This by Cardiff Garcia is the best explanation of the dangerous contradictions of quantitative easing. Here is an extract:

 QE is good for the economy because:

 1) Signaling channel (reinforces signal of rates policy)

 2) Asset inflation channel

 3) Portfolio rebalancing channel

 4) Bolsters some kinds of extant collateral (houses, riskier assets)

 5) Bigger monetary base => higher inflation expectations

 QE is bad for the economy because:

 1) Signaling effects unclear, easy to bungle signal (see: Bernanke, May-June 2013)

 2.1) Removes rehypothecable collateral from financial system

 2.2) Removes safe asset that’s better than what it gets swapped for (IOER)

 3) Asset inflation mainly helps the people with assets. Also: bubbles!

 4) Causes weird market functioning effects related to Treasury and MBS liquidity

Points 2.1 and 2.2 are that treasury bonds are better collateral for private sector loans than ordinary cash. Swapping bonds for cash is counterproductive.

The same argument was made in a minute by James Wilson in 1859. Wilson was the founder of both The Economist and what would become Standard Chartered (today 11th on the FTSE 100), as well as  a cabinet minister. After the Indian Mutiny he was sent to be the Finance Member on the Council of India. The Indian government's debt had doubled paying for the war against the mutineers/rebels in 1857. Wilson argued that the India Office should not repurchase this debt, rather keep the bonds in circulation as collateral for foreign investment. 

This went against the Victorian values of thrift held by the rest of the Indian government. Wilson was quickly slapped down (and died of dysentry in 1860).

Oddly enough, this is what triggered me writing the last post.

There are several posts by Matt Yglesias that analyse the economy of the universe of George RR Martin's A Song of Ice and Fire. This practice should be encouraged unquestioningly.

The George RR Martin series is one of the greatest pieces of literature from our era. Avant garde snobbery it can happily reject - the great works of past centuries were written for popular consumption. Naturally, what I am quickest to appreciate is the detail and realism of the fictional world. But the whole format of the series seems designed most of all to demonstrate the political economy of Martin's world. Here are parables galore for Yglesias et al. to write and debate about. Contrary to most fiction, it is possible to do this with lots of sophistication. Or maybe this is just what I first read into, and why it appeals to me in particular.

The Wire, Breaking Bad and other examples from our present television golden age are similar, The Wire most so. Like A Song of Ice and Fire its purpose is to depict a fictional universe, but one that is true to economic, political and social reality. Welcome to the kingdom of Baltimore! Watch as the city's princes vies with each other for power, and send their henchmen to enforce the subjugation of  marcher lords on the kingdom's borders. The Wire is the imperial periphery of Robinson and Gallagher.

I'm probably not reading enough of the right classical literature, if it seems so refreshing to find fiction that takes political and economic themes seriously. Off the top of my head, The Tempest and Coriolanus are badly lacking. Both plays revolve around individual emotions and decisions: mercy against old enemies; pride and honour between one man and an array of what looks like a serious political drama, but is really just one long foil.

There must be too many people in positions of cultural power (leftist literature students, one must presume) whose first thought is 'how can I humanise history?' (politics/economics if they give the last any thought at all). Well the greatest recent literature is not so patronising.

P.S. I'm reading V by Thomas Pynchon at the moment. If there's anything that might satisfy my tastes...

Update: http://online.wsj.com/article/SB10001424052748704025304575284722645443124.htm 
I disagree with Tabarrok: every film and TV series (especially Breaking Bad) that portrays clime in any vaguely positive light is a coded celebration of entrepreneurship and creative destruction. Usually it still retains its ruthlessly individualistic window though. The Wire stands out as an exception. I don't even think it manages to portray capitalism pessimistically. Economics is neutral - Tabarrok should maybe know better.

Update 2: And sticking with the marginal revolutionaries, Tyler Cowen has written an essay formalisitn this theme. http://www.gmu.edu/centers/publicchoice/faculty%20pages/Tyler/Model.pdf. Cowen: fiction presents verbal economic models, to a reader inclined to read into them as such. Behavioural economics and signaling  are economic concepts that apply to individuals. My original post is probably more me preferring macro to micro.

The best part of Cowen's essay is when he passes on an observation from Tabarrok in the conclusion:

"... contemporary computer games break down the distinction between novels and models altogether. If the game has enough sophistication, and is sufficiently entertaining or inspiring, the model becomes like a novel as well. Game characters are "produced by" mathematical equations and programs, as we might find in an economic model. Nonetheless the resulting model has enough story-like properties to make it both a model and novel at once."

http://link.springer.com/article/10.1023/A:1009400926449

Welfare

My friends James Burt and Jonathan Goddard have just pointed this out on facebook:

This is the graph of household incomes in the past thirty years.

What interested them was in the the lowest quartile.  The lower quartile seem to have had a good recession versus the rest of the population. Their 2009 saw incomes rising at their fastest for a decade. This recovery is much better, proportionally, than the other quartiles'.

Why?

The ONS provides data by decile as well as quartile.

This makes quite a difference. The intermediate deciles are higly correlated with each other (I've removed some to make the graph clearer). But adding the bottom two deciles together is statistical vandalism. The first and second deciles are synchronised, but the bottom decile misses out completely on their rise in the decade before 2006. The base year is 1997, with high inequality; the first and second deciles are catching up with ground lost under the Conservative government. 

The story is that the lowest income groups started losing out first, starting in 2007/8, but have bounced back stronger.

I wondered how much of this is new household formation. The data is per household. Each household is equivalised, to control for its size. Its income is divided by the number of members, but each successive member counts for less. If one member of the household splits, this leaves the original household richer, as they have a lower denominator. Just one 18-24 year old, the new household will be at the lower end of the income spectrum.

This graph shows the percentage of households in the decile where the chief economic supporter is under 25. There is a blip, but small. 

There is also data on how much income is from benefits of different kinds. In 2012 pounds, and excluding effects from changes in taxes, or government spending in services in kind:

This explains the disproportionate growth of the lower deciles before 2006.

Given that median disposable income (including services in kind) is £24,000, at the lower end of the distribution, the benefit system is decisive. The lowest decile is the lowest because it receives fewer benefits, now receiving less per household than the fifth decile. On the other hand, the benefits are stable. There is no violent swing in 2008/9 and 2009/10

The sixth decile seems to have done very well out of the recession in terms of government support. Although most of the benefits for higher income households are pensions and child support (pensions about a third to a half more than child support), eighth and ninth decile households each received £3 a year in 2012 from jobseekers' allowance.

Household composition looks like the most important factor. The lowest decile has twice as many people in further or higher education than any other, and this has been the case since the turn of the millennium. The lowest decile has fewer children than the one above it. (Although it draws level in 2008/9, without having much effect.)

Income at all levels grows slower after 2003/4. If the slowdown were not general, and were it not for the fact that 2003/4 is when the rise in benefits levels off, it would be tempting to blame migration. Perhaps Jonathan Portes is right to argue that it has not been to the detriment of low income natives. The alternative left is a slowdown in productivity growth after a blistering 1990s – and inflation in 2011 was surprisingly high for the bottom of a cycle.