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Home > Blogs > Moorad Choudhry > Central banks and QE again: be afraid

Central banks and QE again: be afraid

Central banks and QE again: be afraid Moorad Choudhry

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Just as I feared I was beginning to sound like a stuck record blathering on about central banks and what their role should be, I noted the consistently excellent Buttonwood's Notebook column in The Economist this week suggesting that central banks will be financing governments on a permanent basis.

The really scary bit was that the article didn’t come down strongly on why, if this is indeed turns out to be the case, it is not only unsustainable but also very bad for the global economy in the long run. Yes there was the usual reference to hyperinflation and Zimbabwe, and there was also this telling statement in respect to quantitative easing (QE) as undertaken by the Bank of England:

“The British government has in effect ended up with an interest-free loan from its central bank, financed by money creation. The debt has not been formally cancelled, but it might as well have been.”

Surely the above is not sustainable? At the end of the day, the central bank is a public sector body just like any other arm of the government. It’s the left hand lending money to the right hand of the same person. Why would it be any different from one department of a company lending money to another department of the same company? Any corporate entity experiencing debt-servicing problems could just state that it had entered into QE with itself and started financing its debt that way.

The fact that inflation is low and/or falling on both sides of the Atlantic is no defense against the foolishness that would be central banks staying in the QE game permanently. At some point they are going to get found out and fiat money will be seen to be untenable. The signs appear to be that Western economies are emerging from recession – just the right time to be talking about how one should start unwinding QE, not beginning to think that it will always be with us.

If one wants to really ram the point home, just extend the logic to its ultimate conclusion. At the moment the BoE holds about 35% of the UK sovereign debt market. Why not go the whole hog and get it to own 100% of it? That way, the government’s budget problems are solved.

Not forever, though. Just as long as it takes for people to suss out what’s wrong with this picture.

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Tags: Bank of England , BoE , Buttonwood's Notebook , central bank , debt , government , hyperinflation , inflation , loan , QE , quantitative easing , recession , sovereign debt , The Economist
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