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QE and helicopter money

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The main event of last week was the Fed’s decision to delay, yet again, its next move to return to monetary policy ‘normality’, by leaving rates unchanged after its latest meeting. It would, of course, have been a considerable surprise if the Fed had decided to raise rates following a variety of economic data showing a very mixed picture. It was sufficient for Janet Yellen to point out that the economy could not be described as overheating and that there was “…scope for further improvement in the labour market”.
 
However, this must have been a fairly acrimonious meeting as it is unusual for signs of dissent to be so obvious. The decision was only arrived at after three of the committee’s ten members had voted for an immediate increase in rates, leaving analysts with a clear indication that it will take some fairly dismal figures to stave off the announcement of a rate hike in December. The Fed’s next meeting is due to take place a couple of days prior to the Presidential elections and any action taken then could be construed as being politically motivated – particularly with Trump criticising the Fed for keeping rates so low.
 
The Fed was not the only central bank experiencing a bit of a rough time last week. First up was the announcement that Minouche Shafik, one of the Deputy Governors of the Bank of England, was leaving to take up a post as a director at the London School of Economics. How the jobs would compare in terms of financial remuneration is difficult to tell, but one must assume that Shafik was probably influenced by sheer boredom. When she was appointed to the Bank of England, it was announced that her major role would be devising and organising how the Bank would go about exiting the QE programme. At the time, this was perceived as being achieved through the sale back to the markets of the £375bn of gilts that the Bank had acquired. Despite the reasonably healthy economic environment at the time, the MPC maintained its extremely loose policy by neither raising interest rates nor reining in the QE programme.
 
When the MPC announced its package of monetary policy adjustments last month which included another £60bn chunk of QE, Shafik probably gave up all hope of actually having to set about the role for which she had been hired. Indeed, the whole structure around which the UK’s QE programme works would question whether it is a relatively sound form of monetary policy, or whether it actually represents helicopter money.
 
Helicopter money is simply money printed by the Bank of England which it then places in the Treasury’s account with there being no obligation to pay interest or to repay the principal at maturity. That is exactly where we are in the UK at the moment. Last month, when asked about helicopter money as an economic policy, Mark Carney responded, “I can’t conceive of a situation in which there would be a need to have such flights of fancy here in the UK”. It was the wrong question: he should have been asked to explain how the UK’s brand of QE differed in any way from helicopter money.
 
When the original QE package was announced it was assumed that the Bank of England would be the beneficiary of the interest accruing on its holdings of gilts – that was before they decided to give the interest income back to the Treasury. It was also assumed that, as their holdings of gilts matured, they would be paid the proceeds and the QE programme would very gradually run itself down. While the Bank is duly paid the principal on the maturing gilt holdings, this is simply used to purchase yet more gilts, thus keeping the level of monetary stimulus at an unchanged level. The only way that the current QE programme bears any resemblance to any sort of financial legitimacy is the concept that the Bank’s gilt holdings will eventually be sold. It appears that Shafik has decided that won’t happen in her working lifetime.
 
Mark Carney was up on his feet again last week when, during a speech in Berlin, he noted that there was little more that the Bank of England could do for monetary policy to boost the economy. His plea was the central banker’s usual call for fiscal and structural measures to boost economic growth, and possibly comes as the Bank of England may be having second thoughts on whether the likely further mini cut in base rates can actually be justified. The truth is that whether this cut is ordained or not is probably only a matter of interest to the band of economists who make their living from writing about these matters. The economist’s how-to guide says that if rates come down it encourages confidence, and vice versa. Unfortunately the author of this guide did not live in an age of ultra-low rates, and so was unable to add a footnote warning them that in such circumstances the accepted norms may fail to apply - or even get reversed.
 
A debate broke out at the end of last week on whether Carney would leave after five years, which is the duration that the terms were assumed to be when he took office in July 2013 or whether he should shoulder the more normal eight-year stint. Some of the more extreme Brexiteers like Lord Lawson, Redwood and Rees-Mogg are in the ‘no time to waste’ camp. We would not let him out until he has returned this country to a normal monetary stance.
 
This week sees little in the way of interesting UK economic news. Thursday brings the release of household borrowing figures, which are expected to show a small reduction in mortgage approvals. Friday sees the release of the latest estimated second quarter GDP, which is not expected to show any change from the previous 0.6% level. Also, on Friday the latest balance of payments figures may show a slight, and very overdue, improvement in the current account deficit.
 
Rather more interesting data will emerge from Euroland this coming week. While not likely to be too dramatic, it is expected to show an improvement in the German IFO index, a reduction in unemployment and an increase in inflation.

All views expressed here are the author’s own and are based on information and data available at the time of writing.

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