by Shazan Qureshi
After floating four companies over the last three years and acknowledged my childhood passion for the stock market, I’ve found a lot of economic talk is heavily theoretical and needs translating into a real life business context. By providing expert advice with guest columnists, as well as sharing experience and insight my aim is to help you make your enterprises asset rich and ultimately give you the freedom of choice in how you wish to exit or retain your business.
A YEAR ON AND QUANTATIVE EASING IS PAUSED - BUT WHEN WILL IT RETURN?
Recently an important anniversary passed quietly by. It is a year since the Bank of England started Quantitative Easing. Has this policy worked?
There is no consensus on this.
There were those who thought that QE’s effects would be predictable: just pump in money and, according to all the usual relationships between money and the economy, spending and GDP would increase. A second group thought that the policy would do no good at all. A third group thought that the policy was simply dangerous: printing money would lead to a surge of inflation.
As with so much in economics, it is impossible to be sure what the truth is because you never know what the situation would have been if the policy had not been in place. A few things, though, can be said.
Over this period asset prices have strengthened, and not just here but globally. Doubtless, some people will see the fact that inflation has leapt to 3.5% as justification of their concerns about QE.
This would be a mistake.
Even if QE does pose an inflationary danger at some stage, that point has not arrived. The recent increase in inflation is quite easily explained by various factors, such as higher energy prices and the restoration of the full rate of VAT.
Since the effects of QE are unpredictable, and may vary from nothing at one extreme to explosive at the other, depending upon economic circumstances and the state of confidence, it is right to be cautious about using it.
Accordingly, the Bank of England’s recent pause was probably justified. But if the economy remains very soft, that in the second half of this year inflation will plummet, and that after the election a programme of fiscal tightening will be put in place, then there will be cause to do more QE.
When would it be right to stop doing QE?
The obvious answer is when the economy is convincingly recovering and seems likely to be able to sustain that recovery without extraordinary support. But there could be reasons to stop the policy even before that point was reached. If inflation fears took off because of QE then the policy could prove to be destabilising. But in present circumstances that seems unlikely.
14 - WORK
A more plausible stopping point might be reached if the policy boosted asset prices in an extreme way without having much effect on the real economy. In these circumstances then you could say that the policy was sowing the seeds of the next bubble. It might then be better to forgo whatever boost QE gave to spending in order to preserve the stability of the financial system.
Yet, although this would be a valid reason for stopping, that point has not been reached. Higher asset prices are one of the principle channels through which QE is supposed to work, so it would be bizarre to shout “bubble” as soon as asset prices rose.
For further professional advice and a confidential one-to-one please email
shazan@rejuvenateonline.co.uk
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