So why the hell didn't quantitative easing produce HUGE inflation?

There's two simple answers to the question of why quantitative easing (QE) didn't set off some massive burst of inflation (to answer Reg reader Gordon 10's question posted here). The first being that it did, the second being that some people, fortunately this time the people running the central banks, got their economics right …

[Anonymous Coward]

Inflation is 0%. Why do you expect to be rewarded for piling gold coins into a vault, and having a dragon sit atop it?

Curiosity here, more than anything else - interest on cash savings accounts has generally approximated the underlying inflation rate for years - with a few exceptions (IceSave had a great interest cash account rate - 8% - I bet that was sustainable, oh wait, no it wasn't).

[Doctor Syntax]

"Why do you expect to be rewarded for piling gold coins into a vault, and having a dragon sit atop it?"

He didn't complain about not being rewarded for piling gold coins into a vault and having a dragon sit atop it. He complained about banks paying poor interest and banks operate in a very different way. Most of the money they are lent by savers they lend out again to people who need it for some purpose. Generally the people who need it are prepared to pay for the benefit they receive from the loan. This makes everyone happy to varying degrees. The original lenders get a return on their savings. The banks make a return because they lend at a higher rate than they borrowed and the eventual borrowers hopefully get whatever benefit they were aiming for (if they didn't then they won't be happy).

And at present it's not working like that. Due to interest rates being kept lower than inflation the lenders are being ripped off.

The gold coins in the vault arrangement works very differently. The gold price fluctuates and you make your money by buying the gold coins when it's low and selling when it's high, a little detail nobody seemed to have explained to our former chancellor when he sold our gold at the bottom of the market.

[Anonymous Coward]

> He complained about banks paying poor interest and banks operate in a very different way. Most of the money they are lent by savers they lend out again to people who need it for some purpose.

Yes I know that. My point was that if you look at any cash account over the last 10-15 years the basic rate of interest is at best around 2% percent above inflation. Sure, you used to be able to get 4% in a cash account, but the underlying inflation was 2%, so the next gain was 2%. There are 2% cash saving accounts out there today (mostly on fixed-term bonds, so not the most liquid form), so I was really arguing that the effective cash interest rate isn't much worse than it used to be if you are willing to shop around for a bit.

If you want much more than 2% today then you're in to unsustainable banking problems again ...

[anentropic]

"Most of the money they are lent by savers they lend out again to people who need it for some purpose"

In fact they don't just lend out 'most of the money' they are lent by savers... they lend out many times *more* money than they are lent by savers

the amount of actual savings on the books versus the larger amount lent out is the reserve ratio

there is no minimum reserve ratio in UK (expressed as percentage it's typically low single digits)

http://en.wikipedia.org/wiki/Reserve_requirement#United_Kingdom

[Sorry that handle is already taken.]

So when are interest rates going to rise? And why doesn't one of the high street banks break away from the ridiculous Bank of England base rate?

(Very simplistically,) retail banks operate on the spread between their deposit and borrowing rates. If they raise the former, they have to raise the latter otherwise they go out of business.

And they also go out of business if they alone raise their rates because everyone takes their borrowing business elsewhere.

[Mike Street]

"I'm tired of my super bonus regular savings fixed term limited withdrawal deposit account paying fuck all in return for the money deposited within."

That's something else you can blame on the EU (though probably the Government would have done it anyway).

Interest rates (like any return on investment) are a reward for taking a risk. Since the Bank Deposit Guarantee Scheme, (under the recast DIRECTIVE 2014/49/EU and previous EU directives) guarantees your money will be paid by the State if the bank goes bust, up to £85,000 since 2010, you aren't taking any risk (except perhaps inflation, which is currently zero, or the UK government becoming bankrupt). So you don't get any reward.

Iceland not being in the EU, it had no scheme (or not one anyone believed in) so a deposit there carried more risk, and hence had to offer higher interest. So they paid 8% or so, around twice what UK banks offered. People seemed to be surprised when that money disappeared, as they claimed not to know they were taking a risk. The interest rate paid is the best possible indicator that they were, even if they closed their eyes to it.

You can get 8% (or even more) if you are prepared to risk losing the lot, just not in a bank deposit. Some corporate bonds pay 4%, and some Government bonds even more (Greece and Argentina probably do, for example). Do you feel lucky?

But if you, sensibly, decide not to risk your money, no-one will pay you much reward. Why should they?

[Anonymous Coward]

" So you don't get any reward."

False logic:The bank loans it forward with a hefty profit and as a capital owner I want my share of that.

Also, there's a significant risk that government isn't paying anything at all when bank goes titsup.

So false logic again.

[codejunky]

Hmm

The problem with demanding better interest rates from the bank is likely to do with how they have been treated. In the US there was a toxic scheme which spread and started off a crash. One of a million things in the world could have happened but thats the one that did it. At that point we had a government who spent way too freely via debt and consumers who were just as reckless. Of course it turns out there were some activities going on by a few within the banks which the regulators should have stopped or at least been aware of, but the bankers were blamed for politicians and consumers demanding more credit and bankers became the latest 'ok to hate'.

The banks wont give us more money for free because they already are. It is demanded that they hold more in reserves and have much tighter regulation etc. That costs money, that holds the money they would have given away for putting money in a safe account government backed with tax payers money. The money we would get in interest is being used to make banks less likely to fall over. And to repay their debts to the gov when it propped them up.

[Tom 13]

Re: Hmm

Except the governments are all telling us the bits that were loaned to prop them up have all been repaid so the money isn't going there. And at this point the regs have all been at the high point for more than 4 years, so that should have equilibrated by now and we ought to be seeing some improvement in the economy and hence the interest rates.

No the problem is more fundamental and Tim names it by missing it here:

Our transmission mechanism, V, may be broken or partially malfunctioning, but we can overcome that simply by flooding the place with M, so as to avoid that fall in PQ.

There's a whole lot more to this MV <--> PQ thing than M, V, P, and Q. Whatever that more is, the artificially inflated housing prices broke it so badly that it isn't translating to inflation. But what's broken so badly is the job market which isn't recovering. There was something of an astute observation on these pages a few days/weeks back: the inflation is real and its there if you know where to look for it. They pointed at luxury goods, I'd point at food prices. The inflation is real, but the numbers used to measure it are being manipulated to make it seem like it isn't. IF we ever do gain traction again in the job market, the Central Banks won't be able to stop the hyperinflation building because they're flooding M because the job market broke V. The instantaneous transmission will just take over.

Any rational person looking at the US economy right now can't have a positive outlook. One of the places the inflation is going is right back into a housing bubble. Most people aren't buying because they can't get the loan (a few are worried they might get stuck when the next shoe drops), but if you look at what is selling (because they have money or access to money) THOSE prices are headed back into pre-collapse territory.

St. Milton was right: don't fuck with the money supply. Keep the money supply growing at the rate at which the economy is really growing (which also means don't fuck with your GDP statistics) and make the politicians solve the problems they create.

[bep]

Re: Hmm

The problem with classical explanations like this is that they don't deal too well with things like the housing market. We should invest rationally in housing just as we should in any other investment but the problem is you can't live in a share portfolio. So people put up with paying interest on housing loans which is over the odds so they will have somewhere to live. It should still be a rational investment because if you rent you should be paying the owner's real or implied interest plus a bit, but what's this, there seems to be a disconnect between house prices and rents? How does one explain that 'classically'?

[Anonymous Coward]

Re: Hmm

"The inflation is real, but the numbers used to measure it are being manipulated to make it seem like it isn't."

Obviously. Very blatant in every OECD-country.

QE pumps billions of dollars to the ultrarich every _month_ and some wisecracker tells us there's no inflation when inflation is _defined_ with a ratio of things money can buy vs. amount of money, all money. Reason why FED isn't publishing M3 anymore.

See:

http://www.shadowstats.com/charts/monetary-base-money-supply

In 2008 US had 17% real inflation, regardless claims for otherwise. Still 5% per year while the Official Truth(TM) is that there is no inflation.

Consumer price index isn't an measure for inflation, it's just few, very carefully selected products with manipulated prices.

Here in North CPI for daily consumer products is based on 25 (!) items. Nearest supermarket sells about 15 000 different products so these 25 are totally irrelevant as price indicators.

Especially when every major shop has the list of these 25 in hand.

[Tim Worstal]

Ah, now you're asking for prediction, not explanation. And prediction, especially about the future, is a very difficult thing....

Late this year, early next is the conventional wisdom here.

[Doctor Syntax]

"Late this year, early next is the conventional wisdom here."

Yes it's been the conventional wisdom for several values of "this" & "next" now. It hasn't happened. Does this suggest that there might be a problem with the theory?

There's certainly a problem with the effect which is that although inflation might be low, when interest rates are lower savings lose their value. It's the unspoken intent, of course. For one thing it encourages people to spend instead of save and for another it's the loss of value of savings that makes the debt less burdensome in the future.

But people have savings for a reason: it's money they think they'll need in the future. So at some point in the future we discover that we haven't got the savings we need & there's damn all we can do about it. I think economists, instead of reading more & more papers & books about economics, should go and read TMMM, especially that bit about the tar pit. Because that description about pulling one paw out only to get another stuck more firmly seems to describe exactly what economic manipulation is doing: solving immediate problems at the expense of more problems which aren't immediately obvious.

[Anonymous Coward]

"Does this suggest that there might be a problem with the theory?"

Either the theory or the reality (economy)... I'd lay a (fittingly combustible) fiver on the problem being with the latter.

[Blank Reg]

The rise in interest rates keeps getting delayed and QE continues because I think governments don't know how to safely get out of this situation. Interest rates have to go up eventually and QE needs to go away, but doing it too fast will lead to trouble. Does anyone know the value for "too fast"? I doubt it.

[Tom 13]

@Doctor Syntax

when interest rates are lower savings lose their value.

Savings ALWAYS lose value relative to the rest of the economy. When savings rates were at 7 or 8%, inflation was running 10%+. That's why truly wealthy people have their pocket money in savings accounts and their wealth in bonds, stocks, etc.

What's different now is that at 5.25% (the old savings and loan guarantee before the S&L collapse) people didn't FEEL like they were losing money. At 0% interest (or even 0.75%) people both know and feel it.

[Anonymous Coward]

Re: @Doctor Syntax

"What's different now is that at 5.25% (the old savings and loan guarantee before the S&L collapse) people didn't FEEL like they were losing money. At 0% interest (or even 0.75%) people both know and feel it."

And THAT Tom13 is the whole point!!!

Economics is not about MV=PQ! It is, in the end, and from the very beginning, all about human perceptions and the behaviours that these give rise to. Mr Worstall's simplification of the equations, valuable as this is, obscures the fact that in the end that all of these equations are simply very simple macro-level proxies for getting our minds around the complexities of human behaviour by abstracting them all up into an Azimovian kindergarten-level psycho-historical model.

There are two types of economists, besides the wrong and also wrong! Those with degrees from our venerated Schools of Applied Mathematics (LSE and so on) and then there are those with degrees from our much maligned Schools of Behavioural Science. The difference between them being that the mathematicians believe they can get their systems of equations right, someday, while the sociologists know that we will never get it right because human perceptions and behaviours are constantly being moulded by present and past experiences melded together with beliefs and hopes for the future.... some of which they are constantly being fed by the mathematical economists.

In the '70's, just as St Milton was making a name for himself, we had already noticed that the basic problem with our models was that the behaviour of people underwent significant shifts across any time-series much longer than 7 years. This meant that long before one could hypothesise from a statistically significant time-series of data as to what should be in the models the reality they were intended to forecast was no longer going to be the reality in which their policy recommendations would be applied.

The longer people FEEL that they should keep their money in their pockets for necessities, and for paying down debts at the old high fixed interest rates and avoid the very high short term credit rates (now exposed for all to clearly see), rather than spending it on 'bling', TV dinners and other unnecessary items they will discover the benefits of a tight domestic financial policy.

Following Mr Worstall's notation Q will respond less and less quickly to rises in M the longer people get habituated to spending what they do not have. Q is anyway sticky upwards because of the logistics of re-stocking a global supply chain, let alone the effect of investment lags or expanding production into currently underutilised capacity. So increases in M will have an increasingly lower propensity to drive Q, and by the same token... ie. that personal demand is readjusting to the side of wisdom, there will not be great pressure on P either. So V will drop as well. This is why this recession is taking so long to recover from this time around and ultimately the reason lies with the fact that is was caused by a failure of trust amongst ordinary people in the financial system itself. You can see Mr Worstall is probably a mathematical economist at heart. Sociologically speaking the classic equation MV=PQ can be written, for the sake of central bankers and the government treasury..

Propensity to QE * (Amount Available i.e. MV) = Propensity to Spend * (Amount Spent i.e PQ)

These equations are not mutually exclusive. MV=PQ says every level of economic activity (PQ) has a requisite level of MV. Happiness is getting to a sustainable level of production and prices and keeping there with some incentives generated through policies suggested by the second and a reliance on the social infrastructure that links them in the real world.

You have probably noticed that we have 4 variables, all of which are independent, all of which influence one another and all of which can and are influenced by the actions of almost every player in the economy.

The bigger you are the more effect your actions will have. The fewer large players, and the fewer large-scale behavioural shifts amongst the smaller players, then the less influential any one player can be. The policy indicators will be much more likely to have the effect you want. It is one of the pre-requisites of a pure market. It is only pure markets that have any hope of being predicted and for their environment to be managed with only small tweaks as needed so that they continue to serve their intended functions.

