Thursday, 6 October 2011

Another Round of Quantitative Easing: It Won't Work

The Bank of England (BoE) has finally announced what many pundits were predicting it would do. It has decided to print more money. (I know! I know! This is primarily a book blog, but my escape clause is I have given myself permission to write on any subject that happens to interest me at a given time).

Let’s recap a bit, shall we?

We are in the middle of the worst recession since the Black Death. Europe is crumbling; America, according to many economists, self-appointed experts, and financial hacks is heading for a double dip recession; and Japan enjoys the dubious distinction of having interest rates that are even lower than those of the BoE (and where has it got them?). Some might hope (in desperation) that the emerging giants of Asia—China and India—will be the engines to kick-start world economy, but it ain’t gonna happen. China and India are bubbles. This notion that there are more than 2 billion people out there, all salivating at the prospect of buying Western goods, while it might make a compelling narrative to hack out an article for some financial mag, is ludicrous. If anything, chances are that the European and Western demands for Chinese trinkets and plastic dolls will go down and China may have to look to its domestic market to maintain its growth (which is slowing, suggesting that the economy is overheating), and whatever else the Chinese peasants might need, I am guessing they would do without a Barbie doll. The Chinese property market is heading for, as they say, a hard landing; and the time is not far off when the Chinese regime will have to think hard about how many more dams it is going to build. Not good news for exporters to China.

Let’s also give it a thought why we are in recession. OK, the monetary crisis was triggered by the dodgy shenanigans of the banks which began speculating money they did not own in riskier and riskier endeavours.

But that is not the whole story.

We in the West have been living way beyond our means for a long time; and now it’s payback time. Debt is never good, especially when you’re paying it down. When the time arrives to pay back your debts, the good time you’ve had with the debt is a faint memory. I accept that there is no escaping debts in the modern (capitalist) societies. However, there are—to paraphrase football jargon—debts and there are debts. If you’ve a mortgage that is an essential debt. If, on the other hand, you’ve built up huge credit card debts buying crap you have watched advertisement of on the idiot box or some other junk you’ve got to have because some vacuous friends of yours have bought it (building their own mountains of credit card debts), then you are the author of your own misfortune.

A friend of mine who recently bought an i-pad (which he can afford but does not need; at least I don’t think he needs, as he has a perfectly serviceable lap top, which, incidently, he upgrades every two years; the guy is a manager of a warehouse) told me that ‘research’ has apparently shown that people owning i-pads are happier than people who own androids, or some such nonsense. It astonishes me that someone would find this worth researching (but it wouldn't astonish me at all to know that the ‘research’ was funded by a grant from the UK government); but even if it is true, you'd agree with me that it says more about the state of collective British psych (or, if you are pedantic, the colelctive psych of people interviewed in the survey) rather than inherent antidepressant properties of i-pad.

It never ceases to amaze me seeing people entrapped in the cage of consumer debt, the walls of which they have lovingly built themselves. For too long people in Britain have been building up debts to service lifestyles which they can’t afford (and probably makes them more miserable; I mean if your self-esteem and inner peace is entirely determined by whether you own a posh car, or show off a fancy hand-bag made from the hide of an animal, or own some ridiculously priced gadget which is the absolute tops until the next absolute tops comes along the next day and you hanker after that, one does not have to be an Indian guru to figure out that it is going to come crashing around your ears sooner or later). It can’t go on, and now the time has arrived to swallow the bitter pill.

(It further astonishes me to see middle classes, which I would have thought ought to know better, getting entangled into the debt trap. They have assets (which they risk of losing) if they can’t pay their debts, yet some of them carried on spending money, tying the money in harebrained schemes etc.,  and building up debts. If you don’t own any assets, if you are one of the beneficiaries of the benefit system, sure, carry on with your hedonistic life-style. What have you got to lose? Just say the right things to your doctor who, for no other reason than to get you out of his office, will support your disability claim, and you are off.)

OK, enough ranting against the consumerism plaguing the British society (in particular the middle classes). Back to macroeconomics.

The way I see it we are in recession (or almost in recession) because ultimately there is not enough money in the system. That could be either because there is not enough money available or not enough money is changing hands.

So what is the answer of the BoE? They are going to create money electronically. It is not the money that is coming into the system from some outside source, mind (e.g. exports, although, come to think of it what is it that Britain produces, other than weapons of mass destructions that are sold to the African and Middle Eastern despots, that is desired by the world?, although, in recent years we have tried to export hooliganism). This money is simply printed and poured into the system. The 64 million dollars question is: will the money go to the part of the economy that needs it? The BoE will give money to the banks and its big hope will be the banks will start lending money. But will they? They did not do it the first time round (paying down as they were their own bad debts). What if the banks may once again decide to hoard the cash? In which case the money will not come into system at all.
Suppose the banks do decide to lend the money. Will there be appetite amongst people to take it, especially if there is job insecurity? Take the housing market as an example. The house prices in Britain—barring some crazy parts in London—are generally considered to be down, and they are expected to fall down further next year. Why might that be? Obvious answer is people are either unable or unwilling to take out a mortgage (which is ultimately a debt). The commonly held assumption is that there are hundreds of thousands of people out there, itching to get on the housing ladder, but can’t because they can’t secure mortgages. Even if this is true, there may be very good reasons why at least a proportion of them is unable to secure mortgages: the banks have become more careful when they lend. Gone are the days of 100% loan (now that was a bubble) but many banks may require 15-20% deposits, and if you can’t afford that, they are not going to lend you. What I am saying is: just because BoE has decided to print money, it does not mean that banks will relax their lending rules any time soon or there will be a sudden demand for incurring more debt.

The inevitable consequence of printing money is an increase in inflation. That is if it works and the BoE achieves its aim of getting more money into the system. If there is a lot of money sloshing about, it stands to reason that its value will be lowered. Which means the prices of everything from utilities to commodities will shoot up. And that is potentially a risky thing. Controlling inflation is like riding a Bengal tiger. There is no guarantee that you will be able to control the beast. And with the public sector salaries frozen for the foreseeable future, that is going to hurt. Shadeloads of people in the public sector are going to lose their jobs in the coming years (primarily because the jobs were probably non-jobs in the first place, created by the previous Labour government, which had no real answer for the big structural deficits in the British economy, and simply created public sector non-jobs from the money pumped into the system by the City), and there is no way the private sector has the capacity to accommodate the orphaned (as my friend, the warehouse manager, puts it, who needs strategic manager for waste disposal system?). That will put more strain on the system, as these people will turn to the government for support at a time when less money will come to the government by way of taxes.

And to make the miseries of those, who still have jobs and are thrifty, complete, the interest rates are at what the BBC never tires of repeating ad nauseum historic low. Anyone in Britain with an ounce of sense will be focusing on paying off their debts, worried that they may not have the job security; and with the inflation looming the tendency would be not to spend (saving money for the rainy day and all that. (I know of some people who are now buying shares and, worryingly, dabbling in riskier practices such as spread-baiting to see their money grow, as the interest rates are ridiculously low).

This, I believe, is the Keynesian paradox where everyone becomes thrifty at exactly the wrong time, although I also think that the moment of spending your way out of recession—the Keynesian solution to Great Depression— is long gone. Much as I hate to admit it, dodgy Dave—smoother than snot on the doorknob—is right when he said in the Neo-Nasty party conference that we need to man up and pay down our credit card debts or some such cheap lines his speech writer wrote for him.

Quantitative easing is an exercise in futility. It will not work. It did not work in Japan, and it won’t work here.