Markets Insight

I’m from the central bank and I’m here to help

Quantitative easing has prevented deflation and the policy is now ordinary
Among Ronald Reagan’s many laurels as a president, one achievement as a candidate is perhaps overlooked: he popularised the idea that, in the hands of a central bank, a printing press can be dangerous.

Running against incumbent Jimmy Carter, he told a meeting of the International Business Council: “We must first recognise that the problem with the US economy is swollen, inefficient government, needless regulation, too much taxation, too much printing-press money.”

The message was designed to highlight the effect on American families of what he dubbed “Carter’s inflation”. It may be that Reagan is better remembered for a claimed dislike of taxes and spending thanks to the Federal Reserve’s eventual success in taming consumer price rises, under a chairman appointed by his predecessor.

Still, with few references in newsprint archives before 1980, Mr Reagan’s was a succinct metaphor for a school of economics obsessed with the changes to the amount of money in the system, less than a decade after the US abandoned the gold standard.

It has lived on in the background hum of anxiety about power wielded by policymakers. In the last decade a whirring of printing machines is shorthand for the innovations of monetary policy, buying government debt and other securities in programmes of so-called quantitative easing.

Yet a good slogan can always be repurposed. The shift has been slow, but appreciable, as official bond buying in the US, Europe and Japan has failed to return inflation to targeted levels, much less spark destabilising price rises.

Large holdings of sovereign debt within central banks has prompted consideration of the nature of money, and what it means for the part of government which provides goods and services to owe money to the part of government which oversees the financial and monetary system.

For instance four years ago the bond investor Jim Leaviss, of M&G, asked who would be unhappy if the Bank of England simply cancelled the £350bn of gilts it had acquired. It could do so in a letter to the Treasury, and had it done so then it would have cut national debt as a proportion of economic output from 63 per cent to 41 per cent, and the UK’s annual interest bill from £50bn to £32bn.

More recently attention has returned to the experience of Japan in the 1930s, whose economy rebounded while much of the world was caught in the mire of the Great Depression. Helped by the boost to trade from a collapse in the value of the Yen after abandoning the gold standard, veteran finance minister Korekiyo Takahashi also told the Bank of Japan to underwrite sales of public debt in order to help fund a dramatic expansion of government spending.

Japan did end up with an inflation problem, among other results of a rapid militarisation, but there is debate about whether the monetary consequences might have been avoided were Mr Takahashi not assassinated in 1936 after he tried to slow spending.

A country not in thrall to its army, with respected monetary institutions, should be able to turn the printing machines off. Note too the question is no longer academic with the Bank of Japan set to buy up the entire stock of debt early next decade, if open ended bond buying continues.

Employed in much of the discussion though is a different metaphor, of money dropped from helicopters. Putting aside technical distinctions of the various approaches to airborne scattering, it might be better to embrace the idea of the printing press. Even if not yet rehabilitated as a concept, fear of machines spinning out notes — or computers magicking money into accounts — could be put to good use due to the way it tends to cause spluttering about hyperinflation in the Weimar Republic and Zimbabwe.

The reason is that to shift expectations about inflation, and change the behaviour of consumers and businesses, the threat from rising prices and policymaker actions must be credible.

Quantitative easing has been successful in preventing deflation, but market interest rates have already collapsed, and the policy is now ordinary. Stasis and conservatism are becoming default assumptions.

Turning on the presses, however, could be a useful jolt. To recast a more famous saying of the Gipper: I’m from the central bank, and I’m here to help.

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