Quantitative Easing

The Federal Reserve has given the markets a fillip with its decision to keep pumping new money into the financial system, known a Quantitative Easing. The reason is that the US recovery is not yet secure and unemployment is not falling fast enough. In other words improving but not yet well.

It is much the same story in the UK. ThingsĀ are looking up, but the recovery is slow and fragile. Retail sales fell in August. This is hardly surprising since inflation is higher than wages and the squeeze on incomes is real. Unfortunately QE in the form practised on both sides of the Atlantic has the effect of bolstering the financial sector, whilst leaving the wealth creating sector of the economy in continuing doldrums. Both America and Britain are doing better overall than much of the EU where QE is subject to a German veto. In Britain there are now alarming signs of rising house prices in some parts of the country and warnings of a housing bubble multiply. QE is linked to this as it is having the effect of boosting asset values but not making new wealth. Meanwhile corporations are generally still sitting on cash piles, unconvinced that the economic recovery is for the long term and not a short term rally.

This blog has for long argued that in addition to Bank of England QE to boost the financial sector and hold down interest rates there should be Treasury instigated QE to finance infrastructure and public house building. QE used to create, in a whole variety of ways, wealth, has a far more beneficial impact on growth. I have argued this at length in a paper which I may shortly publish. Watch this space.

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