Intentions which are ostensibly the well-being of us individuals. That a focus upon MV=PQ by all the rich and mighty helps achieve and maintain this goal in any way is merely part of our belief system.

However, the problems we have still despite using the insight it gives us is a GOOD THING! It brings our blind faith into question.

We are resolute in ignoring that we do not have a pure market, anywhere. The central banks have propensity to manipulate M. Service and manufacturing companies at the behest of shareholders have a propensity to raise V through obsolescence and fashions and frippery and misleading advertising and Q is pushed ever upwards by psychological manipulation of consumers. Companies similarly apply great effort to influencing prices both on the supply side and the sales side. Very large companies seek to corner supplies and fence off markets, very large associations of smaller companies do the same thing through the government of their nation state, large associations of nations so the same thing through their trading blocks and their military machines.

Is it any wonder that keeping a dynamically stable and expanding equilibrium between MV and PQ is a circus act achieved by few and only briefly? Perturbations are increasingly large and increasingly frequent as the frequency distribution of corporate (and nation-state) sizes polarises between the ever fewer ever larger ever more powerful and the ever more ever smaller and ever impoverished.

MV=PQ has nearly run its course. These are its death knell. But such is metaphysics we can rely on its resurrection too. Once the power of most large corporation's finally transcends that of nearly all nation-states on the planet the organisation of their market will be a matter of board meetings and management directive.... the ultimate low-risk command structure for risk-averse businesses. MV=PQ will become a true mathematical relationship taught in ever management school to help with regional and local area setting of production goals, consumption opportunities and the volume of IOU processing needed to facilitate our activities.

The Soviets and PRC tried it, and failed. Perhaps Mr Carney will help Euro-USA get it right this time!

Me? I am heading for the hills..... I have got this revolutionary idea I want to work on... its called democracy.

[LucreLout]

@Tim

Late this year, early next is the conventional wisdom here.

Base rates won’t rise this year.

Given that a primary driver of inflation is public spending (public sector pay, in essence) and we have a government committed to reducing the bloated size of the state down to something more manageable, this should apply downward pressure on M4 money. Couple that with cooling commodities prices due to lack of demand elsewhere in the world, and it’s hard to see a reason why the UK would need higher base rates any time soon.

Will they rise? Yes, absolutely. Will it be this year? Nearly no chance. Next year? Possibly, but also possibly not. Without the Eurozone competing, an important driver of growth is missing, and it is certainly possible that this will see the slack persist beyond next year. Thereafter, all predictions are fairly worthless due to the in/out referendum and the appalling lack of serious debate or political progress being made.

As things stand, only Europhiles can really be sure how they will vote. I might vote yes, or I might vote no. I’m wholly undecided, and need to see plainly what the ‘new terms’ of our membership of the EU will be before deciding on my vote. The political apathy from the EU on that issue is unhelpful, as clearly the yes camp will need time to sell the arrangement to the UK. I need to know what things look like if we stay in, but importantly for the EU, I also need to know what things look like if we leave. That requires both sets of options be fully negotiated between now and 2017. I raise this issue only because it is this that will determine the route map for sterling and BoE base rates post 2017 as opposed to natural economic functions.

[Schlimnitz]

Re: @Tim

Look at the Scottish Independence thingy for a clue to what I predict will happen.

Cameron and EU cronies will say 'look at all these news shinies we promise to give you if you vote right'. People will be duped, and nothing (of any substance) will change...

[Neil Stansbury]

Tim, it's not nearly as complicated...

...as the maths might make it look.

The simple reality is all the money injected through TARP, direct QE or any other initiative has been trapped by two things - the increases in reserve requirements and the Fed Funds Rate.

There has been no noticeable inflation because the money hasn't been in circulation, it hasn't been in circulation because vast quantities ($4 Trillion+) of it are on deposit at the Fed trapped by the required and excess reserves.

When an institution can deposit excess reserves and get 0.25% from the Fed with zero risk it's easier than lending it into the wider economy - that was Milton Friedmans original idea, to use the Fed Funds Rate to allow the Fed to expand it's balance sheet and still control liquidity.

At some point all this funny-money will leave the Fed, and flow into the wider economy and then all.. bets.. are.. off..

(This is of course ignoring the fact that the various stock indexes around the world haven't been sky-rocketing because of the "business cycle" or real productivity improvements, they've been climbing because of vast amounts of cheap money in the banking system, some of which has ended up helping the Bond market bubble etc)

http://www.frbsf.org/education/publications/doctor-econ/2013/march/federal-reserve-interest-balances-reserves

http://www.huffingtonpost.com/robert-auerbach/massive-misconceptions-ab_b_3490373.html

[Zog_but_not_the_first]

However...

Whenever I get to the end of an explanation of economic activity like this (and for the record, I like, and find Tim's most useful) I hear a "Ta da!" in my head as if I've been watching a magic trick.

Clever, complex, utterly convincing and yet I know there wasn't a rabbit in the hat, dove in the wine bottle etc.

But this trick changes lives.

Endnote: I'd love a Tim article on privatisation. Has it worked. And for whom?

[Tim Worstal]

Re: However...

"Endnote: I'd love a Tim article on privatisation. Has it worked. And for whom?"

Hmm, yes, that could be fun. Given that I'm at the ASI and the ASI were the people who pushed it all originally. Be fun to actually be objective about it rather than polemical.

[Naughtyhorse]

objective about it rather than polemical

okay, who are you and whay have yu done with the real tim worstal?

[Chris Evans]

Re: However...

On a related note. I often wonder where the country would be economically now, if the Miners had won?

Also the Coal Mining industry itself?

[Squander Two]

Re: However...

> if the Miners had won

Depends how you define "won". Scargill's explicit aim was to overthrow the democratically elected government and replace it with something more to his liking. He is to this day a member of the Stalin Society.

I suspect a lot of the miners would have been quite unhappy, after "winning", to discover precisely what it was they'd "won".

[Stork]

Re: However...

Where he country would have been? In the pits ;-)

Honestly, I was in the UK in the 90es and it seemed like the main reason to defend the coal mines was for the mining jobs. I thought the first concern would be if it made economic sense, and to me it seemed to be an expensive way to produce polluting energy.

My native Denmark is far from perfect, but at least governments rarely got directly involved in industry.

[David Black]

Re: However...

Thumbs up for that too and maybe an explanation of how the state owned companies of other states are so keen to own our former state owned companies... that has never made much sense to me.

[Tim Worstal]

Re: However...

I have an interesting theory about that. No proof of it, none in the slightest, but will include it.

[Squander Two]

Re: However...

> maybe an explanation of how the state owned companies of other states are so keen to own our former state owned companies... that has never made much sense to me.

Well, I'm not Tim, but I'm going to leap in here anyway.

Different countries' governments are good at different things: the Israelis are a lot better than the British at post-earthquake rescuing, for instance; the French are better than the Americans at high-speed trains. The advantage of privatisation is competition: it enables people who are better at doing something to take it over from people who are worse at doing it. There's no reason why those taker-overs shouldn't themselves be state-owned.

Now, we could make the argument that French trains would be even better if the French would privatise them. Maybe that's true, maybe not; I have no idea. But that's an argument for the French to have amongst themselves; there's nothing we in the UK can do about it. In the meantime, French rail firms, even nationalised, are better than British ones. And what we can do is build a system that allows and even incentivises them to run our trains.

Plus, enabling French rail firms to make more money by running some of our trains too -- obviously they can make more money running rail services in multiple countries than they can in France alone -- means they have more money for investing in their own expertise, and thus they get even better at it. And we then benefit from that too.

[graeme leggett]

lack of twins

The problem with state-scale economics is that there's never something you can exactly (or close enough) compare with to see what would/might have happened if you didn't do the thing you did.

Like a dinghy nearing the shore on a blustery day. You can try and use your sail to get you back to safer water, or grab the oars and pull away heartily. But you can't put yourself back in the same position and try the other method to say which is better.

[Tim Worstal]

Re: lack of twins

A huge amount of truth in that. And we've really only got reasonable macroeconomic data on perhaps 20, 30 countries, over 50-70 years. Not really enough cycles and examples for us to be able to sort through all the variables.

We're not quite blind here but we're definitely not seeing all that well.

[Anonymous Coward]

Re: lack of twins

Isn't that true with anything a state does? What if the US hadn't invaded Iraq in 2003, how would the world be different now? What if the US had invaded Saudi Arabia in 2001 since that's where most of the 9/11 terrorists actually came from and were funded from?

We can't go back in time to answer those questions any more than we can investigate whether the Eurozone would be better off if it had adopted QE or what state the US would be in if we'd tried austerity. Obviously people will have their pet theories both for these questions and the former more politically-charged ones, but no one can prove their case.

That's why it is always so easy to run against the incumbent - no matter what he does, you can always claim you'd have done it differently, and we'd all be better off.

[Paddy]

You got me?!

I am reading an economics post, me! And what is more I feel I am learning something - Shock, horror! And I quite like the feeling of learning something new in an unexpected topic.

Thanks Tim.

[baseh]

Thanks Tim, great explanation

And yes, as already commented here the worry is now how to ease the Easing quietly. The bonds are already crashing at the mere hint of rising interest rates and the volatility jumps. It is a real worry about the "solid" investments, pensions, mortgages, etc., where the big money of the ordinary people is.

[Paul 25]

Likewise, thanks Tim

Likewise, thanks for a very clear and concise explanation of something that the mainstream press have largely glossed over. I despair of the major media's inability to explain, even in general terms, what's going on with things like QE

I always like a good TW post. Even when I am in disagreement with Tim about some aspect of politics, I still get to learn something.

It's also nice to read stuff by someone who is happy to accept that you can disagree with someone without them been 100% wrong or having no insight worth listening to.

Sadly being a leftie in the UK at the moment can be hard work. Any suggestion that someone's sacred cow might be nonsense, or that some highly simplistic view of a complex problem might be wrong gets you shouted down.

It's all a bit too "People's Front of Judea" over here on the left at the moment :/

[Naughtyhorse]

People's Front of Judea

Splitters!

[LucreLout]

Re: Likewise, thanks Tim @Paul 25

Sadly being a leftie in the UK at the moment can be hard work. Any suggestion that someone's sacred cow might be nonsense, or that some highly simplistic view of a complex problem might be wrong gets you shouted down.

I don't know, because I'd rather listen to you and decide if your point has merit than simply shout it down, however, on any realistic assesment of the last general election, it is the sacred cows of the left that were slaughtered by the populace. Simplistic arguments over redistribution of rewards without commensurate redistribution of efforts were roundly dismissed.

With respect, it is for the left to review why it exists anymore. Seriously. When labour formed as a party, had they set out a list of demands chiselled in stone, most of the UK would have regarded those demands as complete a long time ago. Simply lurching further down the same road doesn't bring meaning to the jouney - travel from Glasgow to London and you'll experience the wonderous joys of Cumbria/Newcastle, Manchester/York, and so forth until London. Continue down that road and all you get is Kent ;-)

[Anonymous Coward]

Re: Likewise, thanks Tim

"Sadly being a leftie in the UK at the moment can be hard work. Any suggestion that someone's sacred cow might be nonsense, or that some highly simplistic view of a complex problem might be wrong gets you shouted down."... paul 25

I think you have seen quite a bit of that in these comments Paul! Take heart. Where there is smoke there is fire. The concerns of social democracy are not those of the 'socialist' stereotype. Too many socialists have failed to distinguish between policy and philosophy to the point that some think the policy stereotypes, joyfully waved in your face by the stereotypically 'greedy' apologists of the status quo, are the socialist philosophy. It is time to recall that nearly every economic thinker from the early days of economics, and who are now canonized by those that attack you, had socialistic goals and intents. That is they sought ways of advancing the well-being of all men, whatever economic activities they are able to perform. They specifically did this as a counter to the evils of the then status quo which your current opponents have inherited and still so diligently try to justify at, against all logic.

The question for the 'left' is not "How do we make the socialist prescriptions of last century work for people today?". It is rather to ask "What have we ALL learned from the past 200 years and what structures, institutions, policies and combinations of policies are most likely to best move mankind towards the sustained achievement of universal well-being?".

The answer is not in MV=PQ!! However, it undoubtedly does involve markets. Real ones. Not casinos. It undoubtedly involves private economic enterprise... and public at times.. and quite possibly oscillations between the two in specific types of service or production. We cannot foresee the cataclysms of the future. Adaptability, diversity of approach, decentralisation of communities and resilience are key goals of any package of policies, and there should be lots of them. Packages that is, not necessarily policies. Different peoples, in different places and at different times and in their various communities face different challenges and opportunities that they will always understand better than 'outsiders'. Outsiders may be on boards of globalized corporations, employed by global institutions or be socio-political philosophers or dogmatists. The tasks of 'small men' people who have the psychological need to be super-influential are to conceive the circumstances, and police them, so that each place lived in can become an effective and sustainable home and environment delivering well-being to its occupants. Whoever they may be and however they want to organise themselves at the various levels of interaction with one another. The key is that nobody and no group be allowed to exercise market power illegitimately and to the detriment of others who are not actively working against their own actual well-being, as distinct from their ambitions especially where those ambitions depend upon taking from others rather than giving.

