Ans: A) When financial markets stood on the verge of collapse in the summer of 2008, two of the worlds most important central banks, the US Federal Reserve and the Bank of England, began considering unorthodox policy measures. They turned to Quantitative Easing, or QE: injecting money into the economy by purchasing assets from the private sector, in the hope of boosting spending and staving off the threat of deflation. These were desperate measures for desperate times. With signs of a fragile economic recovery gathering enough momentum to reassure policymakers in the US, the policy was expected to be wound down. But in a move that caught commentators off guard, the Fed instead committed to continue with its existing level of asset purchases. For the foreseeable future, at least, QE is here to stay. What began as a short-term crisis measure has now become a key component of Anglo-American growth strategies. Its important, then, to take stock of QE and the central role it has played within the Anglo-American response to the financial crisis. The way the Fed led the policy response to the financial crisis is important in two ways. First, it reflects the extent to which the Anglo-American economies have become financialised: credit- debt relations are pervasive throughout all facets of contemporary economic activity and there has been a deepening, extension and deregulation of financial markets commensurate with this development. In that context, with the increased competitiveness, scale and global integration of financial markets intensifying the risk of financial instability, the crisis management capacities of central banks have become increasingly important. Second, central bank leadership of the policy response also reflects a key feature of neoliberal political economy in practice. Despite all the rhetoric of free markets, competition and deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its heart: neoliberalism has been extremely reliant upon the active interventions of central banks within supposedly free markets. The crisis has been warehoused on the expanding balance sheets of central banks, demonstrating just how much scope for policy manoeuvre there is when governing elites want it. Government debt and private assets, including toxic mortgage-backed securities, have been indefinitely transferred onto central bank accounts. This strategy highlights the role of arbitrary accounting processes, shaped by state institutions, at the heart of supposedly free market economies. Given this room for manoeuvre, there is no doubt that a much more expansionary fiscal policy and a progressive taxation system could have been implemented in response to the crisis, but that response is foreclosed by the ideological confines of the prevailing neoliberal orthodoxy. Instead, we have monetary expansion and fiscal austerity. Incubated within the crisis conditions of the 1970s, the neoliberal revolution in the West.

1. Ans:
A) When financial markets stood on the verge of collapse in the summer of 2008, two of the
worlds most important central banks, the US Federal Reserve and the Bank of England, began
considering unorthodox policy measures. They turned to Quantitative Easing, or QE: injecting
money into the economy by purchasing assets from the private sector, in the hope of boosting
spending and staving off the threat of deflation. These were desperate measures for desperate
times.
With signs of a fragile economic recovery gathering enough momentum to reassure
policymakers in the US, the policy was expected to be wound down. But in a move that caught
commentators off guard, the Fed instead committed to continue with its existing level of asset
purchases. For the foreseeable future, at least, QE is here to stay. What began as a short-term
crisis measure has now become a key component of Anglo-American growth strategies. Its
important, then, to take stock of QE and the central role it has played within the Anglo-American
response to the financial crisis.
The way the Fed led the policy response to the financial crisis is important in two ways. First, it
reflects the extent to which the Anglo-American economies have become financialised: credit-
debt relations are pervasive throughout all facets of contemporary economic activity and there
has been a deepening, extension and deregulation of financial markets commensurate with this
development. In that context, with the increased competitiveness, scale and global integration of
financial markets intensifying the risk of financial instability, the crisis management capacities of
central banks have become increasingly important.
Second, central bank leadership of the policy response also reflects a key feature of neoliberal
political economy in practice. Despite all the rhetoric of free markets, competition and
deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its
heart: neoliberalism has been extremely reliant upon the active interventions of central banks
within supposedly free markets.
The crisis has been warehoused on the expanding balance sheets of central banks, demonstrating
just how much scope for policy manoeuvre there is when governing elites want it. Government
debt and private assets, including toxic mortgage-backed securities, have been indefinitely
transferred onto central bank accounts. This strategy highlights the role of arbitrary accounting
processes, shaped by state institutions, at the heart of supposedly free market economies.
Given this room for manoeuvre, there is no doubt that a much more expansionary fiscal policy
and a progressive taxation system could have been implemented in response to the crisis, but that
response is foreclosed by the ideological confines of the prevailing neoliberal orthodoxy. Instead,
we have monetary expansion and fiscal austerity.

