Tuesday, November 09, 2010

Werner on QE - Bernanke agrees

Within a few days of posting on this blog (1 Nov) Richard Werner's view  that so called 'Quantitative Easing' is normal behaviour for a central bank was confirmed by none other than Ben Bernanke, Chairman of the US Federal Reserve. Bernanke was speaking at Jekyll Island, Georgia, a day after the 'QE2' monetary policy was launched, at a conference to celebrate the founding of the Fed 100 years ago. He said:
'This sense out there that quantitative easing or asset purchase is some completely far removed strange kind of thing ...an unanticipated, unpredictable policy - quite the contrary. This is just monetary policy.'  Quoted in the Financial Times 8 Nov. 

At the Southampton UK 28 Oct seminar, Werner quoted from the Bank of England's leaflet on QE: 'normally the amount of money grows each year'. He asked: 'Who creates it and who allocates it?'. The BoE leaflet does not say and few economics textbooks do either.

Various measures of money supply, named: e.g, M0, M1, M2, M3 are used by the BoE, but he said these measure 'savings supply' and not the most important measure of money. In Werner's view, what should be measured is newly created purchasing power, as seen in the creation of credit by ordinary banks.  The standard measures fail to capture this essential  'transaction money' that drives an economy. He showed how an old problem that puzzled  Keynes,  that of being able to differentiate between useful (GDP-promoting money) and harmful (asset-inflation producing money) can be solved by focusing on this credit creation process. Slide No. 33 of his presentation showed how the availabilty of credit for land purchases in the UK over 30 years had a very close relationship to the inflation of land prices. Slide 32 shows how in Japan, credit creation (over 20 years)  for GDP transactions was the key economic driver and not interest rate variations or fiscal policy.

Bernanke's admission shows that the term QE is, as suggested here last week, a hollow public relations tool. Werner's own meaning of the term QE was coined to concentrate the minds of economists, central bankers in particular and governments on the creation and allocation of credit. His research has shown that this was behind the extraordinary growth of both Japan and Germany in the decades after the devastation of WW2. His seminar paper should be studied by anyone wanting to get clarity on what might safely re-start national economies.  Treasury ministers, Chancellors of the Exchequer, et al, might learn something.
Posted by Charles Bazlinton

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