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The reaction to today’s notice of more quantitative easing (QE), or the electronic 'printing' of new money – to take the total Bank of England programme to £325 billion – has been startling.
Instantly doubts have been expressed over its effectiveness – yet meanwhile there are forecasts from some quarters that as much as £600 billion could eventually be spent trying to reflate the economy with new money.
On the one hand there has been uproar from some experts about the impact on people’s pensions. This is because QE is used to buy back government bonds, or gilts, which reduces their yields and in turn lowers annuity rates, which are linked to gilts and which determine the amount of pension many people receive.
However, others argue that annuity rates were already dropping before QE begun; that while we are hostage to the broader economic backdrop which includes QE, the eurozone crisis is what really matters. ‘It’s the broader backdrop that is most relevant,’ said Tom McPhail of Hargreaves Lansdown.
The extra £50 billion that was earmarked today is part three of a desperate experiment. Even Bank of England governor Mervyn King would admit that was the case if it weren't for the terrible effect his confession would have. The Bank of England has made calculations as to the impact on economic growth and inflation, but nobody is really sure. Individual concerns about annuities aside, some in the City would have King’s head; yet others ask ‘what are the alternatives?’
Philip Shaw of Investec who, noting that longer-term borrowing costs are already very low (thus meeting one of the stated aims of QE), reckons each round of creating new money may become less effective than the previous one. Is King aware of the programme’s diminishing returns? If so, why did he press the button this time? For now the US Federal Reserve appears to be doing a better job with the confidence trick of leading people to think it will do more QE without actually doing so and risk undermining the value fo the currency.
Philip Rush of Nomura highlighted this uncertainty in a note to clients: ‘The MPC would likely claim growth would have been much weaker without its actions, and cite the subsequent turnaround in the data as evidence of effectiveness, despite there being a coincident global recovery. Ultimately, we believe much of growth's weakness is structural and thus outside of the MPC's ability to correct.’
Many people are just befuddled by it all. Experts, in their emailed responses to the news of more QE, don’t always appear to understand the theory which they are seeking to debase. Is it, for example, intended to circumvent the banks or not? The Bank of England would say it isn’t.
And as to what’s next? Take your pick. The most extreme forecast came in a note from Michael Saunders at Citi. ‘We continue to expect that the combination of the sluggish economy and lower inflation will lead to a series of further installments of QE, taking the total up to about £600 billion over the next year or two.’
Others said recent more upbeat economic data suggested not a penny more will be created by the computers on Threadneedle Street after this batch. We shall have to wait and see.
Comments (22)
I think that this programme of QE is going on and on with no proof that it is working. I read this last week by the economist Shaun Richards who makes that point strongly.
"Time for a re-think?
In my opinion yes. For all the arguments advanced in favour of QE I have yet to see anyone giving evidence to say that it has outright worked anywhere it has been tried,unless of course you only count increased inflation. Accordingly all we ever see are calls saying we are just about to turn a corner or if we look backwards that only if (usually Japan) had done more it would have worked! Or as Andrea True Connection put it.
More More More
For myself I am intrigued by the disparity between the narrow and broad money numbers and am reminded of Goodhart’s Law yet again. Has a proposed solution to a dislocation created its own dislocation? Quite possibly."
http://www.mindfulmoney.co.uk/wp/shaun-richards/why-the-uks-latest-monetary-figures-mean-that-the-bank-of-england-will-give-us-more-quantitative-easing/
17:45 on 09 February 2012
The B of E did go to some lengths to "prove" that the original round of QE in 2009 boosted the economy, mainly through lower bond yields. As there were other factors generating some economic recovery at that time, it is hard to be sure how far this was really justified. Even if it was to a degree, the diminishing returns point seems a good one - when bank reserves and the monetary base have already been inflated to an extent hitherto unimaginable, does repeating the dose really have much of an effect?
On the other hand, the B of E may feel a political need to be seen to be taking some action rather than standing pat, although feeding money more directly to business, by-passing the banks, might be more effective.
19:19 on 09 February 2012
More criminally irresponsible behaviour, no less.
19:46 on 09 February 2012
The spin doctors are at work again. The Keynesian approach of hocus pocus is neatly articulated in the Bank of England video where they say they are NOT PRINTING more money. Granted in legal terms they are not PRINTING, the currency is simply created out of thin air through key strokes on a computer, but it still has the same EFFECT?
This is "pretend money" (counterfeit in reality) REAL MONEY has intrinsic value and is a store of value (purchasing power) which is impossible with any fiat currency because INFLATION is inevitable. The target of 2% completely hides the UGLY TRUTH that even 2% inflation will reduce a fiat currencies purchasing power by 80% over 40 years, and it can through a number of anomalies be even worse than that.
