Tag Archives: Quantitative easing

Economists at big, powerful institutions generally think alike. From HM Treasury to the Bank of England, consensus views dominate. Whether it’s the Organization for Economic Cooperation and Development or the International Monetary Fund, dismal scientists tend to converge towards a single “house view”.

This is, perhaps, hardly surprising. You don’t generally make your career within a large, hierarchical organization if you like thinking “outside the box”. More fundamentally, these “top” institutions are essentially political and strategic in nature – with the strategy determined elsewhere. For all the scientific pretense, resident economists will overwhelmingly serve up what their political masters want to hear.

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Oil prices rallied last week, after a surprise drop in US crude inventories. Despite on-going volatility ahead of the Opec exporters’ cartel meeting on April 17th, the trend seems clear. Oil is up 40pc since mid-January.

The dollar fell, meanwhile, as minutes from the Federal Reserve strongly suggested US interest rates won’t rise anytime soon. The greenback is at its weakest against the yen since 2013 – which is how Uncle Sam likes it, given the related export boost.

Far from “normalizing rates” over 2016, as was promised December when the Fed hiked borrowing costs for the first time in a decade, America’s central bank could soon employ yet more “extraordinary measures” – as some of us said at the time.

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So that was “jarring January”. Since the start of the year, over £4,000bn has been wiped off the value of global equities – that’s four, followed by 12 zeroes.

US stocks endured a steeper first-week decline in 2016 than in any year since before the First World War. Market volatility drove the MSCI World Index of leading shares down 8pc in January – a degree of decline usually seen during systemic crises, such as the 2008 Lehman Brothers collapse or the 2001 bust.

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“The final word on quantitative easing will have to wait for historians,” wrote Ambrose Evans-Pritchard last week. Now the US Federal Reserve has apparently ended QE, I’d like to take a cue from my esteemed Telegraph colleague by suggesting what future historians might say.

Last Wednesday, the Fed terminated QE3 – the latest incarnation of its money-creation programme. The American version of this highly unorthodox policy began in late 2008, with the Fed creating virtual balances ex nihilo and purchasing assets such as government debt and mortgage-backed securities, often from bombed-out banks.

The US authorities originally billed QE as a $600bn exercise. By unlocking frozen interbank markets, it was supposed to spur growth, breaking the credit crunch. As meaningful recovery remained elusive, though, QE2 was launched in 2010, with its successor two years later.

In sum, the world’s most important central bank has fired $3,700bn from its monetary bazooka. America’s QE has been six times bigger than envisaged. The Fed’s balance sheet has grew more than three-fold in just over half a decade – an unprecedented monetary expansion. And it’s not just America, of course.
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A Western central banker is ordering a pizza over the telephone.
“Should I cut your pizza cut into six slices or eight slices, sir?” asks the youthful restaurant staffer.
The central banker pauses and scratches his chin. “Hmmm, now let me see,” he says slowly, weighing every word.

“I’m feeling hungry tonight … so cut my pizza into eight slices, please”.
The central banker then pauses again, asks for a moment and then gives his final instruction.
“Actually, I really am quite famished. Could you slice it into ten?”

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How is the Eurozone economy doing? Given that the 18 countries sharing the single currency comprise the UK’s biggest trading partner, accounting for around half our international commerce, this is a question of major economic and political importance.

Whether the Eurozone stages a meaningful recovery over the next 12 months, stagnates, or collapses amidst a fully-blown melt-down – which remains depressingly plausible in my view – will significantly influence the UK’s economic path, determining the backdrop against which the 2015 general election is fought.

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British politics has perked up – to say the least. It’s just over a fortnight since the dramatic local and European elections in which Ukip surged. Now we’ve seen a riveting Newark contest, featuring a Tory fight back.

With all this, plus open warfare in the cabinet and the Queen’s Speech, complete with fainting pageboy, the Westminster village has been on overdrive. Domestic politics has dominated the airwaves over the last week – and that’s great. Clearly an econo-nerd, I’m a political junkie too.

It strikes me, though, that almost all the political analysis we hear takes it as given that the UK economy is fast-improving and, as the May 2015 general election approaches, will get better still. That may, indeed, happen and I certainly hope it does. Yet, away from high-octane TV psephology, economic news has emerged since last weekend, particularly from abroad, which could ultimately mean all political bets are off.

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UK inflation just hit a four-year low. Hurrah! The Bank of England will now be under much less pressure to raise interest rates – which is good news for the UK’s highly indebted households.

Inflation is now so subdued we don’t need to worry about it anymore. The real danger is that Britain contracts a nasty dose of deflation – the Japanese-style disease of falling prices, stalled demand in expectation of a further price slide and curtailed investment. So be reassured that our central bank, having already created £375bn of virtual money, could yet unleash even more quantitative easing.

The above two paragraphs represent, more or less, the conventional wisdom on UK inflation. I find myself, yet again, disagreeing with almost every word – except for the very first sentence. UK inflation is indeed at a four-year low, according to the Office for National Statistics. In November, the Consumer Price Index was 2.1pc higher than the same month in 2012.

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Economists aren’t very popular. Dismal scientists, after all, are the kind of experts who don’t know what they’re talking about but make you feel as if that’s your fault. Such bamboozling is often deliberate, especially when it comes to forecasting. Projections and prejudices take on the air of unchallengeable truths when expressed in faux-scientific language and garnished with mathematical hocus-pocus.

As an economist myself, I’d say that one of the few positives from this ghastly sub-prime crisis is that the profession is becoming more humble. Since the credit crunch, the use by economists of ever more complex models, and the increasingly inane assumptions that go with them, has partly reversed. Good.
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George Osborne waited until the depths of winter to deliver his fourth Autumn Statement. Yet the Chancellor was still on the front foot. Buoyed by upbeat new growth forecasts, Osborne presented fiscal numbers much improved on those in his March budget. This UK recovery, though, is extremely fragile and may not be sustained. And our country remains deep in the fiscal mire.

Thursday’s Commons set-piece was a political triumph for Osborne. This was inevitable, given the better economic backdrop. The Office for Budget Responsibility more than doubled its 2013 GDP growth forecast to 1.4pc, up from 0.6pc in March. Next year’s prediction accelerates to 2.4pc, said the OBR, up from 1.8pc nine months ago.
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