Blimpish || a Tory

Chris Dillow helps Charles Bean with what he should’ve said about quantitative easing – and to dispel some of the myths around it, as it is fundamentally only a different means of adding to the money supply.

Here’s what I don’t get about the Bank’s position (or is it the Government’s position?) right now: why not initiate a substantial quantitative easing now (or even, a month or two ago), of a few tens of billions of pounds?  Why wait until rates are already down near zero, and it’s seen as a desperate measure?

The most common explanation as to why they won’t do it seems to me to make the case.  The explanation is the one Chris links to – the fear that any step towards easing will trigger a crisis of confidence, causing capital flight in fear of hyperinflation.  But surely, lurching into quantitative easing as a desperate act is more likely to do that than a planned and declared intervention?

Doing it in a planned way could also be shored up by explicit commitments against deficit monetisation (best backed by a clear plan for fiscal consolidation in the medium term, unlikely though it is) and to a price-level target over the next five years (more suited to managing expectations in a highly uncertain environment).

Significant quantitative easing before interest rates hit zero might trigger a bit of inflation, but at least the relative changes in interest rates needed to counter this would then be more modest (2% to 5% is less drastic than 0% to 5%).  If interest rates are already at zero and quantitative easing is used as a desperate measure, there must be some question over the credibility of the Bank in raising interest rates to choke off any inflation amidst recovery?  Better to take the decisive action sooner and deal with its potential downsides in an orderly way, or so it seems to me.