Talking with a group this week I was reminded about the paradox between monetary policy and regulation. Cutting the repo rate to almost nothing cheapens money for commercial banks. Cheap loans encourage customers to borrow and spend. Similarly QE injects money into the financial system. Banks awash with cash lend it out and consumption stimulates growth. Savers too are encouraged to spend. Better a new kitchen than a fraction of one percent on deposit. And it doesn’t stop there. Low rates increase asset prices. We feel better off and spending ensues. So why is monetary policy less effective than it used to be? Because in the new world of bank regulation the supply chain is damaged. Banks are being encouraged to cut their balance sheets and redeposit cash with the authorities. Are there any solutions to this inconsistency? The new leader of the opposition thinks so - People’s QE, where the central bank finances spending (via a state owned bank). It would be simpler to scale back regulation and let banks lend. Where you stand on the efficacies of these two approaches depends on whether you believe in markets or central planning. The end game will be the same - inflation - an old solution to an old problem. However People's QE may get there faster.