By Michael Baxter 1 Dec 2009 [1 Comment | 477 views]
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So the baby boomers are set to retire while the UK’s fiscal debt is going wild. Not pretty is it?
There is only one possible long-term solution:
The big problem with quantitative easing is not the idea at all. Rather it is how it is being applied
Central banks are making a mistake:
The flight from risk, meaning banks are not creating money like they used to, (see Gold boom, or is fool’s gold boom?) and the retirement of the baby boomers, is inevitably leading to higher savings and is cancelling out the effect of printing money via quantitative easing, see the demographic punch.
There is another factor too: productivity. In the west technology is increasing the amount we can produce from one unit of labour. Globalisation too is pumping up the world’s capacity as the likes of China see their productivity level catch up with the west.
On one level demand is not keeping up with potential supply, hence there is a good chance we will see deflation in goods an services over the next few years.
But, when supply is constrained, it is a different story. Supply of oil, food, gold and, in a way, property is constrained; hence prices go up.
There is a real danger that quantitative easing is going into the wrong areas:
New money is being sucked into commodities and property:
Some see the recent rises in asset prices as a new bubble.
Maybe we are seeing the emergence of two conflicting forces:
Maybe, we are set to see deflation in products where the main component cost is labour, but inflation where the main component cost is raw materials.
For the baby boomers, looking forward to retirement, there is a tragedy lurking.
All this new money is being used to pump up asset prices, but is not dealing with the real need.
In order to produce more goods and services for the growing retired populace, we need to find a way of producing more goods and services from less labour input. The obvious way of doing that surely lies with encouraging entrepreneurism.
Yet, all this new money being created is being used to pump up asset prices, it is being lent to people who want to buy property, but business lending remains short on the ground.
If quantitative easing was used instead to buy corporate bonds, and better still bonds in smaller and medium sized companies, this country would see a revolution in entrepreneurism, productivity would rise, the fiscal deficit would be more affordable, and the retiring baby boomers could relax.
Instead, the flight against risk is mitigating against this.
But above all, because banks were bailed out, they have not learned their lesson.
In a sustainable economy, money that is lying idle is channelled by banks into creating wealth.
For too long, banks have instead used the money to create the illusion of wealth, by pumping up property prices.
The fear mongers who say quantitative easing is the work of the devil and will create nothing but problems are wrong. But that does not mean there aren’t problems. The real snag with current policy is that it really could be creating a new bubble, whereas it could be used to create real wealth.
I agree with almost everything you say. However, I sort of think asset price inflation (the inflation of predominently commercial and residential properties is a good thing) and does not constitute a bubble.
Residential and Commercial property asset price inflation stimulates the demand for new buid properties from the construction sector and prevents banks from loosing money on loans against property, thereby preserving banking capital. Asset price appreciation is surely a mandatory requisit for us to come out of this recession.