Friday, August 24, 2012

Bank of England rolls out defense of Quantitative Easing

To no one's surprise, the Bank of England rolled out its defense of Quantitative Easing and discovered that the benefits of QE offset any costs.

According to an article in the Guardian,
The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.... 
Clearly, QE is a policy that exacerbates inequality in wealth.
However, Threadneedle Street said that QE had helped all sections of the population by sparing the country from a deeper slump. The rise in asset prices after QE was announced in early 2009 followed sharp falls in the two previous years. 
"Without the Bank's asset purchases, most people in the UK would have been worse off," it said in a paper prepared in response to queries from the Commons Treasury committee...
Is this a statement of belief or fact?
"Economic growth would have been lower. Unemployment would have been higher. Many more firms would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of asset purchases must be seen in that light."... 
"By pushing up a range of asset prices [such as equities and bonds], asset purchases have boosted the value of households' financial wealth held outside pension funds, although holdings are heavily skewed with the top 5% of households holding 40% of these assets."
Apparently QE is just a variation of trickle down economics.  By boosting the wealth of the rich, the BoE would have us believe that the rich convert so much of this additional wealth into consumption that it has a meaningful impact on economic growth.

As for how well QE and zero interest rate policies work, David Rosenberg had an interesting observation:

It is rather amazing that a 2.8% yield on the long bond couldn't do the trick. By hook or by nook, it looks like the Fed is going to make an attempt to drive the rate down even further — but if that was the answer, wouldn't Switzerland, Japan and Germany be in major economic booms right now seeing as how low their 30-year bond yields are? 
This is exactly the point that your humble blogger has been making since zero interest rate policies and QE were adopted.  Clearly the economic headwinds created by these policies offset the benefits of these policies.

Regular readers know that Walter Bagehot, the man who wrote the book, Lombard Street, on modern central banking, knew this and said to never take interest rates below 2%.  He was well aware of Mark Twain's observation about being more concerned with the return of his money than the return on his money.

He said this in the 1870s before the development of computers and massive economic models.  Of course, the economic models run by computers wouldn't know that the assumptions they are based on don't work below 2% unless the economists who created the models specified this fact.

Based on available evidence, we might guess that it is highly likely that this fact wasn't specified as central banks in the EU, Japan, the UK and the US keep pursuing zero interest rate policies and QE.

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