Thursday, October 06, 2011

On QE, Pyramids and the Like

If you follow me on twitter, you'll probably guess that my reaction to the new QE announcement is a positive one, athough obviously, I'm a little disappointed that none of the freshly minted QE money will be used to finance the building of a pyramid.

Of course, I don't actually think we should build a pyramid, in reality there are plenty of alternatives that we could choose in preference to pyramid building. The point I'm trying to make is that if we're going to create new money into the economy, we really ought to get that money generating economic activity, preferrably among people who are currently not engaged in economic activity. This to me, seems a far better way of doing things than buying government debt off banks in the hope that it might be enough to get them lending again

I think we should go this way for two reasons, the first is that like Chris Dillow, I think we have a shortage of investment of opportunities; the second is that I believe we are suffering from a balance sheet recession, households and businesses are already struggling with large quantities of debt, are there many individuals and businesses out there willing to take on more debt? It's for these two reasons that I have doubts about QE, even if it helps with bank lending I can't see there being many takers for this new debt.

I support QE because I believe that a not very effective stimulus is better than no stimulus at all, but I have my reservations.