2. Incubated within the crisis conditions of the 1970s, the neoliberal revolution in the West was
birthed during the 1980s with the landmark electoral victories of Margaret Thatcher and Ronald
Reagan. The early years of their tenure were marked by proactive central bank policies, fighting
inflation through high interest rate regimes that were justified with monetarist dogma. Those
policies had mixed results, but, crucially, they signified the strong emphasis upon monetary
policy within the new paradigm, which now prioritised price stability, rather than the traditional
post-war commitment to full employment.
By 2008, the challenge faced was markedly different. Now it was deflation and a shortage of
liquidity, not inflation, which threatened the functioning of financial markets. Yet, in common
with the inflationary crisis of the early 1980s, monetary policy has again been emphasised as the
proactive component of the policy response. The common element in both crises is this
combination of monetary activism, through extreme tightening (in the 1980s) or loosening (from
2008) of the credit flow, plus of course fiscal austerity.
What have the effects of this combination been? In the 1980s, the high interest rate regimes
aggravated unemployment, boosted bank profits and accelerated the growth of income
inequality. When the Anglo-American economies did return to growth they were markedly
different than they had been before.
In the present period, weve witnessed a similar form of wealth redistribution. Recent estimates
by Berkeley professor Emmanuel Saez, an influential scholar of income inequality, suggest that
95% of wealth gains since 2009 have accrued to the top 1% of the US income distribution
pattern. In Britain the experience has been very similar, with the Bank of Englands own report in
2012 suggesting that QE had benefited Britains richest 5% the most.
These two major crises the first inflationary and the second deflationary have been the defining
moments of the neoliberal period within the Anglo-American sphere and its remarkable that they
have led to a similar pattern of policy response.
They have also both produced regressively redistributive recoveries: by this I mean that where
and when growth has returned the benefits have been highly skewed towards the upper
percentiles of wealth holders. That was the case in the 1980s, when the acceleration of income
inequality really got underway. And it has been the case, once again, in the wake of the 2008
crisis.
Todays recovery has largely been confined to rising stock prices and asset values. Meanwhile,
average incomes have continued to stagnate or decline and income inequality has intensified.
Quantitative easing has been central to this regressively redistributive recovery, boosting balance
sheets and stock market values without providing a commensurate recovery throughout the
economy as a whole. These measures have disproportionately benefited those who already own
financial assets on a large scale.

3. Quantitative easing is thus exposed. Its not merely a technical remedy to a malfunctioning
financial system, but rather a deeply political policy programme. There are winners and losers
just as with any economic policy that affects the overall distribution of wealth and resources
within society. The conventional fixation with GDP obscures these dimensions of the recovery
and ignores key questions about the distribution of wealth within society.
As the statistics about the uneven benefits of economic activity since the final crisis show, its
important to remember that recessionary periods are not simply dead-spaces: even while the pie
may be shrinking, the slices held by different groups within society can expand and contract in a
very uneven manner with serious social consequences. There is no small irony in the fact that the
banks, whose indiscretions lay at the heart of the original financial crisis, have been the major
winners during the recession.
If we keep on following these same neoliberal policy paths we will only end up with ever more
deeply divided and highly unequal societies. These are not firm foundations for healthy
democracies.
B)
According to Milton Friedman, "inflation is always and everywhere a monetary phenomenon."
If that is true, then you have to wonder where the heck all of the inflation is.
Every central bank in the Western world is holding interest rates down, and almost all of them
are printing money like it's going out of style.
Five years ago, nearly every economist in the world would have told you this would cause
inflation to skyrocket, and the big deficits governments were running would make matters even
worse.
Taken together, monetary and fiscal policies are far more extreme than they have ever been.
Yet, inflation has remained rather tame at 2%. In Friedman's world that just wouldn't be
possible.
What does it all mean?....
It means even Nobel Prize-winning economists can get it wrong-at least in the short run.
Here's why Friedman has been wrong on inflation so far. It starts with his basic theory.
Friedman's Theory on Inflation
The central equation of Friedman's monetary theory is M*V=P*Y, where M is the money
supply, Y is Gross Domestic Product, P is the price level and V is the "velocity" of money,
thought of intuitively as the speed at which money moves around the economy.
In this case, the M2 money supply has been increased by 11.5% in the last two months and 8.2%

