Friday, November 2, 2012

Professor Charles Goodhart: QE "counter-productive"

As reported by the Telegraph, Charles Goodhart, a former member of the Bank of England's Monetary Policy Committee, observed that more money printing might be "counter-productive" because of its effect on retirement plans.

Professor Goodhart has explicitly recognized what I call the Retirement Plan Death Spiral.  Under this death spiral, low interest trigger a shortfall in the return on the retirement plan assets.  This shortfall is covered by reducing current consumption which in turn leads to a shortfall in the return on the retirement plan assets....

Professor Goodhart's comments are also confirmation of Walter Bagehot's advice to central bankers to never let interest rates fall below 2% was based on the understanding that rates below 2% would be counter-productive.

More money printing may not just be ineffective but “counterproductive”, a former Bank of England ratesetter has warned ahead of next week’s key decision. 
Charles Goodhart, a professor after whom an economic law has been named, raised his concerns about quantitative easing (QE) as Lord Turner, chairman of the Financial Services Authority, said new policies need to be devised to boost the economy. 
Mr Goodhart is the most senior economist to date to warn that more QE in its current form could harm growth. Speaking at a Fathom Consulting event, he said the first £200bn round of QE was “extraordinarily effective” but that subsequent money printing, which has taken the total to £375bn, “had much less effect”. 
“It is even arguable that, due to its effect on pension schemes, by the time you got to QE3 it was counterproductive,” he added. 
The Bank has admitted that QE caused pension scheme deficits to balloon, which forced companies to plough money into the schemes that might otherwise have been used to invest in jobs and growth. Pensioners have also seen their incomes fall as a result of low annuity rates, impacting spending.
Nice to have confirmation that what your humble blogger first identified as the Retirement Plan Death Spiral has been confirmed by the Bank of England.

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