Saturday, January 17, 2015

17/1/2015: Is QE permanent and do we need a Government debt 'deletion'?

In a far-reaching comment on the QE and its true nature, published back in 2013 (see here:,  Ambrose Evans-Pritchard took the arguments of several economists and drew, with them, a very far reaching set of conclusions.

To summarise these:
1) QE is permanent - it cannot be undone. I agree.
2) Better than that, QE should be used to cancel legacy Government debts, providing deficit financing ex post facto. I agree only partially.
3) QE should be expanded to a stand by facility to fund aggregate demand via funding future deficits. I disagree.

Why would I disagree with the 2 latter points?

Reason 1: Government debt is not the biggest problem shared by all economies today. In some economies, such as Greece, Italy and US, for example, it is the main problem. But in other economies, such as Ireland and Spain, for example, it is secondary to household and corporate debts. This means that even if economic growth restarts on foot of the above 3-points plan, the reversion to 'normalcy' in interest rates will simply crash legacy debt-holders. No amount of fiscal stimulus will be able to undo this damage.

Reason 2: Government deficits and debts did not arise from purely automatic stabilisers (or in simple terms solely from the disruptions caused by the Global Financial Crisis) in all economies. In some countries they did, as, for example in Italy and France. In others, they came about as the result of imbalances in the economy that drove large asset bubbles, e.g. Ireland and Spain. In yet other countries they were systemic, e.g. Greece and Italy. The 3-points plan can help the first set of countries. Can do damage to the second set of countries (via interest rates channel and/or by generating another bubble) and will provide no incentives for change for the last set of countries.

There are other arguments as to the fallacious or partially fallacious nature of points 2 and 3. These include the arguments that public spending creates own bubbles - those in wages and salaries, employment and practices in the public sector, or those in rates of return for politically connected businesses or those in public infrastructures that will have to be maintained and serviced over decades to come, irrespective of the economic returns they might generate. They also include the arguments that public spending and investment can crowd out private spending and investment. As well as arguments that in a number of countries, especially within the euro area, public spending as already hefty enough and priming it up using monetary financing today is setting us up for creating a permanent future liability to continue funding the same out of tax revenues into perpetuity after the QE funding is completed.

The key, however, is the problem of total debt distribution, not just of Government debt volumes. A 'delete' button must be pushed, I agree. But what we will be deleting has to be much more complex than just the Government debt. In some countries it will have to also include private debts. And for that, we have not had a QE devised, yet...

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