How do you go to the bog? Well I go rather frequently because I eat too much, and this means that the bathroom becomes an extension to my library shelves. I ought to explain that there are no library shelves in the bathroom, because books would get damp. Water flushing into the bog, water in the sink, water coming out of the shower head into that bath chosen for people with big bottoms: it sort of spreads about and it is not good for books.
When you are unemployed, you can take your time and any time on the bog. So books get consulted this way. For example, my recent update regarding Rudolf Bultmann was largely done on the bog, in terms of mental formation. Then there is the bit at the end that states Dennis Nineham relates to Bultmann, and I wondered if this was true. So since the New Testament interpretation book found its way back into the study, a Dennis Nineham book found its way into being alongside the bog (it is there now). I think it is right: Dennis Nineham is interested in history, but a history around assumptions in these biblical texts - their worldview and then our worldview, and this is enough to support the connection between Bultmann and Nineham. Thus some of my time on the bog.
Now it is natural when on the bog to consider quantitative easing. It is something I have thought about before, though not with such terminology. It does puzzle me that a government should have to obey rules of debt, which can be just as inflationary as what is now called quantitative easing, which sells its own debt to its own added money.
I read the opinion of Bishop Saxbee in Crosslincs (the Diocese of Lincoln's rag) about the economy in which he calls it a zero-sum game (here is a link: they now use an awful Mortons Digital presentation when a .PDF - as was - would be so much easier to handle and download - anyway it pages 14 to 15 of the current issue 16). This is just wrong. So is Peter Ould's dummy tale of a simple doubling of prices when money supply doubles, which is also to state a zero-sum relationship.
It is not the way an economy works. An economy works by distributing resources and employing resources. Money has a price (rates of interest) and has a semi-independent existence. It is true that money has a derived value, that is the sum of goods and services in an economy. But money works by lack of knowledge and subterfuge, and is dynamic, and is itself expandable and contractable without effort from central banks. There are two aspects of it: actual quantity and velocity of use, and they add up to the same thing in terms of the dynamic of flow.
Making new bonds that relate to assets down an asset line already covered is a form of expanding the money supply: their price-worthlessness is a form of contracting the money supply. We have been through a huge expansion in bonds-making and insuring against bonds, all of which has funnelled productive surpluses in the East to finance consuming debts in the West, and disguised the comparative disadvantage in the West by its expansion. Money values like this are rather like fat, when inflation has been reduced by lower import prices, so that the asset prices expand beyond productive and working ability to afford them, and in the same way the bubble bursting has a necessary ugly consequence on asset prices - sticky and resistant markets may be, but the pain of collapsing monetary values has to take place.
Usually, an economy working at some 'natural rate' of unemployment means that monetary policy is an economy-responsive tool. That is to say, where resources are in equilibrium according to technical efficiency and comparative advantage, monetary policy with interest rates can make money more or less expensive and contract or expand its quantity. Eventually money and output will equate, but the interest rate has a transitory effect of slowing or speeding activity and wider price adjustments. People do not know there is more or less money in the system, but as it comes into shops and businesses (or doesn't) it has competitive effects and forces levels of change. Eventually all you get is different prices, and indeed the price of money itself stabilises. But it all works in the transition.
However, after such a huge rise in credit that fuelled a mirage of economic activity (as well as productive increases), the bump back is pretty nasty and has real consequences. The system moves from equilibrium to chaos to a new equilibrium. The additional reluctance of banks to lend after such a shock to the system affects cash flow of even solvent businesses and causes a reverse multiplier effect of additional real losses. The transition effect is severe, but the crash in the economy is very real, with closures that have their own depression logic. It is not zero-sum, but below zero-sum, just as an expansion can be, resource-allowing, greater than zero-sum.
This chaotic collapse produces a different economic equilibrium, one of massive spare resources and lack of use. Monetary policy in terms of pricing money comes to an end, because a near zero price is the end point of effectiveness. Nobody wants the stuff at any price. Actually, it is more complicated than this: the banking pipework is bunged up and the actual rate of interest reflects this to businesses and consumers, and thus the central bank near zero rate isn't functioning as the real rate elsewhere.
It is at this point that monetarism becomes duff: its curves are too flat to function. Quantitative easing, that which we all do, thus is to bypass the ineffectiveness of interest rates. However, it has to be said that unwanted money just gets saved. It slows down so much - so little velocity - that it is like it doesn't exist. The best that can be said is that it might bring actual interest rates closer to the central bank's.
It is the equivalent of keeping on shitting when actually you have to unblock the bog first.
It is at this low equilibrium that the policy has to become one of spending the money: and government is the one body to do it. Here Keynes kicks in, to shift the shit. Tax cuts are not enough, even to the poor who spend: it has to be actual physical spending on things that are cut out and constructed and made and put into place. It has to be resource using. It can be anything, but it is far better if it adds value and adds potential to adding value. The British government is tinkering at the edges here: it has only brought forward a few ready to go projects.
Spending has to be hefty, spread about, continuous and ongoing. It could be a mass project of buying up houses going cheap and doing them up, plus building more, and making them available for rent: never again must houses be left in short supply to make a mirage of rising asset prices on which all else depends. It means doing up city centres, carrying out repairs, building new relief roads, building some high speed railways, doing flood relief projects, creating nature habitats, building power generating resources.
The aim of such an approach is to use resources of labour and capital that are simply unused, and to move the equilibrium back again to one of activity. It is here that the danger with all this current monetary policy lies: that once there is uplift to the economy, and the monetary side becomes more responsive, then inflation can kick in - and possibly be misread as recovery in itself. The role of monetary policy is almost always one of stability: that as the Keynesian project gets underway, the private sector expands too, but the private sector may be restrained - and rightly so - by stable monetary policy until the Keynesian expansion programmes run down and the private sector of consuming and its economic priorities take over those resources.
In the end, quantitative easing is something of an emergency and one off. Like visits to the bog, shitting money should be regular and have some sort of routine, and be of a stable price. But to get there now requires government to spend, and it can spend whatever it gets hold of, even if it is printed (or in computer screens). But it must use liquidity to directly employ resources and restore productive activity, otherwise it ends up like Zimbabwe, which is the monetary equivalent of diarrhoea.
But just as cycles of eating and shitting are different, and one can be of a greater quantity of another, so that transition works in the economy. Also (here is where the analogy breaks down), some input can create its own additonal input and just expand what comes out at the other end.