More QE? Give us a break

A head of steam is building up for more quantitative easing in the US and the UK, though apparently not for the eurozone, which is the one place which really needs it. Here’s the case against more QE, which I was going to put on BBC Radio 4’s Today programme on Friday morning, except that we were diverted by the short selling issue.

I’d never say there are no circumstances in which another dose of it would be needed, but the only real justification is the sort of extreme deleveraging, deflationary threat that we saw post the Lehman Brothers collapse in the autumn of 2008. Things look very serious in the eurozone, but we have not yet had that extreme event. Market closure to a major sovereign such as Italy, with no mechanism in place to prevent default, would certainly be the trigger I’m talking about. But as I say, we are not there yet.

In the meantime, it is very hard to argue that in Britain at least with inflation heading towards 5pc and real interest rates deep in negative territory that anything would be gained from further QE. Bond yields are already as low as low can be. If the purpose of QE, by which is meant the creation of new money by central banks to purchase government bonds or other assets, is to depress bond yields, thereby forcing higher risk investment and spending, well, how much lower can they go? They are already at their lowest level in more than 100 years. There’s nothing to be gained by pushing them even lower.

It’s true that money growth in the UK economy is much lower than is consistent with reasonable growth, but it’s been at that level for a year now and it has not driven us back into recession. Anecdotal evidence is that velocity of money, which is the key indicator of economic activity, has fallen quite steeply recently, but let’s see it in the figures before spraying the economy with newly printed money again. In the US, meanwhile, money growth has picked up quite sharply, pointing to significant recovery a year from now. That doesn’t mean it is going to happen, but it is an encouraging sign.

About the only other piece of good news around at the moment is that commodity and fuel prices are falling again, taking the pressure off inflation and putting a little bit of money back in people’s pockets. Do we really want to stoke these prices up again for some kind of short lived and probably quite marginal boost to growth.

QE is like a drug. The first dose was quite potent, but the more frequently it is used, the less effective it becomes and the more the addict demands. QE2 in the US, launched in response to a soft patch in the recovery similar to the one we are going through today, was almost certainly a mistake. Sure enough, it boosted asset and commodity prices, but it did very little for ordinary people. To the contrary, by raising food and fuel prices, it only made them poorer.

To maintain negative real interest rates over such a sustained period is unfair on savers and therefore morally and socially questionable. It certainly softens the deleveraging process, but only by punishing those who have been prudent with their money. Enough is enough. There’s no case for further QE right now. I’ll tell you when that changes.