More QE is vital to avoid double dip
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Both the UK and US governments will be forced to embark on further quantitative easing programmes at the start of next year, according to Ignis chief economist Stuart Thomson.
The Treasury seect committee yesterday warned that the UK Government’s austerity measures have pushed the UK closer to a double dip recession. Thomson agrees that this will be the case unless the Monetary Policy Committee loosens fiscal policy further.
He says: “The UK economy will slow into next year. It will need more quantitative easing, which will probably be announced alongside February’s Inflation Report when the Bank of England will be confident of being able to look forward to a year of low inflation.”
Thomson says the Office of Budget Responsibility was too optimistic in its prediction for UK growth and says European deflation will mean export will be subdued. As a result, he says the only way corporates will invest will be for the MPC to embark on a bigger and longer QE programme than the £200bn already injected into the UK economy.
He says: “Companies have the comfort of cash on their balance sheets right now and we need to see those companies gain confidence in their own and the national outlook.”
Thomson predicts the US Federal Reserve will also embark on QE thanks to a similar situation where US firms are unwilling to invest their large cash reserves. He says Fed chairman Ben Bernanke will be forced to ‘print’ as much as $2.5 trillion at the start of 2011 to build business confidence and stimulate the economy.
He says: “The US are confident that its ‘animal spirit’ and ‘can-do’ attitude will pull it through but Keynes said that QE revives the animal spirit. Right now US firms have the means to invest but they don’t have the confidence.”
Thomson warns that the UK must not rely on the revival of the European market, which he predicts will continue to struggle as peripheral nations’ debt/GDP ratios balloon over the coming years.
He does concede that further QE programmes will envoke voter anger and will once again bring up the “Zimbabwe issue” of hyper-inflation but says both David Cameron and Barack Obama must concede political pain and further anger towards an improving banking sector before their economies can recover.
He says: “QE must carry confidence with it, but unfortunately if nothing else, QE helps the banking sector which is vital to the recovery. So this will mean there will be more anger towards the banks and a call for further bank regulation.”
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Readers' comments (1)
Sean Fernyhough | 21 Jul 2010 12:27 pm
I'm not sure that Keynes ever mentioned the Heineken-like properties of QE. In fact he is as likely to have suggested that QE probably won't work in the face of stiffening liquidity preference. The theoretical basis of QE is flawed in present circumstances. It is based on the simplistic view that through fractional reserve banking it will produce an increase in the money supply (through advancing of credit) of a multiple of 10 of the original amount of QE. I think this analysis has been explicitly suggested by Obama's speech writers.
It hasn't worked like that and it won't work like that: the credit has already been created privately in the bubble. Banks are bolstering their capital reserves and the private sector's appetite for credit is diminished in the face of uncertainty about the future.
Policymakers need to realise that the glass isn't half empty; it's been knocked over.
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