HONESTLY, it wasn't just the prospect of free wine and canapés that attracted me to the annual lecture of the Scottish Economic Society, hosted by RBS at the Royal Museum of Edinburgh the other night. I was genuinely interested in the subject, "Winding and Unwinding Extraordinary Monetary Policy", particularly as it was given by a distinguished member of the Bank of England's own Monetary Policy Committee, Professor David Miles.

It started encouragingly. Professor Miles stated that "I mean extraordinary in a bad way," and that he looked forward to the day when the Bank of England could revert to a more normal monetary policy.

Perhaps he would offer a more balanced and sceptical assessment of QE than the Bank of England's usual tendentious narrative of its supposed benefits.

But that was about as good as it got. The remainder of the lecture was an apologia for the failed policy.

"Economists should not be judged by how well they forecast the future", the Professor stated – just as well, since the Bank of England's own forecasts of the impact of QE have been so hopelessly over-optimistic.

"Sadly, it is the case that, despite this extraordinary monetary stimulus, growth in the UK has been anaemic," Professor Miles conceded. Nevertheless, he went on, "the level of economic activity has been higher than it would otherwise have been" – a self-serving and unprovable assertion with which many would take issue, and for which no evidence was provided.

What about the other inconvenient fact that undermines the Bank of England's narrative about the benefits of QE - namely the fact that the rate of inflation has consistently exceeded its 2% target since QE's introduction, running at more than 5% on occasion?

According to the Professor's account, we should ignore the actual rate of inflation and pay greater attention to "underlying inflationary pressures within the economy", which, he claimed, had been "extremely weak".

At this point I started to wonder whether the Government should ask Professor Miles to lead its negotiations with the public sector unions, applying his theory that inflation doesn't really exist to convince them to sign up to a pay freeze. But somehow I don't think that Dave Prentis, Bob Crow or Len McCluskey would be too impressed.

Their members are suffering sharp declines in the real value of their wages, and, in the case of the lower paid, finding it increasingly difficult to make ends meet.

Then, to my astonishment, Professor Miles put up a graph which showed that the velocity of circulation – the rate at which money circulates around the economy – has completely collapsed since Quantitative Easing was introduced.

My astonishment was not so much the fact that the velocity of circulation has collapsed - that I knew only too well - but rather that any member of the Monetary Policy Committee appeared to be aware of it. However, Professor Miles offered no explanation as to why this might have occurred.

So, in a spirit of helpfulness, I suggested to Professor Miles that the collapse in the rate at which money is circulating around the economy might explain why quantitative easing has failed to stimulate a recovery in output. And the reason this collapse has occurred is because QE, by driving down gilt yields and annuity rates and driving up inflation, has reduced the real incomes of pensioners, small savers and those on fixed incomes, while forcing companies to divert limited investment funds to cover rising pension scheme liabilities.

As a consequence, pensioners and others on fixed incomes have been forced to cut back their expenditure, while investment by the corporate sector has also been curbed. And that is why the velocity of circulation has collapsed. Companies and households have been forced to hoard cash to counter the negative impact of QE on pensions and savings.

In this way, QE has hampered economic adjustment and stifled economic recovery.

In the light of this, I asked when the Bank of England would revert to a more normal monetary policy.

In response, Professor Miles played back the Bank of England's official line in its August 2012 submission to the Treasury. A wider view needed to be taken of the impact of quantitative easing, he said, including its positive impact on corporate bond and equity prices. The Bank of England's conclusion when these factors have been taken account is that QE's impact on pension schemes had been "broadly neutral". (I don't agree - for the reasons set out here).

Overall, the lecture was something of a curate's egg – good in parts, in particular with respect to the technical exposition of the mechanics of monetary management, but disappointing in its wider strategic assessment of the effects of QE. Overall, I had the impression that Professor Miles was defending a policy in which he does not fully believe.

And he never did get round to explaining how and when the Bank of England will start unwinding quantitative easing, or give an answer to my question of when the Bank is going to revert to a more normal monetary policy. 

Photo: Professor David Miles