It’s two for the price of one. A new acronym, and a new (ish) idea. And QE, by the way, is so very 2012.
The thing about QE is that it is not really money printing. The Bank of England buys government bonds – not from the government – but from banks. But one day the bonds will mature, and when that happens, the effects of QE will go into reverse. Besides, there is another point. To acquire this money from the Bank of England, banks have to give up what is considered to a very safe and liquid asset – namely bonds.
Now if QE involved buying bonds at zero interest with no maturity date, directly from the government, that would be called creating money.
QE is not what they call helicopter money. It is not the equivalent of scattering money from a helicopter. It is more like scattering money from a helicopter, and sucking up certain assets from the ground at the same time.
What QE does do, is push up the price of bonds, making other assets look cheap, thereby either stopping certain assets from crashing, or indeed making them rise. So house prices or equities rise in price, and we may feel more confident and spend more, and businesses may invest more. That strategy does not work as well when the asset that rises is oil – or indeed gold.
But some say that the Bank of England needs to target its QE more precisely.
This is what happened in the US. Some QE was used to get rid of so called toxic waste from banks’ balance sheets and as a result – goes the argument – banks are in better shape. Some of it was used to buy corporate bonds, ergo – goes the argument – the US has seen a swifter recovery than the UK.
So what can the Bank of England do? Former MPC man Adam Posen wants to see it buy bonds in a kind of public bank, charged with investing into business.
Recently, Adair Turner – chairman of the FSA and one of the men who was at one point thought to be in the running for heading up the Bank of England after Mervyn King – called for what he described as overt monetary financing, or OMF. This is helicopter money, it is QE targeted at certain assets, and it is something Mervyn King is dead set against.
He said it’s not up the central bank to do such things, because then it would be engaging in fiscal policy. Rather, he says, it is up to the government. But the government wants to make cut backs. If the government spends money it is slated for being reckless. So we get £375 million of QE, and still the UK is limping along bottom.
Before we close, it may be worth reminding ourselves of words spoken by Adam Posen last year when speaking to the ‘FT’. He said: “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content.” He then added that the Bank of England holds “anguished religious ethics” about QE.
So maybe we need to move from QE to OMF. Or is that blasphemy?
For Lord Turner’s speech discussing OMF, see: Debt, Money and Mephistopheles: How do we get out of this mess?
© Investment & Business News 2013