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Quantitative easing has had a mixed press since it was announced by Mervyn King, the Governor of the Bank of England, in February 2009. In his columns in the Sunday Telegraph Liam Halligan has lambasted it with an almost religious fervour, equating it with "the printing of money" and claiming that it will lead to a big surge in inflation. One of his recent articles proposed that money printing (and hence QE) was "the last refuge of declining economic empires and banana republics", and amounted to "state-sponsored theft". Halligan sounds like a hellfire monetarist, repeating Milton Friedman's old maxim that inflation is caused by excessive growth in the money supply. 

But what is "money"? The question sounds simple, but it is actually both difficult and controversial. Obviously, legal tender notes and coin are the most familiar form of money, and many people — including Halligan perhaps — understandably believe that they constitute all of the textbook definition of "money". At one time the Bank of England did indeed prepare data for a money aggregate, known as M0, which was dominated by its own note issue. But nowadays, payments across bank deposits are many times larger — more than 100 times larger — than payments with cash. So the standard definition of money includes deposits. The quantity of money, as normally understood in the UK, embraces a very wide range of deposits and goes under the label of M4. The Bank scrapped M0 in 2006 because it had ceased to represent the notion of money properly. Roughly speaking, M4 was more than 30 times larger than M0 before M0's demise. So a basic question for Halligan is, to which money aggregate do your warnings relate? Is he concerned about the total of bank deposits (over £1,500 billion) or of the note issue (about £50 billion)? Without a clear answer, it is difficult to know what to make of the hullabaloo about declining empires and banana republics. 

Friedman's own work related mostly to measures of money that included deposits, because he found from experience that these so-called "broad money aggregates" had the best relationship with national expenditure and income. Over the two years since QE began, the M4 concept of money has increased slowly, by about 3 or 4 per cent. The increase in the quantity of money has been the lowest in any two-year period since the 1950s. How can Halligan forecast a huge leap in inflation on the basis of that? The flow of words is wonderful, but what is he actually worried about? 

 
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