Monday, 16 March 2015
QE is no use because it just boosts asset prices?
The above is a popular criticism of QE. And those who make that criticism often then go on to advocate “QE for the people”, “green QE” or something of the sort. The latter variations on standard QE involve printing money and using it to fund a selection of public spending items (education, health, etc) or fund tax cuts.
No doubt QE for the people has a bigger effect on employment per pound or dollar than the asset price boosting variety of QE. (Incidentally, 99% of the assets bought by the Bank of England to effect QE have been government bonds rather than other privately held assets, and I’m assuming that QE in fact takes that “government bond” form.)
However to criticise QE because it “just boosts asset prices” assumes that asset prices were at their optimum level PRIOR to the boost, and that as a result of the boost, asset prices are then above optimum. Well it can equally well be argued, at least on the face of it, that asset prices PRIOR to the boost were BELOW optimum, and that QE brings asset prices BACK TO their optimum level. So why might that be? Well to sort this out, it’s first necessary to get government debt incurred to fund public investment out of the way.
Debt incurred to fund public investments.
The idea that government debt is justified if it funds public investments is a popular one. In fact Milton Friedman, Warren Mosler and yours truly have argued that governments should borrow NOTHING: not even to fund publicly owned investments. (See here for more details).
However, we don’t need to get bogged down in that argument here. Let’s just assume that government debt used to fund public investments is justified up to the point where that debt equals X% of GDP, where X can be anything between zero and whatever you like.
Assuming QE is implemented, it is reasonable to assume that the latter chunk of debt should not be QEd. That is, the only debt that should be QEd is debt incurred so as to fund stimulus.
But is it right to use debt to fund stimulus? Well Keynes said that stimulus can be funded with EITHER borrowed or printed money. (See 2nd half of 5th para here.) But quite what the point of borrowing so as to fund stimulus is, I don’t know. After all, the effect of borrowing is “anti-stimulatory”. Why do something which brings the OPPOSITE of the desired effect? The word “bonkers” springs to mind.
One possible excuse for borrowing to fund stimulus is that the existence of government debt or government bonds makes that stimulus easier to reverse, should the need arise. But the flaw in that argument is that even if there is no government debt, and the state wants to apply a dose of “anti-stimulus” (i.e. deflation), that’s easily done by having the state wade into the market and offer to borrow at above the going rate of interest for risk free loans. (As it happens under current arrangements, that job would probably be done by the central bank, but there’s no fundamental reason why the treasury couldn’t do that job – in the same way as there’s no fundamental reason why treasuries cannot issue base money: something the UK treasury actually did during WWI.)
The case for funding stimulus with borrowed rather than printed money is feeble. Ergo if borrowing IS USED to fund stimulus, asset prices will be artificially DEPRESSED. And that means that if QE is then implemented, far from artificially raising asset prices to above their optimum level, asset prices will have been artificially depressed by the latter borrowing, which means that QE will RETURN asset prices to their optimum level.
But that’s not to criticise “QE for the people” or “green QE”. Indeed the latter idea, which consists of having the state simply print money and spend it, was being advocated by Milton Friedman just after WWII, by Abba Lerner around the same time and more recently by MMTers.