Hi David and Eoin and hoping all is well with you. Re Tim Price, "artificial" interest rates and "stop the (printing) press". The problem I have with this way of seeing the world is the implicit assumption that the very low real and nominal interest rates we have been experiencing have in fact been "artificial" rather than a reflection of the actual levels that central banks genuinely see as appropriate to strike a balance between demand and potential supply in the economy and to thereby avert unnecessarily high unemployment and deflationary risk. If the zero-based interest rates (and QE) that we have been seeing for some years now have been artificially and inappropriately low, we will soon be seeing a broad based inflationary shock (i.e. not just commodity inflation but labour market inflationary pressures as well). In fact, we would most likely be seeing it already. However, the weight of evidence suggests that after some years of super-loose monetary policy, we are still not on the cusp of any such inflationary shock and that monetary policy has in fact been appropriately anti-deflationary rather than "artificial" and inflationary. Of course, the appropriate level of interest rates and QE will naturally change as the economy improves and as unemployment falls. As long as central banks move with this, things will be as they should and we will see neither deflationary nor inflationary shocks. The attached report might be of interest in this regard.

David Fuller's view Thanks for your very good points in an email of general interest, and for the report which I have posted in the Subscriber's Area. You make a reasoned defence of Keynesian economics and will be aware that some commentators on both sides of the Atlantic are proclaiming success for these policies.

I take a more cautious view, not least due to time lags and because we have not seen a similar monetary experiment on this scale.

Western central banks are still holding down government bond yields with QE. Weak GDP growth and competitive pressures from globalisation are weighing on wage demands. As economies recover we are most likely to see inflation first in the prices of commodities and equities. Arguably, this has already commenced in commodities. Does not a portion of gold's considerable rise over the last decade reflects concern over future inflation? Might the dramatic surge in global equity prices over the last six weeks also be driven by excess liquidity? I believe so.

Everyone who is employed likes the beginning of an inflationary cycle because it is mostly benign. The problems start when long-dated government bond prices move higher at a similar rate. What will central banks do then? Will economies have recovered sufficiently to withstand a change in monetary policy from erring on the side of inflation to fighting inflation?

There are more questions than answers, not least concerning the timing of these cycles. Meanwhile, I suggest that we enjoy this cyclical bull market in equities while we have it.

Regarding the attached report above, I have no doubt that the Fed would love to discontinue QE. However, when it last did this both the economy and stock market weakened. It can be hard to kick the habit of steroids, even when aware of the side effects.