The headlines all say that the Bank of England has pumped another £50 billion into the economy in the third round of quantitive easing. In fact, the money will not get far into the economy. It is given to the banks and other financial sector companies, and evidence from the previous £250 billion worth of quantitive easing is that almost all of it will stay there, being very handy stuff with which to fund massive salaries and bonuses.
This whole notion of what is and isn’t useful in the economy is strange anyway. This cold weather is making us all use a lot more gas for heating. Those higher bills will count as increased economic activity and higher GDP, but actually we are all less comfortable. This morning I have put on an electric heater to boost the central heating. That is increasing economic activity and increasing GDP. But for the last week I have been burning logs from my own garden on an open fire – that doesn’t increae GDP as I didn’t pay for them. But they were warmer and more pleasurable. A homely example that the automatic equation of GDP with a better life is nonsense.
There is a mystery about the way Q.E. works. The Bank of England does not just give the cash away to financial institutions, but exchanges it for assets. We are told that this is not the Bank of England saving the bankers from their mistakes by buying up toxic assets, but rather that the assets are gilts.
I do not understand this at all. Why would banks want to cash in gilts? Gilts are already perhaps the most liquid asset you can hold, other than cash, in the classic definition of liquidity that they can be easily sold without much affecting their value. On top of which, these same financial institutions are actually still buying bonds from the Bank of England on a regular basis, which would make the process pointlessly circular. And the current Bank of England bonds the banks are buying pay historically low rates, almost certainly lower than any gilts they are exchanging under Q.E.. Why would they do that?
The only sense I can see is that the Bank of England is giving cash in return for junk, and the gilts line is a cover. Any genuine official statistics on exactly what the Bank of England has bought up under Q.E.anywhere?
It is beyond doubt true that the effect of creation of new money is to reduce the value of currency already in circulation. The effects will show through in inflation and the exchange rate. Of course, those will continue to be affected by other factors as well, which is why there are better and worse times to do it. But in effect Q.E. is still a transfer of wealth from those who hold any of the currency to those given the new stuff. In other words, more cash from you to the bankers.
Actually if QE had been used genuinely to stimulate the economy it would have been a marvellous thing. With £350 billion we could have built an enormous amount of social housing on brownfield sites, converted derelict high streets into housing, built the Severn barrage and a high speed rail link from London to Aberdeen and still have had change. We could have reopened the steel industry to do it. a thousand manufacturing firms could have been re-tooled. Millions could have been employed. The entire logic of economic depression could have been turned around.
Instead we gave more cash to the bankers.
thank you for informing us about your little black market projects
we will submit legislation to tie down the burning of logs so that burning logs will add to GDP
second we have not ever used one dollar pound euro to buy anything
we have only provided loans
its our money, was, is, will be
we do what we want with it
and less you understand about what we do better for us
have a nice day
“normally pretty astute.” That’s very polite of you, Craig, since I was so rude.
.
As to your question, “what possible incentive would the banks have to sell their gilts – which are, as you say, as good as cash – to the BoE for cash?” my assumption is that the BOE is buying bonds in the market, i.e., from anyone, which might include you or I, Lloyds Bank or the Bank of China. In that case, the cash exchanged for the gilts may indeed be invested in new bonds, but as you ask, why would it be?
.
If I sell a bond I may use the cash for consumption spending, business investment, buying a house, etc., all of which are stimulative. At the same time the number of bonds in circulation has been cut, thus there is a negative impact on interest rates, which is also stimulative. And even if I did buy another bond, that merely passes the cash to someone else who is more or less likely to actually spend it.
.
But it is not altogether clear to me what is happening from the single news report I have read, probably because the central bank prefers to obscure from public view exactly what it is doing. However, in this case, unless you are aware of evidence to the contrary, I am inclined to believe that the BOE is engaging in a straight forward effort to stimulate the private sector by increasing the money supply.
At the Leveson inquiry it has been revealed that a photo of Hauge in a gay bar was brought by NOTW for £20k and never published, no doubt Rupert (great friend of Netanyahu) was just happy to have the picture and never once considered using it to ‘influence’ Mr Hague.
_
Andy Coulson was Cameron’s press adviser at the time whilst still being paid by the NOTW. That’s what Cameron means by transparent government – transparently corrupt to the core.
