In response to an FT article by Wolfgang Münchau on 7th December 2014, entitled 'The ECB, demigods and eurozone quantitative easing'
http://www.ft.com/cms/s/0/c90dd466-7bb4-11e4-a695-00144feabdc0.html#ixzz3LFawPj62
Recipe for QE - AKA Mario's Marvellous Mash for Münchau…mmmm
1 . Take a computer terminal, type in a few figures and hey presto you have 'new money'
2. Use new money to buy 'government debt' from banks, who bought this debt with 'old money' returned to them by customers who had originally borrowed new money, with which to create old money by doing something useful and/or useless
Note 2a) Whether borrowers use this new money to do something useful or useless is significantly effected by how much it costs them to borrow the money - this is called the 'interest rate'. Experience has shown that people are more productive with money that costs them something to borrow, but governments and most economists prefer to ignore this, because governments prefer money that costs them nothing, hence this recipe
Note 2b) The government has to sell this debt because they spent more old money than they had confiscated from citizens - this is called taxation. Taxation is confiscated on the understanding that they do something useful with it - Unfortunately governments don't have to take responsibility for doing something useful with it because they didn't have to work for it, and they can go back to step one if they don't confiscate enough for their ambitions, which they never do. Because of this advantageous state of affairs (if you are a government) they can largely forget about doing anything useful, and spend their time coming up with 'clever wheezes' to sell to citizens so they can do it all over again in 5 years time - this is called 'politics' and inevitably leads to more debt
3. Tell the banks that they must lend out this new money otherwise you will charge them old money for storing the new money on their behalf
4. Watch in wonder as the banks 'invest' this new money in risky assets, boosting the price of these assets way above their fundamental value - this is called 'asset price inflation', but don't use the 'I' word because governments prefer citizens to believe that inflation only applies to the particular collection of prices that have been chosen on the basis that they are going down - this is called 'substitution' and 'hedonics', and is a recipe in its own right
5. Tell citizens that the rise in asset prices is a reflection of how well the economy is doing and inform them that the 'portfolio rebalancing channel' will take care of things on their behalf. When they scratch their heads and look at you with a blank expression, tell them that 'treacle down' is a better way to think about it
6. Prepare another delicious helping of Mario's Marvellous Mash for Münchau…mmmm, for when this one achieves little other than making your rich mates even richer (advise them that Andy Wharhol's are on the up)
7. Pray (people of an agnostic or atheistic persuasion may prefer to update their CV)