The key point is that government statistics are manipulated to HIDE the real inflation rate, you can't believe anything the bankers or politicians say, it is a complete SCAM designed to keep ordinary people in perpetual DEBT while the elites get filthy rich! The "magic of compounding" only works for maybe the top 5% of the DEBT PYRAMID, the other 95% progressively have their labour and savings STOLEN to the point bare bones survival becomes a reality for the masses.
20:22 on 09 February 2012
They would be better off giving each British citizen a thousand pounds each and then atleast we would go and spend it and feel good about it !
Using it to buy govt. debt doesn't reap any immediate benefit.
20:40 on 09 February 2012
I think that everyone should think about the 2 main reasons for QE and then the other consequences.
The first reason is obvious; it is to reduce the cost of long-term interest rates which have helped to reduce the 5 year fixed rate mortgage rate for customers, for business loans and the government’s rate to borrow. This benefit might have been exhausted but we will never know if it has stopped long-term rates going up due to the awful state of the UK government PSBR. The lower rates that everyone is paying will help borrowers to pay off debt more quickly or start to increase spare income for spending.
The next is liquidity. The BOE buys gilts which release funds for investors. Those investors will have spare cash to spend or purchase different assets. Most will purchase different assets because these investors are pension/hedge funds etc. Some of this money will be used to increase the value of all UK equity markets. This actually is the only effect we can see straight away. This enables companies to raise money in rights issues and for companies coming to the market. This is all good news for investment. It will eventually have a wealth effect and money will start to be spent but that will take time.
This will help the government raise money in the market due to supply and demand. It will reduce the price of sterling due to more money being circulated. This is relatively good news as long as there is not a run on the pound. The good thing for the pound is that where else can investors put their money?
Inflation is an obvious problem but unless the world starts to grow much, much quicker then, this might be limited for now. Most of the inflation we have seen in the last few years has been caused by commodity traders, ETF’s etc along with China.
My own feeling is that deflation is still the evil creature that we need to stop now but we always go too far! The biggest problem for me is when we start selling the bonds back into the market and take the money back out. This is when all assets prices will get rerated. This might be decades away though.
21:05 on 09 February 2012
We have had QE since 1997 and the Blair years 'printing via artificially inflated property values' scam which has changed the face of the UK economy forever and created a 2 tier economy consisting of the piss poor (no actual way of earning any money) and the stupendously wealthy ( no actual way of 'earning' any money!). The artificial values created during a 5 year window since then have been floating around ever since and have corrupted the economy beyond reasonable recognition.
The situation is truly horrendous, as is the political arena which consists of nothing more than filthy rich public school boys in ALL parties,with absolutely NO ONE to vote for at all unless you have a particular agenda.
The banks are given all the cards even though they are grossly under performing (except for a privileged minority) and generally taking the piss out of the ordinary citizen.
I never used to be overly political, but the last 15 years have made me sit up and take notice, especially as I have had my retirement age put back to around 92.
I have correctly predicted multiple times on City Wire that Mr King CANNOT raise interest rates, such is the mess that was created by Blair and cronies and it has got nothing to do with 'what he wants to do', he CANT do anything and interest rates above 1-2 percent are are consigned to the history books period.
As an amateur historian I was remarking only the other day that it was rather strange that the British were (amongst) the first to abolish slavery given the immense wealth and empire building potential.
I now realize that Wilberforce was entirely misinformed by the wily old movers and shakers of the period and it wasn't actually abolished.
It was simply renamed 'Capitalism' and the victims changed color.
23:08 on 09 February 2012
Chris let them credit me with the amounts robbed from my pension pot and I will put the money to good use, and even circulated the proceeds to help the economy, that being real money spread around.
01:33 on 10 February 2012
Snoekie
I am sure you could spend the money with good intentions but the reason for buying AAA bonds is that the BOE intends to sell them back to the market at some stage and destroy the money. This will be deflationary but restore credibility in the pound. This will happen but not for a long time. They might just exchange the debt with longer dated gilts. However, they will be reducing the pile at some stage. This will be another lever to contain inflation in the future.
09:25 on 10 February 2012
The government cuts spending and the B.O.E. floods the market with money.
Without a real policy and economic balance this country has no chance of prosperity. Are they all mad?
11:22 on 10 February 2012
This is the only chance we have.
The people who voted for Brown were mad it was obvious he had created a stack of cards just waiting to be blown down.
11:34 on 10 February 2012
What have been the benefits of QE to anybody apart from our friends at the banks? It has resulted in a high rate of infaltion and yet further losses to pensioners buying annuities. Back to the drawing board, Bank of England!