This means understanding the evil of homogenised solutions, the evil of having all your eggs in one global basket, in one mindset and ultimately in one corporate mega-don.

Socialism is really about, if it means to achieve its welfare goals, the self-policing of human economic activities on a global scale so that no one person, group or entity is able to disrupt the fair and free trade of goods and resources nor alter the psychology driving the consumption of people into ways disadvantageous to their well-being nor impose their will or selfish economic policies on others by military or economic or criminal force. Yes we do need rule and governance that is truly social and in the social interests of everybody such that all can experience their concept of well-being that is globally recognised as legitimate even when different. That is the root of cultural diversity and a resilient prosperous species.

I am afraid Mr Friedman and Mr Keynes, even with the help of Mr Worstall, are never going to get us there. The 'pass' awaits us. We can let Mr Carney and Cameron and the Global n+n carry on driving us all into the swamp barring the 'pass', or we can redefine what it is to be 'socialist' by actively thinking about the problem analytically and philosophically so that the bridge over the swamp, as well as the direction of the road through the 'pass' and into the plains beyond, can be designed and presented and built before we all sink in the mire.

[Anonymous Coward]

Re: Thanks Tim, great explanation

"The bonds are already crashing at the mere hint of rising interest rates and the volatility jumps." baseh.

...perhaps because the market conditions that the equations used to gain policy insights assume perfect markets and rational economic man. Garbage in --- garbage out.

As long as the average size of players in the casino grows and their size distribution polarises between large and small volatility will only get worse. You 'solid' pension funds are 'managed' by big players. Your mortgage participation units are agglomerated by big players and your 'solid' investments are in big players themselves.

It can only get worse.... until every player, and association of players acting in concert, is statutorily limited in size so that their individual actions are always too small and spaced in time to move the markets in any noticeably way.

Market economies are good... real ones.

[Banksy]

@1980s_coder

None of the high street banks are tied to the Bank of England base rate, there are many alternatives they can use such as LIBOR when lending or borrowing money. However, due to various schemes by the Bank of England they can get their hands on pretty much as much liquidity as they like. The result is they don't have to compete for savers' ££££ and rates for savings products are in the toilet.

[Richard Jones 1]

Re: @1980s_coder

Yes and no. If you base your rates on you own theory of where they should be you may win if you can create a margin wide enough on which to live. However if all the others are borrowing at 0% and lending at >5% you are going to be hard pressed to make loans at anything like an acceptable rate if you are paying out 4%. In short why would anyone want to borrow expensive money when cheap money exists?

I fall into the 'I in effect own my own personal bank group'. I do not need to borrow from a commercial loan arranger and my age fewer and fewer people would want to lend to me. So, if I want something I borrow from me and pay no interest. I would love to have an interest rate that pays me more - I look back to the past years when I was getting above 10% - but also when I look back there were costs to that time that I am not sure I want to pay now.

Of course the left would like me to pay it all away as 'stoppages' i.e. increase tax on me and the economists would like me to go out and spend, but on what? Health and caring for other family members limit my options and don't half dent my interest in simply buying for the hell of buying. I should get some projects sorted on the house, but see above comment on the 'caring' issue'. The conflict between that and the projects would just be too great. I must also keep an eye on my own possible future care issues, though I have negative thoughts about, i.e ways of avoiding 'care centres'.

[graeme leggett]

Re: @1980s_coder

"there are many alternatives they can use such as LIBOR when lending or borrowing money"

But then some bankers got done for fiddling LIBOR, so perhaps that's not so good.

[Banksy]

Tons of inflation

For your man on the street there has been tons of inflation. The thing is that the measures of inflation have been manipulated to remove the inflationary items that have the biggest impact on normal people, i.e. the cost of housing.

Additionally, manufacturers, especially of food products, now give you much less for your money than they used to. The size of Mars bars these days is an absolute joke. Of course, the manufacturers dress it up as, 'Won't somebody think of the children!" type concern.

Good point from baseh though. Things could turn deflationary in some areas on the back of an interest rate rise, not that I think one is even remotely imminent.

[Paul 25]

Re: Tons of inflation

The Mars bar was reduced in size in 2008, not sure you can blame that on QE.

[Graham Marsden]

@Paul 25 - Re: Tons of inflation

> The Mars bar was reduced in size in 2008,

So why has it now diminished from containing 230 calories to only 177 calories yet remained at the same price?

[StephenD]

Re: @Paul 25 - Tons of inflation

The Mars bar I have in hand, bought yesterday, weighs 51g and has 230 calories. Very tasty it will be too.

Yes, there are smaller ones around - in part driven by the Poundland phenomenon.

[Chris Miller]

Re: Tons of inflation

I share your doubts about the 'reality' of CPI/RPI. It often looks like government economists coming in and adjusting the 'basket', saying: "out go boring old bread and milk, in come exciting flat screen tellies and PCs". But the thing we all know about tellies and PCs (and similar electronic consumer goods) is that, whatever the price is today, in 6 months you'll be able to get the identical item for 10% less - a significant degree of deflation is baked in.

[Anonymous Coward]

Changing the CPI basket

You can argue at the margins about what the mix should be, but you can't argue about whether the mix or contents needs to be changed as times change.

A century ago the average person spent quite a bit more of their earnings on food than they do today. Food is a pretty small cost at the level of sustenance. The thing is, most people prefer to buy food at well above sustenance levels, buying "natural" or fancy foods, craft beer, expensive wines, going out to eat (paying someone else to make your food and do the dishes for you, basically) So it is probably a much larger portion of your income than it really has to be. Likewise fuel expenses depend to a large extent on how far you choose to live from where you work. They're also subject to fluctuations in price unrelated to the condition of the economy due to trouble in the middle east, drought, etc. So pulling those out of calculations of 'base' inflation makes a lot of sense.

Then you have technological advancement. 100 years ago no one had expenses for internet, cell phones, TVs, and so forth. Only the rich city dweller had to worry about bills for electricity or telephone. When the average person adds something to the basket of goods they buy, like cellular service/phones and internet over the past 15 years or so, it reduces the percentage spent on many other things. Hopefully because they're making more money, maybe because their saving less/going into debt, but regardless of that on a percentage basis of how much they spend on everything they're spending less on something else like landline telephones, buying CDs, going to movies, replacing their car less often because they shop online instead of driving to the mall twice a week or whatever.

Is it right to add stuff for buying computers and TVs? Well, consumer data shows people are buying an average 0.whatever computers and 0.whatever TVs each year, so obviously it isn't a crazy idea to represent it. The price of those do drop, so you get a much better computer or much better TV today than you did for the same money in 1995. That is exactly what the CPI is supposed to reflect. If you don't think that measures things accurately, come up with your own way of measuring inflation and get people to accept it as superior. Claiming that they're gaming the system by adding stuff that falls in price serves no one except conspiracy theorists. They're only gaming the system if they add things that fall in price that typical consumers are not actually buying.

[kraut]

Re: Changing the CPI basket

You can argue at the margins about what the mix should be, but you can't argue about whether the mix or contents needs to be changed as times change.

You can argue about that, indeed, but no one can sensibly argue that excluding housing costs makes sense.

[Tom 13]

Re: Changing the CPI basket

I'm not arguing food prices vs 100 years ago. I'm arguing food prices vs. 10 years ago or even 5. Ten years ago I paid $100/week for groceries. Five years ago I paid $150/week. At this point I'm up to $175/week and thinking I need to shift the budget to $200. No they haven't gone up because I buy more expensive food. They've gone up because of inflation. Could I economize more than I already am? Yeah I probably could, but they wouldn't affect the end bill all that much.

Despite the protests from the earlier poster about the 2008 date on the size change of the Mars bar, it is a real phenomena. It happens with the sizes on the bags of chips, the half gallon of ice cream that is now maybe three-quarters of a half gallon, and even the 16 oz can of evaporated milk that is now 14 oz. In fact, the only size that has gone up in my lifetime was soda when it transitioned from the 2 quart container to the 2 liter bottle. And that was more than 30 years ago.

It's known that a number of key elements are excluded from CPI because if they were included the economists brains would go all wobbly because nothing was matching up with their theories. Housing is only one, fuel is another. And yes electronics are overstated. But hey, that gives a constant downdraft on all the other crap that's going up.

[Anonymous Coward]

Re: Tons of inflation

"whatever the price is today, in 6 months you'll be able to get the identical item for 10% less - a significant degree of deflation is baked in." Chris Miller

Don't be fooled Chris. I have been buying PC's since my first 'staff discount' kit, when working at IBM and just been working on aspects of them in the 'labs'. Consumer electronics, especially at the high-end of technological innovation, arrive through 'channels'. "Supply chains" might be another more modern phrase. Channels provide local market facilities and knowledge, they also provide customer service and a route back to repair workshops. They are also a convenient way for tech manufacturer's to move as much new kit out of the factory door very very fast before the next crank of the technology cycle and so insulate them to some extent from the cash-flow lags inherent in getting money back from the retail market. The channel absorbs some of the risk in getting the latest and greatest into your sweaty hands.

Channels are expensive to run. Tech' kit, functionality for functionality, actually has depreciated at 25% compound since 1980. This cannot sustain the very necessary channels. Their very structure and costs imposes a tight range in which the unit price of the retailed product can vary... whatever a product's functionality. PC's have effectively cost me almost the same number of working hours every time I have come to buy one for the past 30-odd years. This is justified by adding more and more largely useless functionality. Yes 6-months down the line any particular model will be 10% cheaper. It will also be 25% cheaper 12-months down the line. Guess why. The new model is nearly due. The channel has to be flushed. Old models must be moved... or dumped in the 3rd world especially now that the 'civilised' market is basically saturated.

The CPI manipulation is laughable. And very cynical. Don't be concerned about the 2.5% baked-in state pension annual hike.... the food price inflation is very real. I have seen a 100% increase since 2008 in a wide range of very basic products. It happens to be that range of food which is all that I can afford!

[Anonymous Coward]

Re: Tons of inflation

> the cost of housing

Housing prices were rising long before QE and have been for years - so you can't blame QE for this. There are many and wide ranging reasons for it.

* Massive massive under supply of housing stock. Mixture of issues here. Physically we have a larger population (some due to immigration, a lot due to people just living longer). Logistically we have a more spread out population - families no longer live together as much as they did. Students go to university and need housing, students don't go back to the family home after university to chase the jobs and so need housing, women leave home to find work rather than staying at home until they get married and so need housing.

* Poor utilization of the housing stock. People are living longer and staying in large houses after children have left home / spouse has died.

* Women working (effectively more than doubled the disposable income of a household, as all of the essentials were budgeted for off one income, and most of that £££ gets steered towards "big ticket" items - housing, cars, etc).

* Modest rates of inheritance tax. The next generation of a family can now inherrit £650K from both of their parents tax free. If your parents own their house, you get a HUGE boost to what you can afford, which in an arena with limited supply will always drive prices go up. If your parents don't own a house then you're buggered, as the lack of that "step up" basically locks you out (i.e. it would take you 25 years to earn that 600K if you and your partner both put away £1200 a month, at which point you probably don't need the large family house anyway).

Basically we need to build 15 million houses, and then prices will drop to something sensible. If you want a "social" model then taxing inheritance more heavily wouldn't hurt to level the playing field between those who's parents had houses, and those who did not, but the fundamental issue is massive undersupply.

[Banksy]

Re: Tons of inflation

I'm not blaming QE for any of the things I mentioned. Should have made that clearer. Just suggesting that there has been inflation.

As Tim suggested in his article one of the key reasons for QE not directly introducing inflation is that the money didn't actually get circulated in the 'real' economy.

[Doctor Syntax]

Re: Tons of inflation

"Housing prices were rising long before QE and have been for years - so you can't blame QE for this."

I think the causality runs the other way round:

1. Elimination of housing costs from inflation measures used to determine interest rates.

2. Off-shoring a lot of production of items in the inflation indexes leading to very low values for those indexes.

3. Maintained low interest rates in view of the low apparent inflation.

4. Low interest mortgages lead to bigger and bigger price rises for housing as all the cheap money goes there.

5. LOTS of financial shenanigans to tap off as much of that home loan business as possible including selling loans to people who can't possibly afford them.

6. BIG liquidity crisis as soon as the people who couldn't afford the loans start to default.

7. QE to fix the liquidity crisis.

8. Low interest rates due to QE fixing the liquidity crisis ultimately caused by too long a period of low interest rates in the first place.

If long continued overly low interest rates were the original problem it's difficult to see how continuing unduly low interest rates for a long time is going to solve it.

[Anonymous Coward]

Re: Tons of inflation

> I think the causality runs the other way round

All true, although the long-term sustained rampant increase is only possible in situations where there is an sustained undersupply of the resource in question.

Your arguments explain why people were _able_ to pay more, but not why they _needed_ to pay more. In a well functioning market, more houses would have been built a long time ago to meet demand (i.e. houses cost a lot less than £300K to build, so why is no one building more of them).

[Jim99]

Re: Tons of inflation

"In a well functioning market, more houses would have been built a long time ago to meet demand (i.e. houses cost a lot less than £300K to build, so why is no one building more of them)."

Try this experiment:

1) Buy a field from a farmer;

2) Write to the local council's planning department asking for permission to build a house on it;

3) See what happens next...

[SImon Hobson]

Re: Tons of inflation

> Try this experiment:

> 3) See what happens next...

