Peter Smith

Prints of The City and other royal pains

I often watch the Sky business channel to find the latest stock picks from its retinue of investment gurus. Invariably I write them down and then do nothing with them. It becomes all too confusing when I might have heard from four or five gurus about, say, ten shares in just one evening and my spare investment funds will only buy a respectable parcel of one. What to do? Nothing is my usual course. For some unaccountable reason this doesn’t stop me from continuing to watch and write down the quite divergent and useless tips.

In between the tips, the various presenters often talk with economic commentators from various financial (and other) institutions. As an ex-economist, programmed to disagree with my fellows, I bear up well under this (usually, at least) while waiting for the next tip. However, three things currently could be described as abominations producing great irk (if ‘irk’ were a noun, which it isn’t).

Appropriately, the newest abomination is of a grammatical nature. All of a sudden the latest economic statistic has become a “print”. How this happened I don’t know. But quickly, the other day, I was introduced to the CPI print in Australia and the GDP print in Japan, and to a number of other prints in quick succession by a number of commentators. So, clearly, it is by no means the idiosyncrasy of one person; though it might have started out that way and may, perhaps, have been first designed to confuse foreigners learning the language. No doubt, in due course, I will hear about the retail sales print and the business investment print and so on. I will have to get used to it, along with getting used to the weatherperson talking about temperatures being “on the rise and on the fall”.

The next newest abomination is the description, so far as I can tell by all economists, of quantitative easing (QE) as being one and the same thing as “printing money”. It is not meant to be taken literally of course. Nevertheless it gives the wrong impression that inflation is around the corner. It conjures images of German housewives in the 1920s pushing wheelbarrows full of Reich Marks to buy a loaf of bread or French peasants in the late 18th century using paper Assignats to light their pipes.

In case of confusion let’s be clear, there is no untoward printing go on. Cash money is not growing exponentially. Bernanke has been QE-ing for some time. Harold Wilson (from his grave) is mostly right and the dollar bill in an American purse is still worth a dollar bill. We no longer live in cash economies. In these modern days, money is mainly in the form of bank deposits held by the public. But here again there is no evidence of outlandish growth in this form of money. Money is not being “printed” in any sense. So, what is happening?

QE amounts to the central bank buying securities in the open market. If these are bought from banks there is no increase in the money supply. There is an increase in holdings by banks of deposits with the central bank. This is not part of the money supply. It would fuel an increase in the money supply if banks were to lend to their customers on the basis of having more liquid reserves. This not happening to any great extent in the US because there is a shortage of lendable propositions in a relatively moribund economy.

If the central bank buys securities from non-bank institutions it will increase bank deposits and therefore the money supply. But, again, this increase will be relatively modest unless there is an accompanying upsurge in bank lending. Bank lending is by far the largest contributor to monetary growth.

Inflation is not around the corner in the US, or anywhere else where QE is in progress or in prospect, unless and until we start seeing banks lending madly. As this can be quite quickly controlled, the days of hyperinflations are behind us. "Us" being the developed world — not, of course, the Zimbabwes of the world.

The third abomination is the perennial assertion that consumer spending accounts for a large proportion of GDP. I heard this again the other day. An economist from one of our sizeable institutions noted the importance of retail sales in spurring economic growth by saying that, after all, consumer spending accounts for 70 per cent of our GDP. Even on its own terms this is nonsensical. The national accounts might show consumer spending measuring, say, 70% of GDP, but they then show net exports (exports minus imports) subtracting from GDP. A large proportion of consumer spending is on imports which add not one jot to GDP.

But this untutored distortion of the numbers is not the gravest offence. GDP is the total of production in the economy over period (loosely speaking because it regards every dollar of public service salaries as production). Though it can be measured from an expenditure perspective, or from an income perspective, or from a value-added production perspective; only one of these methods of measuring GDP is primary. Income and expenditure arise after production. Production is the key to growth. In particular, expenditure has no life of its own. It is a derivative of production.

The fault of talking about expenditure as though it were a driving force is that it takes attention away from what really can increase GDP, which is to ensure that business has the best environment in which to invest and produce – less crowding out by government, less taxation, and less onerous industrial-relations regulation, and red and green tape.

My conclusion is that the present collection of both investment gurus and economic commentators leave something to be desired.

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics

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