posted on 05 December 2015
by Dirk Ehnts, Econoblog101
The BBC had an article yesterday which is interesting for two reasons: first, the authors seem to have no grasp of monetary theory, and second, the authors are not asking obvious questions.
Let's have a look:
This is misleading. Since readers usually have no grasp of monetary operations at the central bank level, most readers will get away thinking that banks can lend central bank deposits to households or corporations. That's false. There are many critiques, so here is just one, written by the chief economist from Standard&Poor's:
So, what QE cannot do is increase lending to the private sector. Have a look at the next bit:
Apart from the fact that the second sentence does not end, the reader is left to wonder what it means when Draghi says that QE is working. Do we have higher inflation? Do we have more economic growth? Do we have lower interest rates? The BBC, if it would take journalism seriously, should have asked Draghi what the meaning of this "mission accomplished" statement actually means. Given that "QE works", why do we need more of it? Wasn't it supposed to return the economy to positive inflation rates and stimulate growth? Most academic economists that I know say that QE has been a failure. Richard Koo has written a book on the QE trap. He says that QE is actually harmful because it takes away interest-bearing assets, which lowers profits for banks. Academic economists associated to Modern Monetary Theory have been saying the same thing. The BBC pretends that none of that is actually relevant. On we go:
That one defies logic again. If you understand a bit about reserve accounting, then you would understand that banks making loans probably transfer more reserves to other banks in the future. However, these are transfers: what one bank loses in reserves, another gains. It is a zero-sum game. Some banks that are indebted vis-a-vis the ECB might use the reserves to pay down debt, so the quantity of reserves should fall if QE is successful. None of this is said in the article.
Here is the real news: QE is a strategy to push the euro down in order to increase external demand. Obviously, more European exports will be paid by the rest of the world increasing their debt. This is the global imbalances thing on the world stage, and a re-run of the macroeconomic imbalances inside the euro zone. No mentioning of this issue is made at all.
Towards the end, the BBC flip-flops on inflation:
This leaves the reader puzzled. Did not Draghi say that QE works? But why isn't inflation a) at the target level (a little below 2%) and b) why isn't the inflation rate moving up, with all that QE going on? Don't get me wrong: Draghi is between a rock (reality) and a hard place (Merkel/Schäuble). He doesn't have a lot of room of manoeuvre. However, the press should then point that out. Without fiscal policy, monetary policy obviously is not enough to get the job done!
The article ends with an economics correspondent from the BBC chipping in:
Well, if you think that banks can lend out "excess funds at the central bank" to households and corporations - it's a free world! Nevertheless, I wonder whether the British public deserves this kind of reporting coming from a government-run institution. Other public institutions in Britain are quite clear in their view of QE:
That's the Bank of England. But what does a central bank know about money?
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