_
http://www.guardian.co.uk/media/2012/feb/09/news-of-the-world-guido-fawkes-hague?newsfeed=true
“… the major banks have failed the coalition targets on lending to small and medium sized enterprises.”
The problem is that no small or medium sized businesses can come up with business plans to justify loans. The economy is depressed, demand is falling and will continue to do so.
What is remarkable is the hypnotic power the ideologists hold over people whose living standards are falling steadily, whose prospects of every kind constantly grow dimmer but who retain a compulsion to believe that all is well and that prosperity is just around the corner. Because the ruling class loves them all.
Maybe the tipping point will be around 60% Youth Unemployment and mass homelessness and it will then sink in that, actually, it is not the fault of the single mother down the road, the desperate bastard looking for work, now that we’ve bombed him out of Iraq and killed his family for fun or other Malthusian villains.
It is that, if we want a decent society we need to make one, because Santa Capitalism isn’t going to give it to us.
@downwiththis
You can’t read or you can’t type. The photo was of a special adviser to Hague, not Hague himself.
Interesting story, nevertheless.
The vast majority of the QE money is spent on buying shares and property. There is only one purpose to it and that is to keep these bubble markets going because they have no other strategy. It is of course just making things a whole lot worse down the line.
Guilty as charged. I was speed reading. He is gay though. 🙂
You would not recognize him as the warmonger sitting next to La Clinton recently would you?
.
http://www.dailymail.co.uk/news/article-1305082/Another-Hague-special-adviser-And-baseball-cap-moments.html
.
There is previous too. A Barnaby Towns was also a SpAd who has gone off to the US to work. He was openly gay.
.
If Hague is gay, then why the pretence? Many other MPs have come out. Perhaps he protects Ffion whom he married in December 1997 when he was the Conservative leader. Talk about Teflon Tony.
“There is only one purpose to it and that is to keep these bubble markets going because they have no other strategy. It is of course just making things a whole lot worse down the line.”
.
Hey, DWoTSOT, what’s the alternative? A good old fashioned depression, everyone to go bankrupt and the gold bugs to pick up the pieces for next to nothing? That’s what made Joseph Patrick Kennedy rich during the Great Depression. He shorted the market on the way down, invested his profits in gold then picked up the Chicago Trade Center for pennies on the dollar. With the profits he was able to buy the US Presidency plus the Senate seat for Massachusetts, not that it brought him any joy in old age.
.
But I don’t think that will work well now. It will convert mass unemployment into near universal unemployment. During the Great Depression, the Western countries still had some demand for manufactured goods. Now most of that stuff’s imported from low-wage economies, so without the bubble economy, there ain’t nuthin’.
.
The solution that seems obvious to me is to get on with the convergence of wages between East and West, without resort to mass immigration to replace the British workforce with third-worlders, Poles, Bulgarians, Slovaks and others who easily outcompete the less competent members of the UK (potential) workforce.
.
To do that, only two things are required. First, abolition of the minimum wage, which forces the least competent members of the workforce into idleness. Second, provide a wage subsidy to insure that those taking the lowest market wages, i.e., comparable to wages paid to the industrial workforce in China and Vietnam, etc. do not starve.
.
I worked out the cost here. It turns out to be rather trivial, since it is offset by cuts to welfare and related services, e.g., prison incarceration, mental hospitals, etc. which cater particularly to the unemployed. In addition, it creates a whole new range of business ops. for British capitalists, which can help restore the balance of payments and, through increased corporate tax payments, eliminate the government deficit.
Anonymous have taken the CIA website down! I have just tried it. https://www.cia.gov/
Mike Whitney, as always has an interesting piece at Counterpunch
http://www.counterpunch.org/2012/02/10/the-troika-blackmails-greece/
CanSpeccy you are proposing the salvation of Capitalism by the re-institution of slavery.
“CanSpeccy you are proposing the salvation of Capitalism by the re-institution of slavery.”
.
So what are you proposing Chris2? Outright starvation, hyperinflation?
.
And what’s slavery got to do with wage subsidies, anyhow? You think unemployment is more dignified? You think being replaced by an African, an Asian or an East European is better than working for a subsidized wage and getting on-the-job experience that will increase the market value of your labor?
.
Come on, get your brain in gear and forget the pathetic leftist “share-the-wealth but don’t expect us to do a job” bollocks.