And that in a nutshell is the primary reason prices are as high as they are. As TW likes to point out, that's what happens in a market, prices adjust until supply and demand match - in this case, prices rise until enough of the demand drops out, and then it's balanced.

We can argue about the causes of rising demand - I believe that "living longer" is probably one of the larger factors - but in the absence of planning restrictions then the market would have caused more houses to be built.

Of course, whenever and wherever new houses are proposed to be build, there's generally "something of a backlash" from the people already living there. I don't know how many watched that series on The Planners a while back - but I couldn't help seeing a certain amount of irony in villagers complaining about how the new houses would spoil the village yada yada yada ... when those people complaining were living in houses that were relatively recent and would have had exactly the same impact (blocking of the view, extra traffic, etc, etc) when they were built. Of course all new houses should be built "somewhere else" - but every "somewhere else" is "in my backyard" for someone.

Too much "I've made it, lets pull the ladder up and keep 'the wrong sort' from getting up here with us" IMO.

At which point I look back, and mostly thanks to choices made by my parents - I don't think I've ever lived in a house that's older than myself (except perhaps by a year or so when I was a newborn) ! I'd never thought about that.

[LucreLout]

Re: Tons of inflation @Simon Hobson

Of course, whenever and wherever new houses are proposed to be build, there's generally "something of a backlash" from the people already living there

I see it all the time where I live. However, just because there is a backlash doesn't mean it is illogical.

There exists in an area, a certain amount of infrastructure such as schools, road capacity, rail capacity, hospitals etc. Adding further people to an area, for that is what housebuilding does, absent increased provision of infrastructure, must reduce the quality or availability of service to those already living there.

More property for sale must logically reduce the value of existing property in a given area too.

So build more infrastructure becomes the inevitable answer, which leads equally to the inevitable question of who pays for that? Well, the NIMBYs (for that is how they are invariably branded) are already losing out on some of the value gain their property would otherwise enjoy and may take the view that is enough of a subsidy towards the new buyers. The new buyers are very unlikely to be able to afford the cost of the new infrastructure to be added to the value of their would be homes, as that would further increase prices. So the infrastructure simply doesn't get built, making the logical position of those already living somewhere to resist further building.

There needs to be a solution, because (and I say this as a home owner) we're not building enough houses. The government doesn't have anything left over after wages are paid to invest in infrastructure - it doesn't even have enough to pay the wage bills, hence the deficit. I certainly don't have what I'd consider to be a fair and balanced proposition for resolving the issue, and I've never heard or read one that was. Invariably they devolve into two camps each persuing their own best interest at the expense of the other.

[Anonymous Coward]

Re: Tons of inflation @Simon Hobson

Hi LucreLout... my sincere apologies if I branded you in an earlier reply to you.

You are right. Fortunately, having the potential for us to one day become a democracy, there are more people needing houses than people trying to keep up the value of their own.

When looking at solutions to the myriad problems involved with 'doing the right thing' we so easily fall into the trap that we have placed our own politicians into. We think in short horizons and instant cures.

Getting ourselves through the next 20 to 30 years without too many disasters and backward steps that actually do degrade our whole civilisation is going to take an even greater level of thought, patience and real action that re-invents perhaps more than a half of our institutions. That is not to so they need to be thrown out.. most only need re-engineering. It is to be preferred that this happens prior to the critical events that will otherwise characterise life for the Millenials and absorb most of their focus. For them, without us starting the process with real meaning now, it will be a case of 'too busy fighting the crocodiles to drain the swamp'. And they WILL GET EATEN.

See my comments regarding the Green Belts. The council's that extended them have high representation very often from local businessmen, often property and construction concerns. It is small wonder that they choose to use any legislation available to them over the years to pursue their own business interests. Especially when their desire to benefit from a reduced supply of building land is congruent to the NIMBY tendencies of their local electorate.

So in analysing causes we soon see beyond the Green Belt legislation and its abuse. There is also a problem in the area of local representation within our democracy. We actually are not so different, despite our self-righteousness, from the FIFA executive and board in the way in which are institutions of governance actually are set up and the manner in which they operate. Without thoroughgoing reform and restructuring, just like FIFA, we and many other countries around the world cannot ever hope to deliver fairness and well-being to each of our citizens.

The primary institution that is needed in any democracy is one which is tasked with powerful and ascerbic capabilities and responsibility to defend against plutocracy and autocracy in any of the others and at whatever level of function. Public and private. And it itself would be required to be totally transparent in its operations, as would all the personal affairs of its staff and their acquaintances until death. The price of PUBLIC service would be subjection to its rigors. The benefit must be that once entered into, much like a priesthood, one can never go back to private enterprise and is left with an adequate pension.. transparently monitored. The qualification would however be significant real world work experience and skills development.

hey ho. We dream on but as a scribe once wrote claiming it to be the words of a certain Great man..."My people die for lack of vision" That is the difference between knowing what is wrong and doing nothing, and knowing something is wrong and having the vision to start doing whatever seems to be required. And the humility to adapt and change as the journey reveals deeper or more accurate truths.

[Anonymous Coward]

Re: Tons of inflation

> 1) Buy a field from a farmer; 3) See what happens next...

Yes. Current green belt policy is pretty much exclusively why we don't have a functioning market. That was my point. The price of land is nothing to do with the actual price of land - you can buy agricultural land for about £6K an acre - so it isn't a land supply issue, it's a planning an approvals issue which entirely self inflicted by policy and therefore fixable.

> So let’s consider building 15 million houses. That would destroy current property valuations for generations to come.

Sure, but as you so clearly point out 15 million houses are not going to appear overnight, so the banks will have plenty of time to adjust. If it takes 100 years then I think we're screwed (that's slower than the current rate of building, which isn't fast enough to keep up with population growth, let along alleviate some of the pressure).

> Optimistically over the next 10 years we might build 1/10th of that.

As population is currently growing relatively consistently at around 5 million heads every 10 years we'll need to to a lot better than we are now (i.e. if we keep building ~160K houses a year nothing really changes).

> or incentivise house building [which can only really be done via tax reductions]

You just need to relax planning and free up some (OK, quite a lot of) land (and possibly tax those who sit on land banks to avoid them hoovering up the supply to keep prices high) - market forces _should_ take care of the rest. The material cost of a house is not that high once you factor out land prices (which are self inflicted costs, which are entirely within the remit of the Government to fix).

> but pointing the finger at preceding generations

It's got nothing to do with pointing the finger at anyone. House prices cannot sustainably rise at 10% a year when underlying wages are stagnant - it's a monetary fiction which is going to either implode or turn the entire economy in to a Japanese basket-case. Building more houses is the only way to release the pressure - sure, you can't do it instantly without ballsing up the financial system, but it needs to happen at some point. Sky high housing costs just make much of the UK uncompetitive for many industries, or are a massive hindrance to labour mobility - neither is good for the long term health of the economy.

[kraut]

Re: Tons of inflation

There's also the fact that when Labour gave the BoE independence - one of the few(*) good ideas they managed to implement - they tied them to the wrong inflation measure: RPIX, i.e. Retail Price Index Excluding Inflation. Which, in turn, led to interest rates being artificially low during the boom years, fueling house price inflation.

(*) the other one was FOI, and that didn't go far enough. Plus Tony is on record as regretting FOI. As you would, with an illegal war and thousands of deaths on your conscience. You'd regret giving citizens a little bit of insight into the government they pay for.

[LucreLout]

Re: Tons of inflation

Basically we need to build 15 million houses, and then prices will drop to something sensible. If you want a "social" model then taxing inheritance more heavily wouldn't hurt to level the playing field

Firstly lets deal with the myth of inheritance tax. All that would happen if this was increased is that assets would be progressively gifted to children to avoid the tax. Ideologically, I quite like IHT, as it means your wealth is derived from your efforts rather than those of your ancestors. However, what value do you put on a first rate education, for example, as without ability to confer fiscal advantage on your children, more parents will seek to convey some competitive advantage (which is really just the same thing).

So let’s consider building 15 million houses. That would destroy current property valuations for generations to come. Which, if you don’t own a house is possibly a good thing. If you do own one, it is disastrous, as you’re now plunged into negative equity forever – anyone who bought in the last 15 years, so all of Generation X would be finished. If you’re a bank, you’re bust, because those whose only asset is the house will simply hand back the keys and file for bankruptcy. If you’re a baby boomer trying to downsize to fund your retirement then you’re knackered. If you’re the state, how on earth do you propose recapitalising or replacing the banks, and funding this building program that would exceed anything ever delivered by the state?

Moving on from the fiscal Armageddon that would ensue, to look at where we could build all these houses? Imagine we’d built all of these without blowing up the banks, such that people could still obtain a mortgage and so buy these properties. Where do they go? Existing towns and cities couldn’t cope – you’d need to build more roads than the green lobby could comprehend, more train tracks than Beeching ever envisaged…. Where does that get funded?

15 million houses is an impossibility. Optimistically over the next 10 years we might build 1/10th of that. 15 million could take almost 100 years to complete.

House prices weren’t wonderful for Gen X. They aren’t great for Gen Y. For the millennials they’re going to be pretty awful. Everyone has differing definitions of fair, but pointing the finger at preceding generations and plotting to sequester their wealth isn’t going to win enough votes and isn’t going to change anything.

Preventing the problem getting worse requires, absolutely requires, that net population increase is balanced with net house building. That alone is a minefield (do you limit immigration, the birth rate [only possible via benefits], or incentivise house building [which can only really be done via tax reductions]) which could sink any political party, absent a grown up debate about the least worst way to achieve it. If you could achieve a consensus here, then post delivery, meaningful debate on how to reduce prices could begin, and in that, I wish you the best of luck.

[Anonymous Coward]

Re: Tons of inflation

I would love to see real statistics, and not mere assertions, about where this 'population explosion' comes from. I personally suspect that the disintegration of families has more influence on the amount of accommodation available than does immigration.

People bellyache about families with two properties. But anyone who divorces and moves out has effectively turned their family into a two-property family.

[Anonymous Coward]

Re: Tons of inflation

I don't think you will find a sponsor for that study. It would show that you are largely correct. It would also show that a 'flexible labour' policy also atomises families and that would be a heresy.

Notice I phrased "'flexible labour' policy" NOT "'flexible' labour policy", it is the labour that has to be flexible. Not the policy. That means Mum working in Redditch and Dad working in Loughborough. This is of-course good for the well-being of the UK businesses, and the idea extends into the heart of the EU. It is also, of course, going to destroy families and create smaller households and need more houses. It also feeds nicely into a demand for dynamic rented accommodation as we all go chasing the jobs. If we valued a stable family life embedded in a local community and contact with our extended family and life-long friends, empowered by good local knowledge of where the sources of all the components of your preferred life-style can be obtained and at the best prices or quality. If we valued all this as a large part of the higher realms of what personal well-being is, rather than chasing bucks and iPhones as we are being taught to value, then perhaps we would all be testifying at the United Nations in a bid to have capitalistic, untrammelled and unlimited, market economies that are dominated by the philosophies of financial capitalism as being the violation of our human rights that they are. You just might find 75% of the ambassadors there starting to come around to your way of thinking after a very few years of insistent lobbying and activism.

[Anonymous Coward]

Re: Tons of inflation

I take it then that, as our basic hedonist, you didn't have to think long about your moniker to come up with LucreLout. You clearly have a good grasp of the problems that occur when too much loose money has no productive opportunities to support in the productive economy! You are right. It just chases whatever is tied down, immovable and always in demand. If you have a little more than actually needed you drive up house prices in your neighbourhood by vyeing for the best position, smartest look, largest garage, best view etc. If you have lots more you look for uniques and irreplaceables. Like listed buildings, castles and so on. If you are masochistic, or can buy somebody to do the work for you, you might corner a section of the local property market and put the houses all out to rent at inflated rates. If you are not into houses it might be stamps, antiques, books, artefacts, paeleolithic or ancient treasures or the odd Picasso or Renoir or you might get a gallery to hype up your 'new discovery' and make that peon's sketches a storage vessel for your surplus funds.

At least none of the latter are mixing up their need for a roof over their heads with their investment strategy.

Houses would not be an investment strategy if they were not kept in short supply! The reason for the shortage of obvious sites for the millions needed is the NIMBYism legitimised by the illegitimate extension by local councils over the decades of the green belt principle which was supposed to be a half mile encircling park space accessible to the town dwellers adjacent. These are now up to 30 miles out and almost always atleast 10 miles deep. London has a green belt area up to 8 times its own area. No parks in sight. Just farmland with no general access and to far away anyway for most town dwellers to get too as a frequent form of relaxation and recreation in their daily life. Those that can are also able to own a second house in the green belt. Those that can't live beyond it and commute every day. It has all been seen before. Amongst the 'location' dwellers of SOWETO in apartheid South Africa.

Antique prices rise and fall with fashion and supply. What's wrong with house prices shedding their speculative content? The stock market does it.

The storage and preservation of excess value until such time it is spent on sustaining the life processes of those that own it has been a preoccupation of humanity wherever they started farming and land husbandry needed more hands than could be consistently provided from within the family. The more food security they wanted the more people they needed and the less they wanted to pay for it. But the more surplus they found themselves with. Since then the history of 'civilisation' has been one of creating institutions that have the stability and form that give the owners of surplus value the assurance of its preservation and of its liquidity when ever it is needed. Without them coin, paper money... and houses more than your basic accommodation... have no value.