4. in the past year, while the St. Louis Fed's Money of Zero Maturity (the nearest we can get to the
old M3) has increased by 13.1% in the last two months and 8.4% in the last year.
Since GDP is increasing at barely 2%, that ought to mean prices should increase by 6%, just
based on the last year's data alone.
Needless to say, that's not happening, since consumer price inflation is under 2%.
Of course, monetarists will tell you that money supply produces inflation only with a lag.
Fine, but it's also true that the M2 money supply has been increasing by 7.4% over the last five
years. Admittedly, there was a year in mid-2009-2010 when it stayed flat, but otherwise the
monetary base has been increasing at about 8-10% per year.
Again, growth in those five years has been below 2%, and five years is longer than anyone thinks
the lag should be. So why isn't inflation at least 5% not 2%?
Monetarists would explain that by telling you that monetary velocity has declined over the last
five years.
That's obvious from the equation, but what is monetary velocity and why has it declined?
The velocity of money is simply the average frequency with which a unit of money is spent in a
specific period of time. And in our day-to-day activities, it's obvious that monetary velocity has
in fact increased.
More people are using debit cards, which cause transactions to move instantaneously from the
bank account to the merchant, and many people are using Internet banking, which similarly
increases the speed of transactions, reducing both the amount of physical cash carried and the
time that old-fashioned checks spend sitting in storage at the U.S. Postal Service.
So what is the problem?
Monetarists will tell you that the decline in monetary velocity is due to the massive balances,
over $1 trillion, which the banks have on deposit with the Fed, which just sit there and do
nothing.
That's probably correct since while the deposits exist, the ordinary mechanisms of monetary
movement simply don't work, since that money has no velocity.
As a result, Bernanke and his overseas cohorts have succeeded in saving themselves from being
hindered by a surge in inflation.
The Japanese experience over the last 20 years suggests that this position, with a huge money
supply and no inflation, may continue for 20 years or more.
In short, thanks to the banks, Freidman's monetary theory has simply stopped working.
Why Inflation is Headed Our Way Eventually
It's not clear to me whether at some point the banks will start lending the trillion-dollar balances
at the Fed, in which case inflation will revive rapidly.
However, there is one other economic theory that is relevant here.

5. Austrian economists like Ludwig von Mises will tell you that ultra-low interest rates will create
an orgy of speculation, in which markets create a huge volume of "malinvestment" - investment
that should not economically have been made, and which has less value than its cost.
Eventually-like it did in 1929, the volume of malinvestment becomes so great that a crash
occurs, in which all the bad investments have to be written off, huge losses are taken and a wave
of bankruptcies sweeps across the economy.
This didn't happen in Japan. The banks went on lending to bad companies, creating a collection
of zombies which sapped the vitality from the Japanese economy and has produced more than 20
years of economic stagnation.
In Japan, the politicians have even decided to print more money and do still more deficit
spending. Since Japan has debt of 230% of GDP this will almost certainly produce a crisis of
confidence, in which buyers stop buying Japan Government Bonds. That will cause the
government to default and will more or less shut down the Japanese economy - the worst
possible outcome.
Since politicians hate periods of liquidation, they could encourage the same behavior here, in
which case growth will continue at current sluggish rates until the Federal deficit becomes so
great that nobody will buy U.S. Treasuries.
Again, without a Treasury market, there will be an economic collapse.
At that point, you're likely to get all the inflation you want - it's basically what happened in the
German Weimar Republic in 1923.
The point is, Bernanke has created something of a new monetary ground, increasing the money
supply rapidly without getting inflation. But it won't last.
At some point we'll get hyperinflation and probably a Treasury default.
For investors the action to take is obvious: Buy gold. At some point fairly soon, you'll need it
Solution
Ans:
A) When financial markets stood on the verge of collapse in the summer of 2008, two of the
worlds most important central banks, the US Federal Reserve and the Bank of England, began
considering unorthodox policy measures. They turned to Quantitative Easing, or QE: injecting
money into the economy by purchasing assets from the private sector, in the hope of boosting
spending and staving off the threat of deflation. These were desperate measures for desperate
times.
With signs of a fragile economic recovery gathering enough momentum to reassure
policymakers in the US, the policy was expected to be wound down. But in a move that caught

