RTE Drivetime: ‘Talking Money’ on Quantitative Easing, 30th March 2015

Quantitative Easing or ‘QE’ for short, is a process where Central Banks buy assets from commercial banks and it is known to bring down bond yields and drive up other asset values.

This has begun in Europe and on Talking Money we looked at some of the effects it may have and the issues that such a highbrow economic issue raises for regular people.

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Scary Chart: US Private Debt to GDP

The US Private Debt to GDP chart is one that concerns me, it spells ‘deleveraging for many years’ in big bold letters. You don’t need much more than this to get the picture. With households so heavily indebted – and consumer spending being the driver of the US economy, it is now wonder that QE2 and whatever else they try is to be expected.

The trajectory of the chart after major financial crashes (remember this is the ‘worst since the great depression’), has a clear path, and for that reason it is likely that we’ll see deleveraging continue on the downward trendline you can see forming above.

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The Euro is a credible currency

Quantitative Easing (which used to be called deficit monetization) is justified – in this clip – by ECB president Jean Claude Trichet. Monetary policy works…. eventually, and when it does it tends to result in high levels of inflation.

Some people said the Euro wouldn’t last a decade, for our part, we hope that they are proven to be wrong, the will of society is a very powerful incentive and can be the difference between what should happen in theory and what actually occurs, for that reason I think the Euro will pull through but there will need to be some serious changes made in the way that the Eurozone manages itself.

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ECB Zero? Will a 0% base rate fix anything?

There was an interesting article in which originated on Bloomberg which Nouriel Roubini said that the ECB should cut rates to 0% and increase quantitative easing to ease dysfunctional markets. I agree that a more accommodative approach would be beneficial, but a base rate of zero would likely not make much of a difference except on the margin.

The idea of a Central Bank is that they really wear two hats, there is a fiscal v.s. monetary balance to be struck, sometimes they act monetarily, other times fiscally depending on the inflation expectation. The best explanation I have seen of this so far is offered by PIMCO’s Paul McCulley where he states that ‘as the game changes so does the meaning of central bank independence’ and he is correct, if disinflation or deflation is a threat then priming the fire for some inflation is the correct approach, but you would be far better doing this with the money supply via quantitative easing than on the …

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A phone call with Bob Frank, author of ‘The Economic Naturalist’

One of my favourite things to do is to talk to the people who write the books I love, often they are hard to reach, others are surprisingly easy, some of them are hard to talk to, others are some of the nicest folks you could hope to have a conversation with, Bob Frank is very much the former and the latter, it took a while to reach him but it was worth waiting for, he has the quality I like best (and I mentioned it already in the review I did on his book ‘The Economic Naturalist’) – namely the ability to talk about complex ideas in plain language.

I called Bob at his house in Ithaca and below are the contents of some of that conversation.

KD: Bob, you have said before that you feel economics has gotten too numerical, that taking that direction can sometimes provide absolute ‘truths’ that simply are not what they seem, so where does the art come into it? Where …

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Inflation in 2010?

John Brynjolfsson of Armored Wolf talks to Bloomberg about his views on inflation, he was formerly a leading fund manager with PIMCO who are the largest bond fund house in the USA, his speciality was TIPS (Treasury Inflation Protected Securities – a security which provides protection against inflation), which in my book means the guy knows his inflation!

Critically he talks about the difference between Japan [and the potential Nipponisation as advanced by economists such as Paul Krugman] of the US market, then his belief in what will happen in the mid-term future regarding inflation. He is not saying ‘hyper-inflation’ such as Marc Faber continuously talks about, but his 4-6% is still significant, in particular if it hits during a contraction in which case its real effect will be greater.

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Inflation… 'when' not 'if'…

The endurance of gold at above $900, rising oil prices, the weakening dollar and a Treasury/Fed combo that is increasing the money in circulation will lead us where?

I hate to harp on about inflation but it just doesn’t seem that further down the line we won’t see a lot of it, the market is pricing it in, the yield curve is suggesting it, and yet it remains on the periphery of commentary for the most part.

One important statement in this talk is the bit where one of the guys talks about the fractional reserve system and the multiplier effect that can turn 800+ billion into 8 trillion.

When we are advising longer term fixed rates to avoid the pain this will bring (and it won’t be in 09′, it will be 10′ or 11′ but rest assured it will come), bear in mind that in the short term you will pay more than you have to, but that when everybody else is hurting you will be insulated. The reason for fixing now rather than later is that the …

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