12:19 on 10 February 2012
They are trying to rectify HUGE problems which started 15 years ago with the Blair administration. It wasn't checked then and has gone on to cause absolute havoc for millions. King is not worth either his salary OR his enormous pension and should retire.
The change in this country over the last 15 year period is as profound as it is lamentable.
Politicians enter the field ONLY for themselves and the only thing they are any good for is lining their own pockets, of which they have few peers.
Realistically, the BOE should simply close down (primarily for their huge mistake in not checking the excess's of the Blair government, which was and is a massive massive fail), parliament should close and the vast amounts saved could go towards real jobs for real people.
14:12 on 10 February 2012
I have extensive files on this subject based on a lifetime of study since I was a teenager. I have archived quotes from many famous people, from signers of the U.S. Constitution, former Presidents, famous industrialists like Henry Ford, Thomas Edison, and in recent times Congressman Ron Paul who is finally getting the word out to a larger audience. The problem is the propaganda from the bankers is so intense and all encompassing that people brainwashed from an early age through an educational system and public media controlled by the "elitists" ruling behind the scene! The average person is easily fooled into believing anybody who questions the political / banker position is a conspiracy theorist, disloyal, suspect, a nut, foolish, poorly educated or any other smear word they can dream up to discredit people who stand for TRUTH above all else.
This quote embodies what I have been trying to get across to people for years, the system is broke and needs fixing.
"Thomas Edison was once quoted in the New York Times as saying the following....
That is to say, under the old way, any time we wish to add to the national wealth we are compelled to add to the national debt.
Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost.
But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good." PROFOUND BUT ACCURATE STATEMENT.
That sums it up in a nutshell and the only reason this corrupt system is perpetuated is because it is appealing to make an above average income without actually doing any real work that benefits society. Human nature is for the most part greedy and lazy, so people aspire to and respond to the "magic of compounding" appeal espoused by the establishment. I recently wrote an article exposing the fallacy of that mantra titled "Compounding in Reverse" and you can read it on my website @ www.myronswinningjuniors.com under the heading Myrons" Musings.
SOURCE of quote: http://www.wealthwire.com/news/economy/2666?r=1
Headline title is "TEN things you should know about the Federal Reserve" but for readers outside the U.S. A. it can be modified to whis corrupt banking model has now been adopted world wide giving the banking cartel a stranglehold on all the worlds resources and labour applied to them, for nothing more than key strokes on a computer or printing of currencies that arat you should know about "Central Banking" no matter what the country. The in reality legalized counterfeit money
15:37 on 10 February 2012
Myron
Thanks for that. I now know not to read your comment
Thanks
15:55 on 10 February 2012
Well Mr Powell, I can only conclude that you must be part of the banking fraternity with a "my mind is made up, don't confuse me with facts" mentality.
The arithmetic is infallible, you can not create currency as DEBT and extract interest on same without creating an unpayable pyramid of debt consisting of interest that never gets created except through exponential creation of debt based loans expanding to infinity, at least until the interest becomes unpayable.
How many more pieces of evidence do you need to acknowledge the obvious? Are near ZERO interest rates and the indebtedness of Greece, Portugal, Ireland Spain, Italy, Hungary, Britain and the U.S. not enough?
18:02 on 10 February 2012
It is as Mr Martin says whether you like it or not.
The UK in particular has been indulging in legalized counterfeiting for the last 15 years or more, since the insanity of the Blair administration.
This is the primary reason that it has all become uncontrollable and Mr King is effectively redundant. How the hell these people supposedly deserve such high salaries is an eternal mystery.
19:55 on 10 February 2012
"What it means" is that your coinage has been clipped. But it is nothing compared to the damage done from 1997 onwards by that economic buffoon Gordon Brown.
The current clowns clearly have not read the best book of the decade: This Time it is Different- 800 years of financial folly, by Rheinhart and Rogoff.
There can be no recovery in real GDP until all the deleveraging has taken place. The leveraging up brought forward consumption from the future, so how can there to be any growth. The "foot to the pedal" policies of Gordon Brown mean that the government and the ordinary people are out of work and out of money. The disastrous actions of politicians only become apparent years after they have stuck their meddling hands into the capitalist system and sown the seeds of havock by allowing exponential growth of private debt creation and government borrowing.
Problem is governments cant tax deflation; in fact, they are desperate to create inflation to enable them to continue spending beyond the country's means. They will create fraudulent statistics to prevent us from seeing how our pockets are being picked.
Anyone fancy starting a revolution to overthrow the current sytem?
09:41 on 11 February 2012
Basically QE reduces interest rates and increases inflation. The important things to look at are:
How are wages rising compared to inflation, if they are less then the economy is contracting, something Mervyn King has said, in so many words, is going to happen.