6. commentators off guard, the Fed instead committed to continue with its existing level of asset
purchases. For the foreseeable future, at least, QE is here to stay. What began as a short-term
crisis measure has now become a key component of Anglo-American growth strategies. Its
important, then, to take stock of QE and the central role it has played within the Anglo-American
response to the financial crisis.
The way the Fed led the policy response to the financial crisis is important in two ways. First, it
reflects the extent to which the Anglo-American economies have become financialised: credit-
debt relations are pervasive throughout all facets of contemporary economic activity and there
has been a deepening, extension and deregulation of financial markets commensurate with this
development. In that context, with the increased competitiveness, scale and global integration of
financial markets intensifying the risk of financial instability, the crisis management capacities of
central banks have become increasingly important.
Second, central bank leadership of the policy response also reflects a key feature of neoliberal
political economy in practice. Despite all the rhetoric of free markets, competition and
deregulation that has been the mainstay of neoliberalism, there is a central contradiction at its
heart: neoliberalism has been extremely reliant upon the active interventions of central banks
within supposedly free markets.
The crisis has been warehoused on the expanding balance sheets of central banks, demonstrating
just how much scope for policy manoeuvre there is when governing elites want it. Government
debt and private assets, including toxic mortgage-backed securities, have been indefinitely
transferred onto central bank accounts. This strategy highlights the role of arbitrary accounting
processes, shaped by state institutions, at the heart of supposedly free market economies.
Given this room for manoeuvre, there is no doubt that a much more expansionary fiscal policy
and a progressive taxation system could have been implemented in response to the crisis, but that
response is foreclosed by the ideological confines of the prevailing neoliberal orthodoxy. Instead,
we have monetary expansion and fiscal austerity.
Incubated within the crisis conditions of the 1970s, the neoliberal revolution in the West was
birthed during the 1980s with the landmark electoral victories of Margaret Thatcher and Ronald
Reagan. The early years of their tenure were marked by proactive central bank policies, fighting
inflation through high interest rate regimes that were justified with monetarist dogma. Those
policies had mixed results, but, crucially, they signified the strong emphasis upon monetary
policy within the new paradigm, which now prioritised price stability, rather than the traditional
post-war commitment to full employment.
By 2008, the challenge faced was markedly different. Now it was deflation and a shortage of
liquidity, not inflation, which threatened the functioning of financial markets. Yet, in common
with the inflationary crisis of the early 1980s, monetary policy has again been emphasised as the

7. proactive component of the policy response. The common element in both crises is this
combination of monetary activism, through extreme tightening (in the 1980s) or loosening (from
2008) of the credit flow, plus of course fiscal austerity.
What have the effects of this combination been? In the 1980s, the high interest rate regimes
aggravated unemployment, boosted bank profits and accelerated the growth of income
inequality. When the Anglo-American economies did return to growth they were markedly
different than they had been before.
In the present period, weve witnessed a similar form of wealth redistribution. Recent estimates
by Berkeley professor Emmanuel Saez, an influential scholar of income inequality, suggest that
95% of wealth gains since 2009 have accrued to the top 1% of the US income distribution
pattern. In Britain the experience has been very similar, with the Bank of Englands own report in
2012 suggesting that QE had benefited Britains richest 5% the most.
These two major crises the first inflationary and the second deflationary have been the defining
moments of the neoliberal period within the Anglo-American sphere and its remarkable that they
have led to a similar pattern of policy response.
They have also both produced regressively redistributive recoveries: by this I mean that where
and when growth has returned the benefits have been highly skewed towards the upper
percentiles of wealth holders. That was the case in the 1980s, when the acceleration of income
inequality really got underway. And it has been the case, once again, in the wake of the 2008
crisis.
Todays recovery has largely been confined to rising stock prices and asset values. Meanwhile,
average incomes have continued to stagnate or decline and income inequality has intensified.
Quantitative easing has been central to this regressively redistributive recovery, boosting balance
sheets and stock market values without providing a commensurate recovery throughout the
economy as a whole. These measures have disproportionately benefited those who already own
financial assets on a large scale.
Quantitative easing is thus exposed. Its not merely a technical remedy to a malfunctioning
financial system, but rather a deeply political policy programme. There are winners and losers
just as with any economic policy that affects the overall distribution of wealth and resources
within society. The conventional fixation with GDP obscures these dimensions of the recovery
and ignores key questions about the distribution of wealth within society.
As the statistics about the uneven benefits of economic activity since the final crisis show, its
important to remember that recessionary periods are not simply dead-spaces: even while the pie
may be shrinking, the slices held by different groups within society can expand and contract in a
very uneven manner with serious social consequences. There is no small irony in the fact that the
banks, whose indiscretions lay at the heart of the original financial crisis, have been the major

