Roger Farmer Is a Member of the More Expansionary Policy Caucus...
...and he is a very smart if (because he is a?) non-standard macroeconomist.
Roger:
We need more quantitative easing to create jobs: I argue in this piece that:
- Quantitative easing should be expanded
- Even if the Bank of England were to buy the entire UK national debt that this policy would not be inflationary
- The global recovery is faltering and an expansionary policy is needed to encourage private investors to create jobs
- Additional quantitative easing could save as much as £38.5bn a year in interest costs to the taxpayer
May 18, 2006 was an important day. It was the day when the Bank of England began to pay interest on reserves. In October 2008 the Fed followed suit. This monumental change in policy gave the Bank an important new tool in its arsenal. It allowed the Bank to influence the economy not just through expansion or contraction of the stock of money, but also through the composition of its balance sheet.In March 2009 the Bank and the Fed made a second unprecedented change in policy. They began to buy long term assets; both central banks have increased their asset holdings over the past year by roughly 11 per cent of GDP. The Bank and the Fed are each sitting on inflated balance sheets that are more than twice their normal size.
The asset purchases by the Bank of England and the Fed have not resulted in corresponding increases in the UK and US money supplies because when a central bank pays interest on reserves, the money supply is no longer tied to the asset base of the bank. A broad measure of the US money supply has been contracting at a rate of 9.6 per cent per annum, a rate that has not been seen since the Great Depression, and growth in the broad UK money supply has been steady. Private investors can choose to hold their wealth in the form of safe assets or risky assets. At the safe end of the spectrum there is cash. At the risky end there is equity and low grade bonds. Unemployment remains at 7.8 per cent in the UK and 9.5 per cent in the US because investors are scared to put their money into activities that create jobs. The appetite for risk has vanished.
Quantitative easing encourages the private sector to create more jobs. As yields on long term assets fall, some of that money moves into equity and newly capitalised firms expand and begin to hire workers. In light of a slowdown in the global recovery, quantitative easing is a programme that should be vastly expanded. Unlike fiscal expansion, which increases the national debt, quantitative easing saves money for the Treasury. Take the UK case, where the Bank of England has bought mainly gilts. The expansion of the Bank balance sheet by £200bn generated a net flow income of roughly £6bn since gilts pay, on average, a return of 3.5 per cent and the Bank returns 0.5 per cent to commercial banks as interest on reserves....
As the economy begins to recover, private demand will put upward pressure on interest rates. In order to prevent an explosion in domestic credit creation that could fuel inflation, the Bank will raise the Bank rate. At the same time, it will raise the rate that it pays on reserves...
