Three-way on the MPC
The nine men and women who set British monetary policy agree that the next few years for the economy are not going to be much fun. But they don't all agree on what to do.
As the minutes of the November meeting reveal, seven members of the Monetary Policy Committee voted to buy another £25bn-worth of assets over the next three months. But two voted against.
David Miles wanted an expansion of £40bn, to keep the asset sales running at the same pace as before. (It would be £50bn, but quantitative easing was always going to take a breather over Christmas. Presumably the Bank thinks that injections of good cheer from Father Christmas will be more than enough to fill the gap.)
The second "no" vote is the more interesting, since it came from the Bank's chief economist, Spencer Dale, who preferred to leave policy unchanged.
Judging from unattributed comments in the minutes, this was partly because he was worried about the sheer uncertainty about the amount of spare capacity in the economy, and the implications of that for inflation.
But he also thought there was a risk that further injections of cash would result in "unwarranted increases in some asset prices that could prove costly to rectify, complicating the task of meeting the inflation target in future."
This has been a growing concern among policy-makers around the world in recent weeks. I raised it directly with the Governor, Mervyn King, at last week's press conference. He gave a robust response - some might say, surprisingly so. (You'll see he makes a scathing comment about people seeing "bubbles" in every asset price rise, when I had chosen my words rather carefully. Not that I took it personally, or anything...)
Now, perhaps, we have one reason for his giving such a lengthy and forceful reply. He's been having the same debate with his Chief Economist.
Should we be worried about a new asset price bubble? The current answer - at the Federal Reserve and at the Bank - is "no". In fact, I doubt that Spencer Dale thinks it's something that needs to be addressed next week or next month.
The agreed wisdom, elucidated by Mervyn King in his answer to me, is that there are two types of bubble: those driven by sheer investor exuberance, and those driven by exuberance plus shedloads of new credit.
In theory, it's only the credit-fuelled binges you have to worry about, because they bring excess levels of leverage - debt - into the equation. Frederic Mishkin also provided a clear statement of this argument in the FT at the start of last week.
When you or I lose money in the stock market (assuming that most of you aren't hedge fund managers), it's usually going to be through our pension fund or ISA. All that happens is the value of the assets in the fund go down, and we are a bit cross. When you have an asset boom, without a heavy expansion of credit, most investors in the market are like that.
But with a credit boom, more of those assets are going to be held by people or institutions who borrowed to buy them. And if the price goes down, they may have to sell them to service that debt (or pay it back). That will lower the price again, causing another round of sales, and so on.
Leverage makes the returns that much tastier when asset prices are on the way up - which in turn takes prices up even further. But it also makes the collapse in prices that much more costly for everyone involved.
Of course, I'm grossly simplifying. In the past year or two, great tomes have been written on the precise dynamics of this latest boom and bust. But credit - and the leverage it created - was the core of the problem.
We know that small businesses and households are not seeing big a expansion of credit coming their way. But is loose credit driving a "risky" run-up in world asset markets? The conclusion of a report produced yesterday by Paul Ashworth, the Chief US Economist for Capital Economics, is "no".
Mr Ashworth went through the numbers looking for evidence to back up the view that the world was "awash with dollars", driving up asset markets in the US but also world-wide, via a revived version of the "carry trade". He didn't find find any. Yes, the monetary base - the narrowest measure of money supply - is expanding. It would be amazing it it weren't, given the Fed's asset purchases. But debt - or leverage - is not expanding. In fact, the evidence is that institutions are still trying to reduce the debt on their balance sheets.
He produces loads of charts to make the point. Let me just give you two here: the first shows how bank balance sheets are still shrinking. The second shows that the expansion of dollar liquidity (the amount of dollars in circulation) has been slowing down recently - though it's interesting to me that is still well above the rates of growth seen after the end of the dotcom boom in 2001.
I don't think this disposes of the question entirely. There's plenty of cash flowing into emerging market economies that wouldn't be captured in Mr Ashworth's charts. It may not be a "credit-type boom", but you could forgive those developing-country governments for failing to spot the difference.
More fundamentally, it is quite reasonable to worry - as Spencer Dale apparently does - about the long-term effect on asset markets of a prolonged period of extraordinarily loose monetary policy. It is just not very healthy to have the risk-free rate of interest (that is, the yield on government debt) set, in effect, not by investors but by the central bank.
Then again, there's a lot about the past few years that's been pretty unhealthy from an economic standpoint. We are where we are.
In the minutes of this latest MPC meeting, several are said to have pointed out that expanding the programme by £25bn would also "bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn, if the projected impact was realised."
They would rather not be here. And now here, they would rather get out sooner than later. They just need the broader economy to co-operate.