Bank Of England's Adam Posen plays down any inflationary consequences from quantitative easing

October 27th, 2009
Author: Richard Henley Davis

Newly appointed policy maker to the Bank Of England, Adam Posen, has said that Quantitative easing will not cause a surge in inflation. This will come as no surprise to Economic Voice readers who have long debated the potential of QE as an inflationary pressure.

Adam Posen has stated that the £175bn worth of exchanging government bonds for cash poses no threat for high inflation and compared the Japanese economic stagnation (In which he is an expert) of the 1990s to the current British economic climate due to the lack of credit available to medium sized businesses. He went on to say fighting deflation has been the hard battle for the Bank Of England over the past few years since the credit crisis hit the world.

He sited historical precedents of quantitative easing during a talk to London's City University students and the lack of evidence for its ability to create inflation in historical QE programs both here in Britain and also abroad.

One of the misleading aspects of the quantitative easing/inflationary argument is the notion that wealth is created for the banks to spend without recourse  which is clearly untrue seeing as at some point quantitative easing must be reversed to prevent a destruction of the value of government debt. And with the banks exercising much greater caution with lending to businesses, the temporarily improved  sheets of the banks demand  lending in more dynamic and less fragile economies like the UK.

British business and mortgages had come to rely on risky credit for their survival.

With the banks abolishing risky lending favor of prudence its difficult to see how the transference of £175bn or £1trillion could make a difference to the wider economy. The question must be asked, what would the stock markets look like if there had been no QE program?

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3 Responses to “Bank Of England's Adam Posen plays down any inflationary consequences from quantitative easing”

  1. Brian English says:

    Without the new QE money the UK economy should be in heavy deflation territory. The QE money is meant to balance the credit destruction the ecomomy has sufferred due to bank losses.

    There are two problems:

    The banks are avoiding declaring their losses due to a relaxation in accounting rules.

    The banks don't want to lend the new money to risky people and businesses. They'd rather invest in nice safe government bonds.

  2. The question I have is at what junction does QE money reach the real economy?

  3. Jeff Taylor says:

    I don't think QE money ever really reaches the pointy end of the economy. It circulates on a gilt merry go round making the banks a bit of money otherwise they wouldn't do it.

    I believe that overall we are in deflation territory, but people are still buying imported goods (foodstuffs) that, because of the parlous state of the pound, are getting more expensive. This makes it look like inflation to the average shopper.