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Creating too much money

Tuesday, October 25, 2016 22:48
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It is becoming more popular to criticise the Bank of England. Michael Gove has recently added his lashing to that from Jacob Rees-Mogg. There is now a strand of criticism which regards the end July announcement of more Quantitative Easing and the further cut in interest rates as an unwise move.

Most commentators and politicians are still hung up on the idea that the Bank is independent. They clearly do not read the formal letters that go between the Chancellor and the Bank which put beyond doubt the fact that the Chancellor signs off all QE, and the government sets the targets the Bank has to hit when it chooses interest rates. Nor are we or they privy to the endless discussions that go on between Treasury officials and Bank officials day by day, or from time to time the private conversations of Governor and Chancellor.The strong agreement over a set of wrong short term forecasts for the economy this year between the Bank and Treasury implies some joint working, not just coincidence of error.

The joint decision to create up to £170,000,000,000 of extra new money was strange. Money and credit had started to accelerate before this decision was taken. Over a month had passed since the people decided to leave the EU, with no falls in consumer spending, general economic output or house prices, despite the Bank’s negative predictions of an immediate collapse of confidence.

The Bank advised and the government decided to print up to £170 billion and spend it on a mixture of second hand government bonds, second hand company bonds and cheap loans to banks. It was part of a concerted effort to get the interest rate down further, which it did, and presumably also to get the pound down more, which it also did. It is difficult see how the Bank could have thought this policy would be good for the pound, given the large numbers of extra pounds they decided to create.

At a time when the USA is contemplating further rate rises, deliberately putting our rates below those of the USA was an invitation to people to switch their money into dollars. Creating more of anything is usually a way of lowering its price. Monetary policy since June 23rd has helped fuel further gains in share and bond prices and some parts of the property market. It will also lead to higher shop prices for certain imports which the Bank as custodian of the need to keep inflation down should worry about. The pound now looks very cheap and could do with a helping hand from the Bank. Ruling out further rate cuts and QE would help, as surely even the Bank cannot think any more is justified.


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