.
Incidentally, if you allow the labor market to work, i.e., get rid of minimum wage laws, you not only drive down wages but you drive down costs too. How else do you suppose that Chinese industrial workers survive on a couple of hundred quid a month? It’s because labor being cheap, everything is cheap.
New lamps for old? Is this what QE amounts to?
‘
But what, I wonder, would the economy have looked like without QE? Proabably a full-on Great Depression 2, with horrendously high unemployment, collapsing demand, diving tax revenues, massive cuts across the board, the £ taking a nosedive…
So, one can aruge that without QE things would have been far, far, worse. We’ve effectively been running on the spot rather than moving forward.
QE isn’t working well enough though, if, it can be said to ‘work.’
QE is designed to give the impression that ‘capitalism’, especially the financial sector, hasn’t actuallly imploded, and the entire system is insolvent, that is the banks, our financial institutions.
Even in the US, a couple of years ago, when the banks were failing and falling, questions began to be raised about the future of capitalism. In Congress representatives from both factions of the ruling party began to publically question whether transfering colossal sums from the taxpayer to the financial sector, the famous bailouts, was ‘capitalism’ or, in fact, ‘socialism.’ For, if private capitalism cannot survive without the protection provided by the State, the State acting as a bank, where did ‘free markets’ go to?
Obviously it was of the utmost importance that this questioning of the central tenets of liberal, capitalist, economic dogma and faith, be stopped. No more discussion. There is no alternative to ultra-liberalism. And poor old Keynes is smeared with the ‘socialist’ label, how that would have amused and appalled him.
QE is creating, not so much, of ‘money’, but rather ‘debt.’ Debt created out of thin air, and money does grow on trees, contrary to what most people think. Which is both ironic, and frightening when one thinks about it.
One can also see QE as a delaying tactic, a frantic and desparate attempt to avert the inevitable, the collapse that’s coming when the markets understand that the debt bubble is bursting and cannot be pumped up again, a bit like Humpty Dumpty.
Finally, QE is almost a strategy for ‘class warfare.’ The ruling, financial elite, essentially loses everything they have on the great, revolving roulette wheel of ‘the markets’, the finantial institutions are insolvent, yet because the ‘elite’ control both the economy and the politicians, they have the power to demand that the State covers their losses and saves them, by ’emptying’ the treasury. Otherwise known as by far the biggest welfare, or social security check payment in recorded history.
My comment vanished into thin air, is that normal?
My exact thoughts,Craig. Having spent a couple of days trying to work it out I also reached the conclusion that the gilts story is a cover and that the reality is the purchase of junk securities to keep the banks afloat. The purchase of gilts would only make sense if the market for gilts had dried up- it would be a bailout of the state. We’re not yet at the point although it is to come. This is a bailout of the banks- something they can’t own up to , for obvious reasons. We must try to expose this deception as the consequences will be catastrophic for all of us. I’m trying to raise issue with Occupy Movement
QE is an attempt to sustain a system, financial capitalism, that, arguably, has collapsed. That is the leading banks are all insolvent, if one examined their books properly. Obviously, this conclusion and realization is totally unacceptable for a variety of reasons, both economic and political.
‘
Whilst Greece, being a very small economy, cannot magically create a new finacial bubble that gives the impression that the system hasn’t collapsed and imploded, the leading economies, like the US and the UK, can, by creating vast amounts of new ‘money’ or really, new ‘debt’, get away with this ‘magic trick’ or Ponzi scheme… at least for a while, until something turns up, before the realization that we are all Greeks, dawns on the public, arguably the banks know already.
‘
Capitalism is on welfare, and the 1% have lost everything playing ‘roulette’, but because they ‘own’ society, and the political class, they are able to demand that the State covers their loses, in what is probably, no certainly, the biggest social security check in recorded history. How ironic, whilst the Welfare State is being gutted, that same State steps in with a massive hand-out to the 1%!
A true indication of how bad things really are is to imagine what the economy would have looked like without the massive injection of ‘debt’ to save the financial system and the rest of the economy. But how long can this Hindenburg-size bubble keep airborne? One keeps pumping it up, but at the other end it’s full of holes.
