure I agree that the steam engine would have been invented earlier, having just read Heat Engines by John Sandfort which gives a thorough overview of the development of all types of engines that perform the REAL work of modern economies. It took a good couple of hundred years just to get to James Watt. A lot of trial and error, coupled with a few intellectual breakthroughs (Carnot, Kelvin, Clausius etc) got us to the peak of energy efficiency circa 1950s/60s (gas turbines & jet propulsion). Since then the energy dream has stalled (forgive the pun).

For a topical rant of mine about energy see:

[Unsuitable/Broken URL removed by Moderator]

#46 Unsuitable/Broken URL removed by Moderator - Eh?

Seems that inserting a link to another post on Stephanie's blog is breaking the House Rules.

For those interested in the rant, it is post 119 on QE: More to do?

Stephanie:

Yes, the QE will be living on (moving on) since, it works
in this situation...

=Dennis Junior=

Has someone noticed the Pound gently sliding down against the Dollar these past few days? Someone's about to buy! Loads!! Create the Pound rush and then sell. Wait for the spike! Despite all the Jiggery-Pocker stuff we're still very much subjected to the whims of a few rich people. Money is the only commodity!