May the force be with you

At long last (they say) the ECB has embarked on Quantitative easing by “printing” over a trillion euros.

So will it work?

The initial signs are that it is doing what it is supposed to do – reduce interest rates on Euro loans.

But Robert Peston, the BBC economics editor is not convinced about the long term benefits. Various countries have already tried this approach (including the US and the UK).

TRICKLE DOWN

One problem is that the approach goes through the banking system. This means that, once the “new money” has been put into the system, it is up to the bankers to reduce interest rates and increase borrowing to stimulate the economy. My understating of the results in the US and UK is that this “trickle down” did not really happen.

There are good reasons for this. Bankers are there to make money. They do this when the loans they make are paid back with interest.

When the economy is booming, making profitable loans is comparatively easy because everyone is making money and can therefore afford to pay back loans.

When the economy is sluggish (as now in the Eurozone), making money is difficult. This means there are fewer businesses which can afford to take on and pay back loans – so bankers sit on their money.

This means the additional cash pumped into the economy by quantitative easing mostly sits in the banks.

UNWINDING

And then what happens when central banks can no longer print any more money? The answer is that they stop and the stimulus which they have been trying to give to the economy is stopped – which can induce a rise in interest rates and a slump in the general economy.

This is similar to one of the arguments in my white paper. This is set out in Debt and HIRC (Rich Countries). The problem with lending is that it helps economic growth to be bigger but also makes any shrinkage bigger too.

My worry is that Quantitative Easing will have a similar effect (if it works at all). It might help a recovery now but at the expense of creating a problem in the future.

SMOKE and MIRRORS

But perhaps the biggest problem is perception; because this approach appears to rely more on perception than on doing anything.

A bit like “the force” in star wars, we are told that Quantitative Easing will help. If we are told convincingly enough our belief that it will help means that it will.

But it we don’t trust the bankers (this is after all something being done by the ECB), then it won’t help at all.

Because all Old Ben Kenobithey have done is wave their hands around and move a few figures around – figures we don’t really understand. They have not actually done anything (build a road, invent a cure for cancer…) – they have not even printed any new money – because these days money is numbers in a computer somewhere, not bits of paper with impressive words on them.

Which makes me wonder whether there is an answer somewhere which does involve real actions – perhaps accepting a lower level of income and changing our expectations about walking to work rather than driving, about holidays in the country we live in rather than the other side of the world…?

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