The monetary inflation caused by increasing the money supply also decreases government debt. They are printing money and buying back their debt. This is reducing government debt. Now it wouldn't be very politically correct for Mervyn King to say we are paying back the debt by printing money. People would think we were a tinpot state like Mugabe run Zimbabwe of the head of the central bank said that so he has to invent other reasons, like "there is a shortage of currency in the banks", I think he daren't even say that now as the banks have plenty of reserves so he has to say "because small businesses aren't being lent enough money".
As someone who is a house owner with a large liar-loan mortgage and a job we've never been better off. With interest repayment on a mortgage of less than 1% (it was taken out as at less than 0.3% above base rate in 2007) the QE policy could not be better. There is more than enough money to spare now whereas if interest rates had gone up to anything like inflation (5%) then times would be unaffordably tough possibly to the point of repossession of the property.
Also with all the monetary inflation there is a good chance that my liar loan will actually pay off with house prices surging ahead with monetary inflation so it should eventually be quite profitable for me too.
11:44 on 11 February 2012
@Truffle Hunter On the button. Here is a quote - Dr Mahathir believes European leaders are in a state of denial.
"You refuse to acknowledge you have lost money and therefore you are poor," he says.
"And you can't remedy that by printing money. Money is not something you just print. It must be backed by something, either good economy or gold."
http://www.bbc.co.uk/news/business-16918000
Personally I would go further than Mr Mahathir and say that it must be backed by a good economy PERIOD.
The fact is that the 2 tier economy which exists in the UK today and has been building for the last 15 years is simply based on printing money, first by massively inflating property values between 1997 - 2003, then by simply recirculating the massive gains, along with huge private and public sector salaries.
In reality there are huge areas of the UK which are close to collapse in terms of economic activity.
The bubble created during the Blair years was so enormously huge it has changed the face of the UK forever.
The days of interest rates above 2% are gone for good.
Our politicians have spent more energy on their own finances than they ever will on anyone else's.
High paying industries for the privileged few are the norm, just look at the entertainment industry where staggering sums change hands especially.
A chat show host is paid an unbelievable £6 million Per Annum when his job is perhaps the least important and intrinsically valuable on the planet.
Excuse me, talking a complete pile of self congratulatory and inane drivel for 45 mins - NOT IMPORTANT, sorry.
The UK, a state of denial and where the Emperor has a constant supply of new designer clothes.
I've never felt so poor in my life.
12:08 on 11 February 2012
Myron Martin
It's actually DR.
The reason we are in this mess is the PIGS excluding Ireland spent too much on their Public sector and they have to realise that they will have to go bust or cut their spending. You do not need to quote obvious and unimportant phrases.
We need to know how to solve the issues that’s why I said I would try and not read your comment. Say want we should do not moan about how you think we got there!
14:10 on 13 February 2012
Having read through some of the posts, I think Myron Martin sums it up very neatly for me.
BoE are keeping their fingers crossed & have little else they can do as they have been given the right to do as they think is necessary. In order to justify his salary & bonus, Mervin King & his cronies have to be seen do be doing something, anything, as we can see that governments know nothing about economics.
The Greeks are seeing what politicians & bankers have done to them, with their collusion, of course, but BoE & our politicians are wrecking our country from grass roots & we are doing absolutely nothing. An entire generation has been written off as the job market gets worse with increasing competition from EU & other nationals taking up jobs not seen as attractive by British youngsters. Who would work in a care home looking after demented, incontinent people but the vast majority of workers from countries where there are no jobs, for frequently less than minimum wage? Why take up a job paying peanuts, when you can get by on scraps from government, barely sufficient to cover your expenses, but sufficient to deter them from taking up poorly paid employment.
We should be proud of the standards required of employers in the UK, instead of seeking to pay slave wages as in the rest of the developing world - we should not be competing to down grade workers rights to nil as in the sweat trade on the backstreets of India or China. Investors/employers should not be sending our jobs overseas, while enjoying the benefits of being based in a stable, peaceful country like the UK - we should be happy to pay a premium for well ordered streets, with decent benefits for those who truly cannot work instead of pandering to the myriad of psychological ailments we seem to think of as normal with taxpayers funding them to stay off the employment market because they are depressed. I am depressed looking at my bank account after working for months on end, with all my wages going on paying bills, rent & food, & I actually earn a decent wage.
We are being taken for mugs because we cannot be bothered to occupy Threadneedle Street or the authorities have denied us our right to peacefully protest. The very people who fund police salaries are being denied the right to voice their disillusionment with the establishment & the politicians who maintain the status quo!
09:43 on 23 February 2012
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