Commentary on Political Economy

Friday 5 August 2011

The USES of Quantitative Easing - Why QE3 is Essential

This is easily Gavyn Davies's best article in a stretch - though I hasten to add that his work is always of high quality.
Particularly on this occasion, Davies is openly addressing the politico-institutional aspects of the 'crisis' that are central to understanding its 'nature and causes' - and also he is implicitly criticising the economics profession for failing to display that 'scientific detachment' that it champions hypocritically.
 And I second 'Enrique's' emphasis below on "distribution": distribution of income (that is, of social resources) is of the essence in overcoming the present crisis. But we live still in a 'capitalist' system, which means that 'profitability' is of the essence. - And this is where, if I may, I respectfully disagree with Davies on QE3.
The first point is that QE3 is not about a 'positive' rate on treasuries - even when it is at 2.4% or even below! It is about a 'negative real rate of interest', as 'negative' as you can get, so that, first, those corporations hanging on to cash are forced to spend it, and, second, inflation eats up the corpus of the 'national debt'. (This is called 'default' on debt by any other name - or 'financial repression' - but if it 'represses' the capitalist class, all to the good!)
The second point is that, in a global capitalist market, the entire point to QEs is to export inflation to countries such as China and Germany - and most of all their corrupt leaderships - that suppress wages at home so as to subsidise (through cheap capital from those exports and low interest rates) their export industries! Indeed, a recent article in the FT on Obama and Merkel by Philip Stephens easily proves the point that Germany is being drawn closer to China and other dictatorships - precisely for this reason, which Stephens, alas, fails to point out or appreciate!
But all this is unavoidable. This time 'IS' different also in the sense that the role of the State - the politicisation of the capitalist economy - is absolutely inescapable! That much is clear to anyone willing to look! The funniest, most absurd thing in all of this, is that there are 'economists' still prescribing 'privatisation' (balanced budgets and austerity) as a 'solution'! When in fact we know that it was precisely (!) this 'wave of privatisation' during the Great Moderation that led straight ot the Great Financial Crisis in which we are and which is about to get worse!
Finally, as I have stressed repeatedly, Gillian Tett is elaborating on my point about "the fracture in the US elite" in her piece in today's FT. All friends are invited to sharpen the analysis at Cheers.
Friends are referred also to this useful review

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