So you either respond.... 'Yes, I agree, are first responsibility is to help each other for us all to have appropriate well-being' or you respond 'Sod it! I reach for another game on your iPhone'. There is no grounds for debate between the two positions... only proselytising and conversion. Logic has been denied in favour of blind hedonistic prejudice. Go well my friend.

[Doctor Syntax]

Re: Tons of inflation

"The size of Mars bars these days is an absolute joke."

And Wagon Wheels ought to have been renamed Castors.

[Anonymous Coward]

Re: Tons of inflation

"And Wagon Wheels ought to have been renamed Castors"

Pollux.

[Anonymous Coward]

Re: Tons of inflation

@ac - that was so sodding clever/funny it really shouldn't have been AC so we could bask in that brilliance.

Have an upvote. :)

[yoganmahew]

QE causes deflation....

...at least it does when you have an asset price bubble bursting.

We had asset inflation as a result of untrammeled financial engineering resulting in an asset price bubble. Why didn't it cause significant inflation? Because it was offset by the China-effect on goods prices (not just China, not just consumer goods). When the financial bubble burst, though, we got two deflation pushes - asset prices and goods prices.

So what has QE done? It has supported and prolonged the asset price deflation by supporting the price of 'bad' assets (either financially bad or unproductively bad). Rather than a sharp deflation and a return to growth, the UK now has a catastrophically overvalued property market, still no wage inflation (the only kind that really matters) and anemic growth. As QE does have the effect of cheapening currency, the net effect for the vast majority of British people has been a lowering of their standard of living.

The lesson from Japan is not that they didn't do QE, it is that you can't skip the losses phase of a financial crash. You have to let them wash through and your best bet is to do that quickly and use some class of funny-money mechanism to make that happen. Then you let clean banks go back to funding projects.

In the US, the FDIC performs this function. The real importance of the US response to the crash was unlimited funding for the FDIC. This meant that good banks were not hobbled with having to work out bad banks, that depositors didn't lose money.

The eurozone's problem is that national governments are unwilling to work out their bad banks, keeping them alive at the cost of the economy...

[Anonymous Coward]

Re: QE causes deflation....

Right on, this is 100% correct. That's the fatal flaw of the Eurozone - there's no "bank of last resort" that can keep depositors whole so the places where the banking losses were concentrated like Greece end up with zombie banks that should have been allowed to fail.

I haven't followed closely enough to know how the BOE handled things in the UK. Did they allow the bad banks to fail, or did they prop them up like Ireland did with theirs? An overpriced property market will take care of itself in the long run - the prices simply won't go up as fast as they otherwise would for a long time. Basically buyers today will find the gains they should have had over the next decade or two were stolen by people who took them in the previous decade. In some ways that's better than a crash as it least it doesn't take down a lot of banks, but the people buying today probably don't care much for it.

[kraut]

Re: QE causes deflation....

They propped up the banks at huge expense to the tax payer, whereas they should have let them fail and have the shareholders and bondholders take the losses..

[Mage]

Thanks Tim

I've saved both pages for future perusal. You never know.

[ratfox]

The proper expression is

A bear of very little brain.

[Tim Worstal]

Re: The proper expression is

As someone whose AA Milne books were actually bought from Christopher Robin (he used to run the bookshop in Dartmouth, so this is not uncommon among sprogs of Naval families) I should of course have known that.

But simple brain and all that.....

[johnaaronrose]

Tim W implies that QE is great and that the Eurozone is doing badly because it hasn't used QE until recently. However, on Main Street in the nothern countries of the Eurozone, things look different: the standard of living is much higher than GB; though unemployment is higher, if fake employment such as work experience for job seekers & unpaid internships is taken into account, I wonder if 'real' unemployment is higher; the housing market in London etc is out of control; young people are shafted by tuition fees in GB; zero hours contracts make life difficult for many people in GB.

[Justthefacts]

Incomplete point of view

This is the central bank, equation based point of view. But the important perspective is "average person", who cares about "how much stuff can I buy with my salary". Controlling nominal prices is basically Angels Dancing on Pinhead

Truth is, people's salaries dropped by 15%, nominal prices stable, result: misery

Keynesian solution: salaries rise in line with inflation, result - happiness

Doing nothing at all: some deflation, some salary drop.

But QE is net identical to having done nothing at all. As you'd expect from the intelligent Martian perspective: adding billions to both sides of an equation (changing monetary policy) without doing anything in the real world (fiscal policy) can't possibly change the real world.

As an experiment, it was interesting, and the evidence is unequivocal: the consequence of the QE action is a recession which is the deepest since 1800s, and ongoing. Look up from your books, guys! Banks never used to need your own private island in Docklands, with guards armed with assault rifles. Any thoughts whether that might be that the plan is going QUITE as well for everyone else?

[LucreLout]

Re: Incomplete point of view @Justthefacts

Banks never used to need your own private island in Docklands, with guards armed with assault rifles

Highly amusing.

I've had a quick look out of my window, and nope, no armed guards. I've seen more armed police at the train station than I have at the wharf; Perhaps they're there due to the poor standing rail workers have with the general public?

For me, we should have let the banks go bust. That we didn't was more to do with politics than it was economics. Quite why that was, and seemingly still is, the fault of all bank staff everywhere remains a mystery to me.

[All names Taken]

Interesting!

It is interesting that the relationship MV = PQ works (apparently?), gives insight and provides means and tools for intervention.

But there again interventionists would say that and aren't they the people that created this sort of mess anyway?

[Colonel Panic]

Is that the sound of a can being kicked down the road?

Thanks for the really useful explanation.

There's one thing I still don't understand:

It was an asset bubble that got us into this mess. Isn't increasing M, and keeping interest rates low causing investors to (as you put it), "go out along risk curve" thereby keeping the values of assets artificially inflated (and just prolonging the problem)?

To put it another way, we were heading towards a cliff. We've bought ourselves some time by tipping rubbish money over the edge to create some landfill. But we're still headed towards the cliff, no?

[All names Taken]

Re: Is that the sound of a can being kicked down the road?

Ethereal rather than virtual? In either case they merely describe models of happening in a "real" world depending upon the data sensed, perceptions and understandings of it, and derivations taken between the model and empirical evidence?

In either case it looks like a dynamical system in which, for example at time T it looks as if a cliff edge with steep drop is approaching.

Add some interventions according to one's tastes and preferences and at a later time say (T + t) the cliff edge has disappeared and been replaced by a meandering normality?

[Tim Worstal]

Re: Is that the sound of a can being kicked down the road?

Definitely a worry. And UK housing prices ain't chopped liver at the moment, are they?

Still better than losing 10% or more of GDP to a recession though.

[yoganmahew]

Re: Is that the sound of a can being kicked down the road?

"Still better than losing 10% or more of GDP to a recession though."

Is it though? The biggest expense for people with static (so relatively falling) salaries increases. House price rises feed almost directly into rental price rises. So you've delayed the inevitable crash (remember the effect of the late '80s crash?) and meanwhile more of the dimished salary goes on housing costs.

Someday that housing crash is going to happen...

[Anonymous Coward]

Re: Is that the sound of a can being kicked down the road?

Who says a housing crash has to happen? If you look at long term averages and figure out property prices rise at 2% more than inflation (I'm just pulling that number out of my ass, so it is probably wrong, let's just assume that's the number though) then since 2000 you should have seen prices rise by inflation + 30% (ignoring compounding) Let's say you actually saw prices rise by inflation + 70%.

Does that mean you're due for a 40% fall? Maybe. Or maybe it means if inflation averages 2% and over the next decade that housing prices remain flat, and then you're back exactly where you should be on the long term average trendline!

Keep in mind, the only reason housing prices took a rapid fall in the US was because the debt supporting them went bust. Normally that would have taken a lot of banks down with it, but since the banks had mostly sold those loans off into complex financial instruments only the really poorly run banks ended up going bust. Along with those big ones left holding the bag on those complex financial instruments, like Lehman, AIG, Fanny & Freddie.

Yes those latter three were bailed out by TARP, but one of the major underreported stories of the financial crisis is that those three companies in particular generated so much profit since then that TARP has shown a significant profit for the US government! I'd love to see someone ask one of the republican candidates who spoke out against it whether he still thinks it was a bad idea in hindsight when it didn't end up costing us anything...

When banks could no longer sell off bad loans it became a lot harder to get loans and as a result housing prices dropped like a rock in areas where they had overheated (where I live they didn't rise like a meteor due to bad loans so there was no drop in prices at all) The UK housing market wasn't supported by stuff like CDOs, and while it may still be overheated (I'll take your word for it as I don't follow it) there's no reason that prices can't stay relatively steady for as long as it takes to get back on the long run average.

Whether that's better or worse for the economy in the long run is probably something Tim is a lot more qualified to write about than me (there's another article idea for him) but which you prefer may come down to whether you're the type who wants the rip the bandage off and get the pain over with, or tug and pull a bit on it here and there so there's no really bad pain but there's some moderate pain over a longer time.

[LucreLout]

Re: Is that the sound of a can being kicked down the road?

The biggest expense for people with static (so relatively falling) salaries increases

Lose 10% of GDP and you'll find several million people lose 100% of their salary, and shortly afterwards, their homes.

So you've delayed the inevitable crash

A property crash isn't inevitable. Though I'd agree, it is likely to happen at some point, mostly due to the government and voters not having a grown up debate about the least worst way to deflate the bubble or slow it while the wider economy catches up.

[Kubla Cant]

Re: Is that the sound of a can being kicked down the road?

Someday that housing crash is going to happen...

Is this an echo?

I've been hearing exactly this prediction for the past 40 years, during which time there have been corrections, but nothing that could legitimately be described as a crash. The allusions to a "housing price bubble" are equally misplaced. True, houses are expensive. But it's only a bubble if the price is sustained largely by confidence, and that confidence liable to be destroyed by a sudden large reduction in demand or increase in supply.

* I should make it clear that I'm writing about the UK housing market.

[BobRocket]

Re: Is that the sound of a can being kicked down the road?

The inevitability of a housing crash in the UK in the future is a mathematical certainty.

Despite importing fecund foreigners for the last 40 years the total fertility rate for the uk was last above 2 in 1973, since then it has been below replacement rate.

We bottomed out in the total mortality rate in 2011/12, from here on in this will rise as the population ages.

Fewer new ones coming in at the bottom and increasing numbers of old ones (who own most of the property) shuffling off means only one thing.

[Anonymous Coward]

Pratchett

This is actually explained more amusingly by Terry Pratchett in Making Money, in which he also explains why the gold standard doesn't make sense.

But as far as I can see QE has gone into a housing asset bubble, bypassing the people who have to pay for those houses. A rise in house prices actually makes most people poorer, not richer. If my house goes up in price by 15%, this is no benefit to me at all because I still need to live in it, so I am no better off - unless I cash in by moving to a poorer area which is presumably poorer because of some loss of amenity. House prices should be included in inflation, because the same amount of money buys less house as time goes on.

[Tim Worstal]

Re: Pratchett

Yes, Brown's move from RPI to CPI (or was it the other way around?) is generally regarded as having been a mistake....

[Anonymous Coward]

Re: Pratchett

What has Brown done that hasn't been regarded as a mistake?

[John Hughes]

Re: Pratchett

Not joining the euro?

(well I think that was a mistake, but I bet most of you lot think it wasn't )

[Anonymous Coward]

Re: Pratchett

"What has Brown done that hasn't been regarded as a mistake?"

Resigned.

(He was also right about trying to reduce child poverty - which we will all pay for later on in crime and benefit dependency - but not in failing to persuade his boss not to spaff money on the War to Ensure Tony's Post-PM US Benefits, which rather negated all the other stuff.)

[Tim Worstal]

Re: Pratchett

His five tests for joining the euro were very good. No, not just because I'm a 'Kipper. They're actually good economics as well as making the political point he wanted to make.

For example, he said that Britain would need long term fixed rate mortgages before we should join.

Much of the eurozone either has long term fixed rate mortgages, or a much smaller mortgage occupied housing sector. So, when we change interest rates in the UK that changes the income of, say, 40% of all households (65% owner occupied, something more than 50% of those with a mortgage? Sorta, around?).

Where there's fewer owner occupiers, or mortgages are fixed rate for the full term, a change in interest rates only affects those who are taking out new mortgages. Say, 1 or 2% of households. Again, sorta, around?

Having a single currency means, by definition, having a single monetary policy. But as we can see, given the underlying structure of housing market finance, the effect of an interest rate change (ie, a change in that single monetary policy) will have vastly disproportionate effects on different areas of that single currency area.

This isn't just a holding action to stop going into the euro. This is a real and serious problem that needs to be solved before we try it.

It also led to something quite marvellous. Will Hutton was banging on about how we should join the euro. And how this housing finance thing had to be solved. So, he shouted that we must have a GordonMac in order to fulfill the function that Freddie Mac and Fannie Mae perform in the US. Because that is how the US gets to having 30 year fixed rate mortgages.

So far so good you might say. It's just that he published this demand two weeks before Freddie and Fannie went bankrupt....

[All names Taken]

Re: Pratchett

Banks: How can we get more money? We need more to meet bonus requirements of our staff(s)?

Guv: Why don't we encourage the minions to buy their own homes? In good times we get more dough, you get more dough.

I tough times we repossess (okay - rephrase that to: repossess with much wailing and hand-wringing but repossess nonetheless) and we still get more dough.