8. winners during the recession.
If we keep on following these same neoliberal policy paths we will only end up with ever more
deeply divided and highly unequal societies. These are not firm foundations for healthy
democracies.
B)
According to Milton Friedman, "inflation is always and everywhere a monetary phenomenon."
If that is true, then you have to wonder where the heck all of the inflation is.
Every central bank in the Western world is holding interest rates down, and almost all of them
are printing money like it's going out of style.
Five years ago, nearly every economist in the world would have told you this would cause
inflation to skyrocket, and the big deficits governments were running would make matters even
worse.
Taken together, monetary and fiscal policies are far more extreme than they have ever been.
Yet, inflation has remained rather tame at 2%. In Friedman's world that just wouldn't be
possible.
What does it all mean?....
It means even Nobel Prize-winning economists can get it wrong-at least in the short run.
Here's why Friedman has been wrong on inflation so far. It starts with his basic theory.
Friedman's Theory on Inflation
The central equation of Friedman's monetary theory is M*V=P*Y, where M is the money
supply, Y is Gross Domestic Product, P is the price level and V is the "velocity" of money,
thought of intuitively as the speed at which money moves around the economy.
In this case, the M2 money supply has been increased by 11.5% in the last two months and 8.2%
in the past year, while the St. Louis Fed's Money of Zero Maturity (the nearest we can get to the
old M3) has increased by 13.1% in the last two months and 8.4% in the last year.
Since GDP is increasing at barely 2%, that ought to mean prices should increase by 6%, just
based on the last year's data alone.
Needless to say, that's not happening, since consumer price inflation is under 2%.
Of course, monetarists will tell you that money supply produces inflation only with a lag.
Fine, but it's also true that the M2 money supply has been increasing by 7.4% over the last five
years. Admittedly, there was a year in mid-2009-2010 when it stayed flat, but otherwise the
monetary base has been increasing at about 8-10% per year.
Again, growth in those five years has been below 2%, and five years is longer than anyone thinks

9. the lag should be. So why isn't inflation at least 5% not 2%?
Monetarists would explain that by telling you that monetary velocity has declined over the last
five years.
That's obvious from the equation, but what is monetary velocity and why has it declined?
The velocity of money is simply the average frequency with which a unit of money is spent in a
specific period of time. And in our day-to-day activities, it's obvious that monetary velocity has
in fact increased.
More people are using debit cards, which cause transactions to move instantaneously from the
bank account to the merchant, and many people are using Internet banking, which similarly
increases the speed of transactions, reducing both the amount of physical cash carried and the
time that old-fashioned checks spend sitting in storage at the U.S. Postal Service.
So what is the problem?
Monetarists will tell you that the decline in monetary velocity is due to the massive balances,
over $1 trillion, which the banks have on deposit with the Fed, which just sit there and do
nothing.
That's probably correct since while the deposits exist, the ordinary mechanisms of monetary
movement simply don't work, since that money has no velocity.
As a result, Bernanke and his overseas cohorts have succeeded in saving themselves from being
hindered by a surge in inflation.
The Japanese experience over the last 20 years suggests that this position, with a huge money
supply and no inflation, may continue for 20 years or more.
In short, thanks to the banks, Freidman's monetary theory has simply stopped working.
Why Inflation is Headed Our Way Eventually
It's not clear to me whether at some point the banks will start lending the trillion-dollar balances
at the Fed, in which case inflation will revive rapidly.
However, there is one other economic theory that is relevant here.
Austrian economists like Ludwig von Mises will tell you that ultra-low interest rates will create
an orgy of speculation, in which markets create a huge volume of "malinvestment" - investment
that should not economically have been made, and which has less value than its cost.
Eventually-like it did in 1929, the volume of malinvestment becomes so great that a crash
occurs, in which all the bad investments have to be written off, huge losses are taken and a wave
of bankruptcies sweeps across the economy.
This didn't happen in Japan. The banks went on lending to bad companies, creating a collection
of zombies which sapped the vitality from the Japanese economy and has produced more than 20
years of economic stagnation.
In Japan, the politicians have even decided to print more money and do still more deficit

10. spending. Since Japan has debt of 230% of GDP this will almost certainly produce a crisis of
confidence, in which buyers stop buying Japan Government Bonds. That will cause the
government to default and will more or less shut down the Japanese economy - the worst
possible outcome.
Since politicians hate periods of liquidation, they could encourage the same behavior here, in
which case growth will continue at current sluggish rates until the Federal deficit becomes so
great that nobody will buy U.S. Treasuries.
Again, without a Treasury market, there will be an economic collapse.
At that point, you're likely to get all the inflation you want - it's basically what happened in the
German Weimar Republic in 1923.
The point is, Bernanke has created something of a new monetary ground, increasing the money
supply rapidly without getting inflation. But it won't last.
At some point we'll get hyperinflation and probably a Treasury default.
For investors the action to take is obvious: Buy gold. At some point fairly soon, you'll need it