This week marked the fifth anniversary of the 0.5% Bank of England base rate and the Bank of England’s Quantitative Easing program which has so far seen the Bank conjure up £375 billion of new base money and spend it on British government debt. It’s difficult to imagine money being any ‘easier’.
Or is it? At his Money Illusion blog this week, Scott Sumner asked
“1. Japan has had interest rates near zero for nearly 2 decades. Is this easy money, despite an NGDP that is lower than in 1993? Despite almost continual deflation? Despite a stock market at less than one half of 1991 levels. Despite almost continually falling house prices? If it’s easy money, how much longer before the high inflation arrives?
2. The US has had near zero interest rates for more than 5 years. Is this easy money? If so, how much longer until the high inflation arrives? If rates stay near zero for 2 more years, and inflation stays low, will you still call it easy money? How about 5 more years? Ten more years? Twenty? (Sumner 2014)
It is a key tenet of Market Monetarist thought that a low base rate or Fed funds rate is no indicator of whether money is ‘easy’ or not. The correct indicator, they argue, is the growth rate of nominal GDP; if it’s slumping money is too tight, if it’s roaring on it’s too loose, and if it’s ticking along at some predetermined rate all is rosy in the monetary garden. As a result of this analysis Market Monetarists like Sumner believe the Bank of England’s low base rates and vast monetary base expansion do not indicate ‘easy money’. Are they right?
Well, first we have to define what we mean by ‘easy money’. It’s a rhetorical term rather than a textbook one so here’s my definition (which, if you don’t accept it, probably scuppers the following analysis so feel to substitute your own); money is ‘easier’ the more people who want credit can get it.
There are two points to make. First, the choice of ‘credit’ rather than ‘money’ is deliberate. When most of us ‘borrow money’ we are, in fact, accessing credit which is some derivative of, or claim on money. Secondly, a point I’ve made previously (Phelan 2013), economy wide aggregates often tell us little of interest or use. Often more useful and interesting is to disaggregate. Instead of looking at the availability of credit to the British economy look instead at the availability of credit to different bits of it.
Looked at like this we would have to say that for most businesses and individuals in the UK, despite the tripling of the monetary base since March 2009, credit is not easily available and money cannot be said to be ‘easy’. The most recent Bank of England lending report in January noted that “The rate of decline in the stock of lending to UK businesses eased slightly in the year to November compared to 2012. The annual rate of growth in the stock of secured lending to individuals rose slightly to 0.8% in the three months to November” (Bank of England 2014) –November’s fall in business lending being the biggest in six months.
But banks certainly do have ‘easy’ money. That tripling of the monetary base, as I wrote recently (Phelan 2014), has flowed onto their balance sheets and stayed there. The money multiplier has collapsed and growth of base money, M0, has not led to growth in broader monetary aggregates such as M4, which would influence nominal GDP. The open handed stance of the Bank of England isn’t showing up as ‘easy’ money as Market Monetarists see it because ‘easy’ money for banks isn’t translating into ‘easy’ money for the rest of the economy.
Do we have easy money? On my definition that depends on who ‘we’ is. Banks face little constraint on their ability to access credit from the Bank of England so for them the answer is yes. The rest of us who rely on those banks find it rather tighter.
Bank of England. 2014. “Trends in Lending” January.
Friedman, Milton. 1998. http://www.hoover.org/publications/hoover-digest/article/6549
Phelan, John. 2013. “Output gaps and heterogeneity.” Accessed March 6th.
Phelan, John. 2014. “Britain’s inflationary outlook.” Accessed March 6th.
Sumner, Scott. 2010. “Milton Friedman vs. the conservatives” Money Illusion, August 24th.
Sumner, Scott. 2014. “How much longer?” Money Illusion, March 3rd.
 For fans of mathematical notation, if E is monetary ease and C is availability of credit then E=f(C)
 If we think of a river, with M0 pouring out of the spring at Threadneedle Street and the broad delta downriver being M4, banks’ demand for money has built a big dam stopping the river flowing. The Market Monetarist solution to this is to get the spring pouring out enough money that it flows over the top of this dam – in Quantity Theory notation to offset the decline in V stemming from banks’ increased money demand (which with downwardly sticky P would pull down y) with sufficient expansion of M