A more interesting modelling might be predator-prey ratio analysis for those on the public take?

Tsk! Humans? Honestly?

Alternatively we can take the Alien Analogy and talk of impending doom that will befall soon unless (like those Princes in Uganda?) we get lots of monies first?

[Anonymous Coward]

Re: Pratchett

Can someone explain to me why the UK financial industry feels that contracts for financing an asset which will take 20 to 30 years to pay for should be anything other than 20 to 30 year contracts?

The alternative to renegotiating, changing money provider etc, every 4 or 5 years, is not fixed-rate for the term. I lived for 40 years where the contracts are full-term, but you could move institution for a small fee, after I think it was about 7 years, and the rate is always at the Prime Rate of the Bank concerned plus 1%. With a two or three month notice of increase (originally 30days?).

It worked wonderfully. Of course it cramped the competitive opportunities of banks to steal clients from one another but it meant that the buyer always knew what he was getting into as much as anybody else did and it was one less thing to keep factoring into your long-term budgeting. Equity access on a 'debit card' basis has also been the norm for nearly 30 years.

[kraut]

Re: Pratchett

What has Brown done that hasn't been regarded as a mistake?

- resign?

- get rid of Tony as PM.

[graeme leggett]

Re: Pratchett

Just to bounce in some more tech - Making Money plays with the idea of the analogue computer which is truly measuring liquid(ity) and the flow of money - the Monetary National Income Analogue Computer aka Moniac.

[Tim Worstal]

Re: Pratchett

Plays round with....well, sorta. Moniac is real. Was built, there's a working model of it out there.

http://en.wikipedia.org/wiki/MONIAC_Computer

It's almost stereotypical Pratchett, to take something near absurd yet real and then play with it even more.

That playing being that Moniac moves from being positive economics (describing, as a model, what is) to normative (what ought to be). Almost French in fact: if we can get the model, the theory, right, then the real world will change to conform to it.

That's why when they do finally get Moniac right the gold flows back into the vault. It's a joke which shows a very deep understanding of economics.

[streaky]

Answer to headline question:

It did, move along, nothing to see here, look at some graphs?

[ecofeco]

No inflation?

Where the hell does this fantasy and far to often repeated bullshit come from? Consumer prices DOUBLED during the last recession. DOUBLED, while unemployment rose and wages stagnated.

No matter how many times anyone says it, the fucking emperor is still not wearing any clothes!

[Anonymous Coward]

>> Consumer prices DOUBLED during the last recession

"Citation needed", I feel: while some things that I was personally exposed to such as London housing and rail tickets certainly took some painful steps (a) I'm pretty sure it wasn't 100% and (b) those are selected items from one of the world's premier la-la lands (London), so I wouldn't dare generalize to the other 60 million green-and-pleasant-landers

[John Hughes]

Re: No inflation?

Consumer prices doubled? You are insane

[J.G.Harston]

Re: No inflation?

When my local supermarket was Netto I could buy a tub of marge for 37p. When it became an Asda the cheapest same-size tub is something like £1. Similarly, Netto used to sell a three-pack of tins of tuna for 70-something-pee. Asda sell one single tin for 70-something-pee. When I first went in and picked up a tin I kept looking around for the missing two that must have fallen out of the multipack.

[Anonymous Coward]

Re: No inflation?

So because a few items went up badly in price inflation must be running amok?

There's always some nutter who claims that consumer prices have doubled in a short period of time, but they can't prove it other than by referring to a conspiracy theory site like shadowstats. Somehow people who got by on $20K a decade ago continue to do so today without having be forced to live in their car and eat cat food. Unless virtually every economist in the western world is in on it, you're never going to be able to defend such a ridiculous position.

[Anonymous Coward]

Re: No inflation?

I think the comments about prices need some exploration. First I am quite sure that places where the US Dollar is legal tender have not had the same experience of those areas using the GBP. My experience of US food prices is that, if you can wield a kitchen knife and a cook pan, know the value to your body of fresh food and recognise uncooked meat when you see it, then I have fed myself on $20 $30 dollars a month when the travel allowance for just one day from 'the firm' was equal to or more than that.

The issue is not culinary art. The issue is that the CPI is designed for a specific purpose as an input to making sense of time-series statistics in economic and business planning. It is designed to be holistically generic (? yuk) to be of wide applicability. Second, wherever it is used it will therefore not be entirely applicable. Least of all when applied to your experience as a consumer just trying to get by. Even in this sector, the lower down the feeding chain you are the less realistic it is going to appear to you. You will spend more on rent, food, clothes, power and fuel than those higher up as a proprtion of your income. In fact that list probably does it for you. No iphones, no tablets, no fancy foods, designer clothes, holidays anywhere... let alone abroad and Interest rates are of no interest!

And yes, the nay sayers are right... prove it, show me the statistics.. they say. there aren't any... they say. Well yea! But who is going to pay to get work done that proves how badly you are being shafted compared with the metro-creepers by the policy decisions of people who would rather nobody knew what you are suffering with your 'basket of goods'? This isn't democracy! Don't you know?

[Squander Two]

Re: No inflation?

> When my local supermarket was Netto I could buy a tub of marge for 37p. When it became an Asda the cheapest same-size tub is something like £1.

Has it occurred to you that there might be a reason why Netto sold the supermarket to Asda?

[Anonymous Coward]

Re: No inflation?

Is this because the fish stock problem has not been linked clearly enough in our minds to the effect scarcity is having on price? Eat less fish. Let them recover. You are right about the price though. I have found one can does about 3 meals for me, or 4. Depends upon how much lettuce, tomato, onion, olives, houmus and pepper slices go on the plate, along with the panini-grill toasted tortilla (actual an 8p wrap) with a bit of grated cheese and garlic clove inside. A little fish goes along way. A little of each of those ingredients goes along way. But it costs a lot more than 8 years ago that's for sure!

[ecofeco]

Re: No inflation?

Citation? Proof? Go to your local library and request newspapers from 2008. Make sure they still have the ad inserts and circulars. Compare both prices and quantities to present.

Compare residential rents and lease.

Compare used car prices.

[Squander Two]

Re: No inflation?

You must be very young, Ecofeco. Some of us are old enough to actually remember 2008.

My mortgage payments have decreased considerably since then. So have a lot of people's, what with interest rates being at record lows. In fact, 2008 marked the point at which those prices started to decrease. That must have had some knock-on effect on rents. Petrol's about 25% cheaper. My family's monthly shopping budget has indeed increased, maybe by as much as 20%, though I think more like 15%. Definitely not anywhere near 100%. All the tech we buy has of course plummeted in price. My phone bills have gone up a bit, though: maybe 20%.

If your library research is revealing 100% price increases across the board, you may need to sanity-check your calculations.

[Anonymous Coward]

Re: No inflation?

Fortunately I don't have problem with finding new clothes. I just visit the charity shop every few months. All I need for six months for exchange of a tenner. And if you need someone to show you all what to do on the Quid a day Nosh contest, just ask. I've been doing that one too... dead easy! ... ? or is that my egg recipe?

[BobRocket]

Not liquidity but solvency

The GFC was sold by the banks as a liquidity crisis, "look we've got all these assets (triple A rated with a cherry on top) but due to a few delinquent borrowers we can't capitalise on them".

(banks are expert at rigging markets and misselling to the unwary/miseducated)

The governments believed them (were in hock to them) and lent them huge sums of money against these assets at very low rates.

The assets are worth shit*. It wasn't liquidity it was solvency. Banks had bought and sold these worthless assets to each other in a massive circle jerk, they knew they were worthless if liquidated but they were good as security because they were rated and had insurance.

When the few delinquent borrowers (remember them) defaulted it took out the insurance company (AIG remember them) and then the banks.

Publicly financed QE has allowed the insolvent (and corrupt) banking sector (with their revovling door) to stagger on, immune from failure their rapacity knows no bounds.

Well there are bounds, the Sovereigns have mortgaged themselves up to the hilt to save the private banking system, these banks are still on (very expensive) life support (they are Zombies and cannot be ressurected, they wiil consume all)

The next crash will take out the overleveraged Sovereigns and there will be nothing the Central Banks can do.

There is (was, I haven't checked recently) an interesting description of what QE is and does on the BOE website that was only released after they started doing it.

* the average house is 'worth' nearly 200 grand not because many people actually have that kind of money but solely because the banks (who have a vested interest in lending larger sums) are prepared to lend two competing people any amount of money, if mortgages were based upon 2.5 times income the average house would be 75 grand (including borrower funded deposit).

[Anonymous Coward]

Re: Not liquidity but solvency

TARP was profitable for the government, even though AIG, Fannie/Freddie and others were bailed out quite heavily to the tune of hundreds of billions cumulatively.

https://projects.propublica.org/bailout/

[BobRocket]

Re: Not liquidity but solvency - No profit either

According to the link, they spent $615bn and have made a profit of $55bn.

Investing $615bn in index linked bonds would have returned $675bn so the reality is that they have lost $5bn in value over the intervening period.

To put it in perspective, if they had invested the $615bn in the S&P500 the value of their investment would be worth around $922bn (or nothing, theoretical performance may not match reality), effectively they have given away $300bn.

[Inthearena]

Re: Not liquidity but solvency

In 2008 and 2009 I think it was a mix of liquidity and solvency.

Some banks had terrible assets (Lehman, AIG) but many had solid investment grade long term assets funded (stupidly) with short term loans (commercial paper).

Unfortunately no one really knew where the bad assets were hiding so everyone stopped lending short term until they worked it out. Good banks, including the better rated AA banks, were extremely close to going insolvent. The government stepped in to provide last minute liquidity (or guarantees).

Bank bashing is now not entirely fair (I'm a banker so obviously am biased) because Governments have responded with extremely strict regulations. Banks now fund their assets with a prescribed mix of deposits, short term debt, long term debt and equity. They even have to set aside a loss reserve in case the loan goes bad (no surpises that this has to be deposited with the government!). Hedge Funds and Pension Funds do none of this and therefore enjoy a major cost advantage of banks. Banks are now in a structural decline including, unfairly, the good ones.

[Anonymous Coward]

QE was used to increase inflation

Otherwise we would have had global deflation after the financial crisis, which would have been very bad: Why haven't we seen lots of inflation the last couple years? That's because global growth and demand is still weak, with China slowing, the U.S. growing well below usual for a recovery period and Europe pretty flat as a unit.

[BobRocket]

Re: QE was used to increase inflation

'Otherwise we would have had global deflation...which would have been very bad'

What, assets marked to market rather than overvalued fictional assets marked to fantasy.

The financial system had (and does) have a vested interest in fixing prices of goods higher than they could realistically fetch in a fair market (they get to lend more at interest)

They are quite prepared to lend as much as competing buyers will pay, this means that lenders are setting the price.

They are also prepared to throw the risk of default and the inability to repay this overvaluation back onto everybody whilst escaping with only the loss of an occasional knighthood.

Explain to me on a fixed income why deflation in consumer goods in line with increased efficiency of production is a bad thing cuz I can't quite grasp that.

[Anonymous Coward]

Re: QE was used to increase inflation

If you wanted to buy a new car which cost $30K but you knew next year it would cost $28K and the year after $26K and the year after that $24K wouldn't you be more likely to delay purchase as much as possible to save money? On the other hand, if you know it will be $32K next year, $34K the year after you'd be more likely to want to buy it sooner. People reduce spending in a deflationary economy, which means companies have to lay off workers, which reduces spending further which means more layoffs. It is a vicious cycle and there's practically no way out.

When we were in a gold standard the only way we got out of deflation was when large deposits of new gold was discovered (i.e. increase in money supply) and since we got off the gold standard deflation has only happened once and it took the largest stimulus plan in the history of the world to break the grip of global deflation in the 1930s. It was called WWII, and isn't a response we'd like to have to resort to again (it was probably not only all the spending, but the fact that the industrial base of the entire world aside from the US was mostly in ruins by 1945)

[Anonymous Coward]

Re: QE was used to increase inflation

" People reduce spending in a deflationary economy, which means companies have to lay off workers"

Totally outdated model which was approximately true somewhere in the 1950s.

Companies lay off workers to make more profits and the economy is irrelevant: There's _always_ a need for more profit, for this quarter.

And companies don't "have to" lay off workers, they are always trying to find a way to do it, just to increase profits _for this quarter_. Even if it means that next quarter some products can't be made because of no-one is there to make it.

Hiring someone is a cost at least an year, so in a quarter-based economy you can't hire anyone, you outsource.

Also "reduce spending" is false: You have to eat something and sleep somewhere. And go to work if you still have a job: _You can't reduce spending even an iota_.

Most of the cost for ordinary people is the housing and housing costs have risen about 150% in last 10 years which causes very real deflation for most of the wage earners (i.e. real economy): Every day increasing slice of the income goes just to have a place to sleep and that means you must save from everything else.

Also: In the 50s a single wage earner could buy a house and pay the mortgage in 10 years. While supporting the family and having almost new car. Now it takes 30 years with 2 incomes and no family even while the productivity of a worker has dramatically increased.

Where do you think the money goes when wage earners are actually _poorer_ than in 1950s?

That's a definition of deflation in the consumer driven economy. The financial sector is just not part of that. (Outside of housing and some raw materials: Everything else is staying in the financial sector, forever.)

The banks (the people who have money) are seeing 10-15% yearly inflation as the central banks are dumping trillions of negative interest cash to them.

