Doubts are growing about the efficacy of quantitative easing. Maccanomics is asking whether monetary easing is a Ponzi scheme, a trap that central banks won’t be able to get out of. The Economist explores the possibility that there is a problem of diminishing returns:
For economies that have already used QE, the problem is one of diminishing returns. The Fed’s first round of asset purchases between late 2008 and 2010 reduced corporate-borrowing rates by nearly a percentage point; its QE2 programme of $600 billion in Treasury purchases, rolled out in late 2010, succeeded in bringing down corporate rates by 13 basis points. In Britain, banks still face high borrowing costs and remain nervous about lending more to small and medium-sized enterprises: a new credit-easing programme about to be introduced by the BoE and the Treasury is long overdue.
My immediate thought is that if monetary tools prove impotent, and fiscal policy is caught in this bear trap of a simultaneous need to stimulate and balance the books, then what exactly is left? The greatest theft of modern times — the rape and pillage of financiers that led up to the GFC — may be leading to a kind of slow motion destruction of the whole system. Especially when the real culprit, the “metamoney” of derivatives and HFT etc, is not being stopped.
But, in the interim, it is worth exploring some of the errors that continue to be committed. I think a key to what is incorrect about the analysis can be found in the word “quantitative”. This is the myth that capital is a quantity of stuff, that “flows”, can be “scarce”, can be “abundant” and can even get “contagion”. It is not a quantity of stuff, it is transactions, social interchanges based on agreed rules about value and obligation. Pricing is not a symptom of physical forces interacting (i.e. supply and demand as two forces of nature). It is, to be more precise, intersubjective. A shared sense of value.
That is crucial when it comes to understanding the inflationary consequences of QE, for instance. If you think QE is potentially pushing too much “stuff” into the system (capital), so that eventually there will be too much stuff relative to the output of the goods and services, resulting in price rises, then you would be concerned about QE. But if you think capital is transactions around an agreed set of rules, not “stuff” at all, you might arrive at a different conclusion. What is the signal value of QE? Because what it signals to the human participants is what will determine pricing. It is the difference between trying to assess something objectively, and trying to assess something intersubjectively (in an intersubjective approach, you, the observer, are necessarily part of the calculation).
Now, this would just be an academic point, if it were not for the massive volume of Metamoney, the $700 trillion that sits on top of the conventional world of money: bank debt, bonds, equity, property etc. That has rendered the whole question of the supply of money vexed indeed. What, exactly, is money supply, now? Is it M1, M2 etc? Or do we include the daily transactions of meta money, the $2 trillion + that spins around the world each day, dwarfing conventional money supply? These figures dwarf other money supply figures. Are they money, or are they not money (bearing in mind that all money is just transactions?). If we include them as money, then money supply has exploded globally over the last decade. And it has not resulted in inflation. Well, except for inflation of financial salaries and bonuses.
It seems to me that what is needed is a way of looking at price behaviour that assumes its primarily intersubjective nature. That is, ditch the pretence that the system is a physical system that can be analysed scientifically, empirically. It is full of self aware actors, and their collective perception is the primary subject being examined. And what I think is happening is that Metamoney is creating huge swings in prices, both in the inflationary direction (asset prices, bankers’ salaries) and in the deflationary direction. It is creating a massive volatility because of the debauch with money creation. It is somewhat reminiscent of what happened in Japan since 2000, when a debauch in transactions around assets in the 1990s resulted in zero interest rates that failed to get the private sector to start transacting again. Richard Koo is making that point.
But it is worse than that. The Japanese money explosion was at least around something conventional: property. This time it is Metamoney: money made out of money made out of money. Money supply has been exploding globally for a decade. And it means that the “laws” of supply and demand, or equilibrium or any other principle borrowed from the physical sciences, simply do not apply in the financial system as it is currently constructed. As is pointed out in this excellent column that details the circularity of modern finance:
“1. The laws of supply and demand do not apply. When food producers compete to supply a supermarket, the retailer has the luxury of selecting the lowest bidder. But when it comes to investment banking, wages are very high even though the number of applicants is vastly greater than the number of posts. If the same was true of, say, hospital cleaning, wages would be slashed. An investment bank, like a supermarket, demands a certain quality standard: it will not hire just anybody. But whereas it may be easy to identify a rotten banana, it is harder to be sure which trainee will be the next Nick Leeson and which the potential George Soros. That gives executives an excuse when things go wrong.”