This week marked the fifth anniversary of the 0.5% Bank of England base rate and the Bank of England’s Quantitative Easing program which has so far seen the Bank conjure up £375 billion of new base money and spend it on British government debt. It’s difficult to imagine money being any ‘easier’.
Or is it? At his Money Illusion blog this week, Scott Sumner asked
1. Japan has had interest rates near zero for nearly 2 decades. Is this easy money, despite an NGDP that is lower than in 1993? Despite almost continual deflation? Despite a stock market at less than one half of 1991 levels. Despite almost continually falling house prices? If it’s easy money, how much longer before the high inflation arrives?
2. The US has had near zero interest rates for more than 5 years. Is this easy money? If so, how much longer until the high inflation arrives? If rates stay near zero for 2 more years, and inflation stays low, will you still call it easy money? How about 5 more years? Ten more years? Twenty?
It is a key tenet of Market Monetarist thought that a low base rate or Fed funds rate is no indicator of whether money is ‘easy’ or not[1]. The correct indicator, they argue, is the growth rate of nominal GDP; if it’s slumping money is too tight, if it’s roaring on it’s too loose, and if it’s ticking along at some predetermined rate all is rosy in the monetary garden. As a result of this analysis Market Monetarists like Sumner believe the Bank of England’s low base rates and vast monetary base expansion do not indicate ‘easy money’. Are they right?
Well, first we have to define what we mean by ‘easy money’. It’s a rhetorical term rather than a textbook one so here’s my definition (which, if you don’t accept it, probably scuppers the following analysis so feel to substitute your own); money is ‘easier’ the more people who want credit can get it[2].
There are two points to make. First, the choice of ‘credit’ rather than ‘money’ is deliberate. When most of us ‘borrow money’ we are, in fact, accessing credit which is some derivative of, or claim on money. Secondly, a point I’ve made previously, economy wide aggregates often tell us little of interest or use. Often more useful and interesting is to disaggregate. Instead of looking at the availability of credit to the British economy look instead at the availability of credit to different bits of it.
Looked at like this we would have to say that for most businesses and individuals in the UK, despite the tripling of the monetary base since March 2009, credit is not easily available and money cannot be said to be ‘easy’. The most recent Bank of England lending report in January noted that “The rate of decline in the stock of lending to UK businesses eased slightly in the year to November compared to 2012. The annual rate of growth in the stock of secured lending to individuals rose slightly to 0.8% in the three months to November” –November’s fall in business lending being the biggest in six months.
But banks certainly do have ‘easy’ money. That tripling of the monetary base, as I wrote recently, has flowed onto their balance sheets and stayed there. The money multiplier has collapsed and growth of base money, M0, has not led to growth in broader monetary aggregates such as M4, which would influence nominal GDP. The open handed stance of the Bank of England isn’t showing up as ‘easy’ money as Market Monetarists see it because ‘easy’ money for banks isn’t translating into ‘easy’ money for the rest of the economy[3].
Do we have easy money? On my definition that depends on who ‘we’ is. Banks face little constraint on their ability to access credit from the Bank of England so for them the answer is yes. The rest of us who rely on those banks find it rather tighter.
[1] Sumner, for example, draws on Friedman’s analysis of Japan in the 1990s
[2] For fans of mathematical notation, if E is monetary ease and C is availability of credit then E=f(C)
[3] If we think of a river, with M0 pouring out of the spring at Threadneedle Street and the broad delta downriver being M4, banks’ demand for money has built a big dam stopping the river flowing. The Market Monetarist solution to this is to get the spring pouring out enough money that it flows over the top of this dam – in Quantity Theory notation to offset the decline in V stemming from banks’ increased money demand (which with downwardly sticky P would pull down y) with sufficient expansion of M.
There is a “heretical” branch of Austrian theory which does NOT believe in the quantity theory of money. From a Hungarian professor comes this: “If the Fed is trying to fend off deflation, then it is using counter-productive means to achieve its ends. ZIRP (zero interest rate policy) has the effect of destroying capital. As the rate of interest is halved, the price the longterm bond is doubled. It now takes twice as much money to get out of debt. This is a loss that has to be charged to capital.” In this respect he disagrees with Mises, but looks instead to Menger. I cannot claim to fully understand his viewpoint, but it basically leads to easy money policies ultimately destroying capital; and as such, these policies are actually deflationary. It’s an interesting take on Austrian monetary theory. See his website at http://www.professorfekete.com/
“Broad money” (bank credit) has not increased much in Britain and the United States in the last four years – but the “monetary base” has VASTLY increased. So why the difference?
It is because before 2007-8 (for many years) there was a vast expansion of “broad money” (bank credit bubble stuff) because every time a banking credit bubble looked like it was going to burst BEFORE this time, the Central Bankers (led by Alan Greenspan) “rode to the rescue”.
By 2008 the credit bubble (the “broad money”) was so vast that no “normal” means could prevent a massive bust – so, rather than allowing a massive “deflation” (i.e. a credit bust) the Central Banks vastly increased the “monetary base” and flung this new money at the banks and other such.
They have been doing this ever since – as they had in Japan years before.
If the “market monetarists” do not consider creating vast amounts of money (from nothing) and throwing it at the banks (to save them from a credit bubble bust) “easy money”, then the “market monetarists” are not worth talking about.
By the way….. in a REAL market, loans would be from REAL SAVINGS (cash-money that was earned but NOT spent – the sacrifice-of-consumption).
Real savings are “capital” – and there is no real capitalism without real savings (credit bubbles are not real capitalism – and neither are Central Bank easy money bailouts).
“Paul you sound like Max Keiser” – NO, what Max does is to take free market (“Austrian School”) language and then twist-it-round (twist-in-the-tail) to get a collectivist conclusion (such as we could all have wonderful-government-health-care – if only it was not for the “banksters”).
Using free market language (before twisting it 180 degrees to get a collectivist, class war – down with “the rich”, conclusion) does not make someone a real supporter of the free market.
Ed Buckley – you are pointing at one Max Keiser’s friends.
Actually neither Mises or Hayek believed there was an exact mathematical relationship here (no Irving Fisher or Milton Friedman MV=PT for them).
However, if you increase the amount of money that IS inflation (whatever happens to the “price level” – which is a silly concept anyway).
So NO easy money policies are NOT “deflationary” and Carl Menger never said they were.
So I would not waste your time trying to understand something it is not true.
One can destroy capital without being “deflationary” – artificially low interest rates undermine REAL SAVINGS.
No real savings – and bang goes capital.