That's why central banks stopped reporting real inflation _and_ the (total) amount of money dumped to banks and big investors.

FED alone has managed about 5 trillions now, that's 5000 billions. ECB and others aren't even telling: Thieves usually don't tell how much they are stealing.

[LucreLout]

Re: QE was used to increase inflation

Explain to me on a fixed income why deflation in consumer goods in line with increased efficiency of production is a bad thing cuz I can't quite grasp that.

To keep it simple, lest I confuse myself, there seems two obvious reasons.

Firstly, the government owe a lot of money. They can't afford to repay that in real terms, so must drive inflation to make repayments less unaffordable. Absent that inflation, taxes will have to rise to fund repayments. Those taxes can't only fall on the workers, so retirees (forgive me if that is not why your income is fixed) would have to take a hit too, leaving you less money to purchase the deflating goods. Lower VAT returns also require a still higher VAT rate.

Deflation means people spend less. Again, that feeds through to employment and taxes, which absent significant cut backs to the size of the state mean those with any form of income would have to pay a greater share.

I've ignored any environmental concerns of mass producing tat (lets face it, half of what we buy is junk) as I'm no great believer in environmentalism. Your mileage may vary.

[Anonymous Coward]

Re: QE was used to increase inflation

"Deflation means people spend less"

False: It means that they buy more stuff as the prices go down while wages remains the same.

In a consumer-driven economy that's a good thing as manufacturing stuff creates jobs.

For banks it's bad as their profits won't rise and the value of their assets are going down, therefore it's always mentioned as a bad thing, very bad!

As we already know, not a single one economist cares about people, they are always paid by big money and therefore the profits for the ultra rich are the only goal. The more, the merrier.

So what we should do is _the opposite_ what the economists say: Bribed liars are lying whatever it necessary to get more bribes.

And that's why money runs the world: It pays the economists and the politicians, directly.

At that point votes (and so-called democracy) are irrelevant.

[Anonymous Coward]

Re: QE was used to increase inflation

"Explain to me on a fixed income why deflation in consumer goods in line with increased efficiency of production is a bad thing cuz I can't quite grasp that..."

Part of the cunning plan? Your fixed income is funded from the earnings of some interest bearing financial instrument ultimately linked to some business making things. We hope. If prices drop and instead of consumption rising (like they tell us it does in Econ 101 and in boom times when the opposite is being explained away) now we see consumption dropping (because it isn't boom time... get it? Not sure I do either) because prices are dropping. That means the businesses supporting you in your fixed-income may fail and ultimately your income too. because boom or bust we all have to keep consuming more and more. Otherwise businesses will go bust, people out of work and even less demand.

Interestingly, the same is true of productivity. If demand doesn't rise as a result, less jobs are needed for the same output, that reduces our buying power and further reduces demand for the more efficiently produced goods thus endangering the firms making them which might put more people out of work and reduce demand further. So productivity is also a bad thing!???

Now we could go on to talk about robots too.... they eat nothing, wear nothing, don't need warmth and go nowhere. Jeesh, we sure are doomed unless we pay more and more for everything and buy more and more of everything and pay more and more taxes to support the more and more guys next door who keep losing their jobs! Yep! We really do have to look after our businesses! What'll we do without them?

[All names Taken]

However ...

... credit (no not that kind of credit) due to where credit (no not that kind of credit) is due and has there not been a worldwide cooperation in seeking a less harmful way of working through things (as described in the article?)?

[Disko]

I will definitely quote

"what need have we for the politicians to put the next generation into debt when we can sort it out just by inventing a bit more money today?"

to me this sums up exactly what has been going on: powerful people don't like some random numbers that don't even affect them directly, and everybody else has to suffer.

[PghMike]

color me skeptical that fiscal stimulus is irrelevant

You wrote: "Simply on the basis that this is the first time anyone really tried that unconventional monetary policy, that QE, and it does seem to have worked."

I suspect that fiscal stimulus would have helped a great deal more than QE. QE, after all, makes loans cheap, but when demand is missing, offering to loan companies money on the cheap isn't particularly compelling -- I think the expression is "pushing on a string."

Creating demand, i.e. fiscal stimulus, by having the government either spend directly, or give money (in the US) to states to spend, is a much more direct path towards getting money circulating in the economy, and increasing V.

And it would "obviously" have helped (well, as much as anything in economics is obvious). We have in the US still too high unemployment, and we also have piles of infrastructure tasks that need to be done, from expanding high speed internet into the hinterlands, to repairing bridges and roads, to hiring teachers to teach overcrowded classes. I suspect it would have been relatively uninflationary to take people who were out of a job anyway, and hire them to do jobs that needed to be done, and that they could have done.

Instead, those people sat on their hands, and the corresponding investments never got made, all due to lack of fiscal (not financial) stimulus.

[Tim Worstal]

Re: color me skeptical that fiscal stimulus is irrelevant

I don't insist (although I do believe) that monetary policy definitely worked better than fiscal here.

However, I do insist something else. The standard Keynesian story is that at zero interest rates only fiscal policy can work. Recent years have shown that unconventional monetary policy (ie, QE) does work. Maybe not as well as fiscal, open to that idea. But the "we MUST" have fiscal at zero interest rates is now proven not to be true.

[Brewster's Angle Grinder]

Helicopter money

We've also had a really bizarre stimulus in the UK: a mandated transfer from banks to wealthy consumers. It was called payment protection insurance mis-selling.

That said, this was an enlightening article. I've read Krugman for a while and I got far more out of this; I understand what everybody was worrying about and why it wouldn't work. Thanks.

[Anonymous Coward]

Re: color me skeptical that fiscal stimulus is irrelevant

But Tim. It depends upon your view of the criterion of what 'working' looks like! If it means keeping the numbers chosen as indicators of economic health looking good that might be fine for you, and good for your masters. But as this long debate has suggested, and very strongly too, there are other effects... bad ones for those of us who are the object of economic activity. It is for our well-being that we all work. Businesses, whatever labels you put on them, are only a manifestation of the way in which we happen to have arranged ourselves to help us get that work done. For our sakes. It is not gospel that protecting our financial industry, and its position in the world... or our influence in the world, are necessary and sufficient for our ultimate economic health as individuals. It is pure jingoism to suggest that it is. Just a 'Convenient Truth' based on sectarian self-interest and personal egoism of politicians who want to 'punch above their (true) weight in the world'. It is also necessary to have this position to squash any surfacing of the Inconvenient Truth which is simply that all capital is created only by labour. We will still work and provide goods and services to each other, whether or not the banks and large corporates are involved. We will still produce surpluses and distribute them to each other through local market transactions. Transitioning would be painful if done too fast, but we are being asked to sacrifice for the banks and big business anyway. How much more motivated will people be if sacrificing wholly for their own benefit?

We have seen many. and by no means all, of the institutional network of shortcomings that keeps us in the quagmire that is called the UK economy. Tory or Labour, Green or Nationalist they will not grasp the nettle of admitting who they are representing. They all still think it is only about governance... the twenty-first century version of patronising elitism serving its own sectarian interests while indulging in the occasional sop to salve their own seared conscience.

There is no social contract worth a sod, and what is needed before one gets to questions of how society is structured is an economic contract. A clear understanding of how the rights of man play out in economic relationships when they are implemented. It looks somewhat different to the system you are all trying to prop up. Yes, it is market based, Yes, there is private property. Yes, there is competition, technological progress and the grand missions of vision and exploration that help feed that progress. And you do not end up with a never ending stripping of the surplus value, generated by the improving methods and technology, out into a cesspit of useless fiat instruments that are unable to contribute one iota to further production. You can actually increase the real wealth in our communities and keep most of it right there. For if you cannot you can never expect the seat of political and social power to ever be democratic. Power will always lie where the money is and the shape of power will mirror the shape of those that it serves. Big business breeds big government, centralised business breeds centralised government, exploitative business breeds exploitative government.

There is no need for interest rates. Make all instruments directly linked to to real productive investment in real businesses and projects and make their success as profitable placements of funds totally dependent upon the acumen of the investing 'agent' of the lending principal. We do not need western style casinos trading 'shares' as ends in themselves and gambling on the little daily bubbles to generate the profit to pay the interest that has to be delivered against the funds they are dealing with. Perhaps we should be examining if an Islamic banking system would be able to bring together funds from investors and deliver them into productive opportunities on their behalf. Yes it would be risky for everyone. Not much would be different. Not for most people. The present system supports a risk less banking system of assured instruments by shifting the end risk on to most of the people anyway. Only those who least need protection are protected.

[Gray]

Numbers don't lie, but liars fudge the numbers

We're enjoying a slow but steady economic recovery in the US? Inflation is lurking around the corner?

Unemployment figures (5.5% currently?) are a sick joke; the calculations are rigged to avoid embarrassment to any Administration currently in office. Try 18+% for a more realistic figure.

It's commonly accepted that worker's wages have been stagnant for 30-plus years; millions of higher-paying skills jobs have been off-shored, and workers compete desperately for low-wage service sector jobs.

Skills training and higher education are no longer affordable for working-class families; student debt (a government-guaranteed gift to the banks) is over the $-trillion mark and rising; hundreds of thousands of college-educated debtors are deferring home and other lifetime investments.

Federal budgets continue to be slashed. The formerly "unthinkable" sequester cuts remain in full force. Politically-corrupt massive tax cuts for America's investor class erode federal and state budget options.

Infrastructure build by our grandfathers is wearing out and failing; estimates put back-logged repair and replacement at well over $2 Trillion. The President and Congress have no will to address the problem.

The US is plunging ahead with disastrous world-wide trade agreements that will severely and negatively impact all the points above, by accelerating the loss of jobs and further suppressing working-class wages, further eroding consumer spending and tax payments.

Cost of living indexes ignore real costs of living. The formula is rigged to avoid COL formula-based payouts and adjustments. Fuel, housing, food, health care ... all have risen sharply and continue to rise.

Retirement in the US is becoming a slow-motion train wreck. Corporations and government have shifted the burden to the worker, with investment schemes (401k, etc.) that are another gift to Wall Street bankers. Social Security is under attack. People are approaching their 60s and 70s and being forced to compete with their grand-children for service jobs to survive. This will be a rapidly accelerating social cataclysm.

The so-called "inequality gap" is real and increasing. The wealthy can go wherever the living suits them; the former middle class, forced into poverty, is trapped.

So ... in all of this, where is the reality-based recovery? The next round of inflation ... when it comes ... will see America descend deeper into oligarchy, followed by kleptocracy.

Please explain that theory of QE again. I can't quite see it through the fog of day-to-day living down here among the masses.

[Tim Worstal]

Re: Numbers don't lie, but liars fudge the numbers

"Unemployment figures (5.5% currently?) are a sick joke; the calculations are rigged to avoid embarrassment to any Administration currently in office. Try 18+% for a more realistic figure."

Very, very, difficult to get to that. 8%? Yes, would accept that without hesitation (a point I've made many times at Forbes). You're only counted as unemployed in he US if you're claiming unemployment insurance. This runs out after 6 months. so, long term unemployed are not in that unemployment number. Technically, this is the "U3" unemployment number. "U6" is the one that includes those others and that's not one generally reported. And it's generally accepted that there's 2-3% of the working age population that probably should be counted in that U3 but aren't.

However, it's not 13%. Which is what you would need to get to 18%. Because we can check the percentage of the working age population that is in employment, college, or not in anything. And there's just not room in that number for us to have another 13% of the population that would like to be working but cannot find work. Or, the other way around, if another 13% of that total population did go to work then we'd have an employment to working age population ratio higher than any society that we know of has ever had.

Unlikely....

"It's commonly accepted that worker's wages have been stagnant for 30-plus years; "

It's commonly accepted but it's not really relevant. The correct number to look at is not wages, but total compensation (ie, including all the benefits one gets, in the US health insurance) and that has been rising.

"Cost of living indexes ignore real costs of living. The formula is rigged to avoid COL formula-based payouts and adjustments. Fuel, housing, food, health care ... all have risen sharply and continue to rise."

Eh? Oil's just halved in price and food's the cheapest it ever has been in the history of our species.

I fear you may have been getting a little too much of your economics news from Salon....

[Alistair]

Re: Numbers don't lie, but liars fudge the numbers

Oil may have halved in price in the markets, but it sure as HELL has not HALVED in price at the pumps Tim.

[LucreLout]

Re: Numbers don't lie, but liars fudge the numbers @Alistair

Oil may have halved in price in the markets, but it sure as HELL has not HALVED in price at the pumps

Oil is not bought at the pumps, petrol and diesel are. Refinery and transportation costs have not halved because input prices have, and in any case, at least in the UK, most of what you pay at the pump is tax.

Clarkson, formerly of TopGear, had that right. By price, your car has a tax guage not a fuel guage. "Oh no, I've run out of tax!".

[ecofeco]

Re: Numbers don't lie, but liars fudge the numbers

You got most of it right Gray, except for blaming the president.

The president tried like hell to get many infrastructure bills passed and the GOP controlled Congress stopped every one of them. He tried to create a better climate for workers and small business. The GOP stopped it.

Over and over the GOP threw the average person to the wolves just to spite the president.

Here are just two examples:

Reuters 2010

In Sept of 2010, Senate Republicans blocked a Democratic bill on Tuesday to end tax deductions enjoyed by companies that close their U.S. plants and move overseas.

