In his column for Reuters, Anatole Kaletsky ventures into the wacky world of quantitative easing or QE. Faced with a never ending run of economic bad news, the authorities, he says, have two basic options:
- "They have essentially two options. They could do even more of what the Fed and the BoE have been doing since late 2008 – creating new money and spending it on government bonds, in the policy known as "Quantitative Easing." Or they could admit the policies of the past three years were not working, at least not well enough. And try something different."
Kaletsky concedes that QE isn’t all bad, but it’s not all good either:
- "The one economic benefit of QE has been to help governments finance the huge deficits caused by recession without having to raise taxes, slash public spending or face Greek-style bankruptcy. In this sense, QE has certainly prevented the U.S. and Britain from suffering worse outcomes, but it has failed to stimulate employment or economic growth. This is exactly what Japan has experienced for 20 years – and as in Japan, additional rounds of QE now will merely act as an anaesthetic, perpetuating stagnation but discouraging more effective stimulus measures."
The failure of QE to stimulate the economy is not for lack of heft:
- "So far $2 trillion has been created by the Fed and £375 billion by the Bank of England, but where has all this new money gone? It has certainly not appeared in my wallet or bank account – nor has it fattened yours, unless you happen to be a bond trader or banker. The fact is that all the new money has been spent on buying bonds. QE has thus inflated bond prices and boosted bank profits, but achieved little else."
If the bankers can’t make good use of so much money, then why not let the general public have a go instead?
- "Instead of giving newly created money to bond traders, central banks could distribute it directly to the public. Technically such cash handouts could be described as tax rebates or citizens’ dividends, and they would contribute to government deficits in national accounting. But these accounting deficits would not increase national debt burdens, since they would be financed by issuing new money, at zero cost to government or to future generations, instead of selling interest-bearing government bonds."
But, surely, you can’t just print money and give it away!
Er, yes you can. In a modern economy with a fiat currency system that’s exactly how money is created. It’s no secret; it’s just that the idea is so counter-intuitive that it refuses to sink into the public consciousness.
Of course, if you started to give the cash directly to the people, then they might finally understand that our entire economic system runs on funny money. And who knows what would happen then?