More on the next QE

From HSBC via FTAlphaville:

There are four alternatives

The first, and probably the most fatalistic, is to accept that monetary policy can do little more to boost economic growth.The world’s major industrialised nations have been slowing down decade by decade (see chart 21). This appears to reflect a series of structural constraints that are unlikely to be influenced significantly by monetary policy. More needs to be done on the supply-side as opposed to the demand-side, in particular in order to tackle the persistent absence of decent productivity growth.

A second, and riskier, strategy is to offer more stimulus through a combination of monetary and fiscal policy. One of the key disappointments in recent years has been a persistent decline in the velocity of circulation of money: there is plenty sloshing around but little of it is being spent. An increase in government borrowing – funded by central bank purchase of newly-issued government debt – would be one way to increase velocity. There are, however, some obvious risks: would central banks lose their independence as a result and, if they did, would governments suddenly find themselves able to spend without limit? The danger would surely be a bout of excessive inflation accompanied by a currency collapse.

A third strategy would be to shift the emphasis away from monetary towards fiscal policy. In a modern-day version of policy assignment rules, governments could increase their borrowing to fund, for example, much needed infrastructure projects. With borrowing costs seemingly very low, there might not be a better opportunity. Yet infrastructure spending has not always helped longterm growth: Japan had its share of “bridges to nowhere” while Spain enjoyed an infrastructure-led boom before its property-led bust. And fiscal positions are already weak relative to history: debt levels are high and deficits are persistent.

A fourth strategy – advocated in the years following the financial crisis by Ken Rogoff* and most recently championed by Andy Haldane – would be to abolish cash altogether in order to be able to impose negative interest rates on holdings of money within the financial system. However, it’s difficult to see how it could easily be imposed: if there is a demand for cash, it’s likely to be supplied, either by foreign central banks (dollars circulating instead of sterling, for example) or through private notes and coin (as with the “Brixton Pound” – the B£10 note carries an image of David Bowie during his Aladdin Sane phase). Either way, cash would remain in circulation.

To state the obvious, the winner will be the easiest politically. That rules out four which is economic parlour talk, and three which will require too greater shift in thinking, one will get a little action but it is clearly two that has the best chance given what an easy answer it is (at least in a lazy population).

I still see it has highly problematic in the US where a powerful rump of monetarist and Austrian politics still exists. It’s even more the case in Europe. It would probably start in Japan if anywhere.

But the most likely scenario is probably more QE as we know it.