With a largely party-line vote of 53-45, Democrats failed to muster the 60 votes needed to clear a Republican procedural hurdle against the measure, which would also give employers a tax break to hire new U.S. workers.

In November of the same, just 2 months later, the GOP was voted into the majority of Congress. That's a stupid that can't be fixed by anyone. They then proceeded to:

Published November 03, 2011 Associated Press

WASHINGTON – Republicans in the Senate Thursday dealt President Obama the third in a string of defeats on his stimulus-style jobs agenda, blocking a $60 billion measure for building and repairing infrastructure like roads and rail lines.

[Brian Miller 1]

How is the view from your nice elephant tusk tower mate?

Tim, not so nice, but dim. You keep telling all who will listen about how truly effective QE is and watch as the poor, sick and meek get too tired of the bullshit.

Remember; "You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time." - Honest Abe.

[Panicnow]

Capital inflation is not caught by CPI

There has been plenty of inflation, but it has been in the value of capital assets. which don't show in CPI etc.

Housing,Land, Shares have all risen sharply, yet GDP has remained static.

[Squander Two]

Re: It's simple, really.

> Manufacturing has been totally decimated

The UK's manufacturing sector has been growing consistently for decades. It has reduced as a proportion of GDP. You might argue that growing but not growing as much as other sectors is a terrible thing for some reason, but you cannot truthfully argue that it amounts to total decimation.

[Tim Worstal]

Re: It's simple, really.

Wayull, not entirely. I think UK peak was 2008 or so. US is still growing. But generally you're right, only not exactly.

[Squander Two]

Re: It's simple, really.

Fair enough. I generally just make this stuff up as I go along and hope no-one catches me out. Comes from being raised by a politician.

[codejunky]

Hmm

I do suspect a large problem is the rest of the world. While we do seem to have handled the recession reasonably well with what we had available I do wonder what the US and UK will do when the next 'event' hits. Right now we have a lame duck eurozone, in a tight spot Greece, China has a lot of debt and is trying to change their economy, Russia is looking for trouble and the US/UK are knocked down but not out.

Have you any thoughts (Tim) on what could be done to handle the next shock if we are still in a similar position?

And btw good article.

[Naselus]

Few things on this:

1) As I recall, the idea at the time was that the QE would get pushed out into the wider economy - we gave the banks huge piles of money specifically to get them to lend it out to businesses, who would pay it to each other and to staff, who would then spend it. So it's a little disingenuous to say that 'it did what it was intended to do', since... well, it didn't. In hindsight, it might be better that it didn't, but that's a happy accident.

2). The Bundesbank didn't believe that QE would be a good thing, and the B of E did. Germany has had faster growth since 2011, and it's budget is in surplus (and all this in spite of the Eurozone crisis). Britain's recovery has been at best sluggish and at worst a double-dip recession, This makes me question the assumption that 'we were right and they were wrong'.

3). The USA runs a considerable fiscal deficit at all times anyway, and so effectively was engaged in Keynesian stimulus through those expensive grants to Elon Musk you were railing about mid-week (along with equally expensive grants to oil producers etc).

4). Britain also started a Keynesian stimulus program in the last year or two (right to buy, for example, is a direct Keynesian stimulus of the mortgage market), and this is pretty much all that has led to any economic recovery on this side of the channel; 'pure' QE as practiced before that led to endless negative growth through the failure of QE funds to leave the banking sector (not entirely through banker greed - mostly due to the imperative to deleverage and increase capitalization.

So yeah, not convinced by this lengthy trumpeting of Monetarist economic policy as a means to reverse periods of negative growth, sorry. The 'options' for dealing with it are Keynesian stimuli on the one hand, which work and have been shown to work over and over again, and monetarist QE on the other, which has been shown to not work very well, if at all, and not work very quickly, if at all. If you're presenting that as a genuine choice, then it's kinda like the choice you face when you have a headache - you could take a paracetamol, which ends the problem in a good way, or you could blow your head off with a shotgun, which ends the problem in a bad way. Only for the shotgun to be truly analogous with QE, there's also a chance you may still have the headache after shooting yourself.

[Missing Semicolon]

The inflation already happened.

We have had plenty of inflation caused by the multiplicative effects of unregulated credit and other financial chicanery. The QE we currently have is intended to fill in the gaping holes where there was supposed to be money in the financial system - the economy has largely continued unabated, as everybody continues to assume that the money still exists.

QE simply ensures that the notional credit balances in accounts are potentially realisable as real spendable money, rather than bringing down the bank if somebody asks for them.

[astronut]

"Easy enough to do, just sell the assets, the bonds, back into the market and cancel that base money received for them."

By coercing the market to buy them back at the original price? How else does the value not tank when you try to sell so many bonds? Who will buy bonds with crap coupons when inflation is rising?

[jrwc]

Yea, "Central Banks got it right," if by right you mean robbing grandma's savings interest so to offer lower than realistic interest rates to Goldmann. Robbing Grandma to pay Goldmann. Just wait, we've seen this before.

[Anonymous Coward]

Nuts!

Any increase in the supply of currency is inflation. Whether or not there is a corresponding increase in prices is another matter altogether. There is not a single currency anywhere in the world that is not based on debt. What is the US dollar based on? Why, the full faith and credit of the United States. What does that mean? Every dollar issued, be it a printed note or via computer network is a debt instrument. Each and every dollar is merely a promise to pay in future--ie, debt. The United States is actually in far worse shape than Greece. Every other nation on Earth is now struggling to get out of the US dollar by any means possible.

Unfortunately, this same madness is applicable to very nation with a central banking system, and the entire thing is on the verge of collapse the entire world over. The system is now beyond all hope of repair. I strongly suggest that you stock up on the things you need on a daily basis for they will soon be in very short supply. This rapidly approaching crisis will be perfectly wretched and it will result in a prolonged period of penury for the majority of people.

All of the inordinately cheery reports you hear form the United States Government are patently false. There has been no economic growth, our jobless rate is sky rocketing and our so-called CPI is faked. Real inflation has been running close to ten percent per annum since 2011. The value of the dollar has fallen by fifty percent in five years. The reason no one has notices is because of the way things are no packaged. Regular standby items such as coffee are now sold in smaller packages. Coffee was at one time available in three pound cans, now it is only available in 38 ounce cans, ten ounces short of the three pound= cans it was once sold in, but th prices have gone up on these smaller packages rather than having gone down.

Most of the jobs available in the United States are part time jobs, rather than the good paying full time jobs we once had. Elderly people who would prefer to be retired are working at the part time jobs ordinarily taken by teenagers and twenty-something up and comers. Our economy is actually more regulated than it is in the UK.

A quick look at the US Debt Clock proves to be informative. It reports that the US debt is officially just short of $18.3 trillion, but that is only the "offical" debt number. There are also the unfunded liabilities that should be included as part of the Federal debt but aren't. That comes to another whopping $97 trillion. On top of that there is the debt of the individual states and the debt run up by municipalities and other sundry small government entities.

In short, the United States has dug itself into a self-filling grave of unsupportable debt. It will bury us, just as it is about to bury the Greeks and the EU. China is no better off than we are because they foolishly followed our lead. They have built entire cities that now stand empty. The only nation that might escape is Russia, but that is very unlikely.

[Olius]

Wow, that's a lot of fancy words used to simply say "Quantative Easing did not directly affect or enrich the lives of people who actually spend money, therefore the cost of living was not able to rise: the lowest common denominator person was still poor and their lives did not improve"

Economics is not this ( ^^^ ) hard.

[happy but not clappy]

Continuous equations...no no no that can't be right...

I like the idea of MV=PQ and all that, but doesn't it ignore the structure of the flows? And that structure is dynamic is it not? So therefore the equation never reaches equilibrium and effectively machine guns those who cannot afford to influence or insure against that structure, no?

The dynamic element has sand-pile qualities (bursting bubbles, avalanche effects) which are by nature unpredictable, and will always dominate behaviour at some boundary of scale, and individuals are almost always at the frothy end of that scale.

So if Milton was right, it is by exception, and only at a selected (large!) scale. Us ordinary folk are stuffed for the foreseeable.

Or am I missing something, and the last 45 years of maths is wrong. Bring on the smug Black Swan guy stage left...

[Anonymous Coward]

Steal from the poor and give it to ultrarich, that's the name of the "QE"

"At which point we've our first answer to why QE didn't create inflation: it did, but by stopping deflation, not by causing prices to actually rise."

This is bullshit. Biggest asset a consumer usually has, a house, has inflated about 150% in last 10 years almost everywhere: See China, USA, Canada and EU. Mostly because of QE: Basically negative interest money for big banks and speculators.

Not for consumers, of course: They still pay more than official inflation (which conviniently totally ignores the increased housing costs).

Why there's no more visible inflation then? Because the financial sector has totally disconnected from the rest of the economy: No matter how much money you pump into there, it will never come out to the hands of Average Joe: It runs only within financial sector.

As we can clearly see from the stock market and trillion scale profits for big banks.

Some exceptions are: Real estate, oil (a high risk product, so many have burned themselves badly with it, so not so popular nowadays) and some other raw materials, but overall Joe Average will never see a penny out of the trillions QE is dumping into big banks.

Hundreds of trillions globally goes to ultrarich, not to "economy". And those people won't invest into producing anything, ever.

Why would they, China can produce same stuff much cheaper and with no investment at all.

In a consumer driven economy it means no visible inflation as wages aren't rising at all and purchase power of a wage earner is going down globally, not up.

Just because of real, mostly hidden, inflation: Dumping huge amounts of money into system lowers the value of the money for everyone (that's why FED hid the M3 and the article doesn't even notice it) .

Big money gets compensated this by negative interest "loans" and the poor (everyone in real economy, mostly wage earners) get even poorer.

And this is not an accident: Central banks (full of stealing bankers, of course) _want_ this: Steal from the poor (by lowering the value of the money they have) and give it to the ultra rich as negative interest "loan".

Rest of the excuses are basically bullshit and ignore most of the reality. Or totally deny it.

[Sir Tiffied Knutter]

Quantative Easing

I've never read so much twaddle in all my life most of just to bamboozle people. The bottom line is that someone, somewhere down has to pay for that Quantative Easing as the government called it. And yes folks you guessed right, it will be us the general tax paying public. Sickening isn't it?

[Scary Biscuits]

Read <i> Dying of Money: Lessons of the Great German and American Inflations</I> by Jens Parsson.

This offers an alternative theory for why there has been no inflation as a result of QE. Basically, money printing (or QE) does not produce inflation immediately as the money seeps into a multitude of hidden repositories, especially off-shore. In the short term, then all you get are the positive effects, although these diminish with time. You also have a large and not usefully productive client state which loudly defends its advantage in the media and sponsors politicians, meaning that even as the evidence of problems accumulates, nobody of importance is interested in listening. Then, one day, the damn breaks and all the money comes rushing back at once.

The parallels between these historical examples and the current situation are very strong. Therefore, just because the effects of QE have so far been benign this is exactly as one would predict for the first decade or so and we are yet even to begin to experience the corresponding cost or the true recession.

[Anonymous Coward]

Let me simplify for you

There's a lot of pseudo maths in here to hide a simple truth. The reason that there's no inflation is because the banks kept all the money that the central banks created. Small amounts of it have been given in bonuses to the right sorts, but the vast bulk is sitting there making banks feel like they have more liquidity. The rest of us got fucked.

If and when the banks decide to release that stolen cash into the economy there will be inflation.

And if inflation is zero (as many commenters have stated) why do the prices of things that I need to buy keep going up? Rent, housing, food, energy, transportation, clothes all increase in price fairly regularly - at a rate far higher than my salary. Just saying that inflation is zero and using that as an excuse to make my savings decrease in real value doesn't really help boost the whole economy.

But then you all just re-elected a government that is going to cut its way to growth, so clearly up is down and black is white in the UK at the moment.

[Inthearena]

Velocity of Money

Thanks for a well explained article.

I have two questions which I would appreciate your help with.

1. What I didn't understand is why the central banks are of the view that V is the problem. I work in banking and our balance sheets have grown enormously. Stock markets are at highs and property lending and values are going gang busters.

Yes - there was an issue in 08 and 09 but I don't think there is an issue anymore. To me the problem seems more Q (slowing demand due to China and European fiscal spending declines).

2. Isn't there a timing issue here? V can change very quickly yet M and Q are less dynamic. If V increases rapidly in the next few years how quickly can the central banks respond? Could we be left with serious inflation? Perhaps this has already happened - evidenced in high investment asset prices?

[MartinKil]

Smoke and Mirrors

Surely what has happened since the crash of 2008 is a combination of Monetary and Fiscal policy. The 375 billion created by the Bank Of England in the UK was used to asset swap with the non-government sector (QE). So no asset transfer there, just a transfer of liquidity and a subsequent fall in bond yields which is one aspect of the monetary policy . At the same time the government was financing it's deficit by it's usual method of selling bonds.

Due to the Maastricht treaty (article 104 / 21.1) the Bank Of England cannot directly buy government debt.

Through some smoke and mirror application of logic it is though allowed via the secondary market to buy government debt (via the asset swap arrangement), so has effectively been financing part of the deficit with the "created" money.

We now have the situation where the Bank Of England owns something like 29% of the UK National Debt. i.e. Government sold debt instruments - Bank Of England now own 375 billion of those instruments via created money - how is this not fiscal policy?