Without QE we’d probably be back to the 1930’s with economic collapse, mass-unemployment, and revolution in the air. QE is an attempt to avoid the consequences of an economic experiment, neo-liberalism, that has gone drastically wrong, as I was convinced it would and have been arguing the case for a quarter of a century.
P.S. Of course the implication of rejecting these bailouts is that the banks must be put through bankruptcy- they need to be taken off life-support, they need euthanasia. This is what we should be pushing for. Until this is done we can’t start to rebuild the country.
QE is, new lamps for old. But only in the homes of the wealthy.
Nice post craig.
`Oh` If you were at the helm Craig. But maybe Scotland would be more deserving of your talents.
When banks create a loan, they increase the Money Supply. If the government takes out a loan by selling a bond, it can print Federal Reserve Notes. If you take out a loan, the banker adds credit to your bank account. At the end of the year, you owe the banker an interest payment. But, since he only created the principal and not the interest, someone somewhere must take out another loan so we can all make our principal and interest payments. Over time rolling over those interest payments creates a Mountain of Unpayable Debts. This crushes economic activity. It also does do what it was designed to do which is to transfer all real wealth from those who created it to those who gave themselves the right to print our money.
As the Bilderbergers understand the situation of the world economy, there are just two solutions. One is Austerity and the other is Hyperinflation. And we are doing both right now. Austerity transfers wealth from us to the Uber Rich by selling off public assets we paid for and canceling programs we paid for so we can make payments on a fictional debt. When Argentina was forced by the bankers to sell of its state owned oil company, the bankers paid 4 cents on the dollar a national resource. Austerity merely accelerates the transfer of all assets to the Bilderbergers.
I said public debt is fictional because the alternative was that government had created money without debt and interest payments so there never would have been a public debt. If you count the Fannie Mae and other guaranteed debts, the total US government debt is 21 trillion dollars.
Hyperinflation does not cancel public debts by deflating its actual value. Double prices and cut your debt in half does not work in the real world. That is an illusion. The Federal Reserve is creating tens of trillions of dollars and loaning it out at rates ranging from 0.01% to 0.25% interest. John Williams at Shadow Stats tells us the real inflation rate is 11.6%. We can calculate the real cost of borrowing by subtracting 0.25% from 11.6%. The Uber Rich pay minus 11% interest which is sort of like giving trillions of dollars to multi-billionaires. Blythe Masters is the English girl who is Vice-President for Global Commodities at JP Morgan. She is heavily invested in food futures with borrowed money. This along with ethanol subsidies has driven up the cost of eating worldwide so millions more die of starvation every year.. If she makes a mistake betting on the future price of food, copper, oil gold or silver, all Blythe has to do is to sell her losses to Ben Bernanke at the Federal Reserve for 100 cents on the dollar. Then Blythe and her friends at Goldman Sachs can borrow even more money and drive prices even higher. This will soon raise the price of food beyond the reach of WalMart shoppers and is by design. They want the poor to rebel so the middle class and the poor will shoot each other. In America this will be interpreted as a race war which is what it will be. If we are busy killing each other, we will not have time and energy to chase down bankers.
That is how hyperinflation works. I recently said America will go into hyperinflation within 16 months cutting wages in half. I define hyperinflation as beginning at 25% for a reserve currency like the dollar. This intentional inflation is designed to reduce you to Debt Slavery so the Bilderbergers own everything of value in the world including you, your spouse and your children.
Quote from Stormfront.org
Spoken like a true nationalist.
With £350 billion we could have built an enormous amount of social housing on brownfield sites, converted derelict high streets into housing, built the Severn barrage and a high speed rail link from London to Aberdeen and still have had change. We could have reopened the steel industry to do it. a thousand manufacturing firms could have been re-tooled.
Craig,
“is that really what the BoE is doing, because what possible incentive would the banks have to sell their gilts”
,
,
By definition ; “A gilt is a UK Government liability in sterling, issued by HM Treasury and listed on the London Stock Exchange.”
,
Hence the gilts bought are by issue of further gilts, this trade of the kind with kind can only make sense, if the gilts that getting bought are fixed rate gilts, with a lower than inflationary coupon (rate of return) rates. This weird trade is the latest symptom of the crash that has so far destroyed the wealth of the middle class, and the poor, whilst enriching the rich even further.
,
The rates calculated for the original transactions were excluding the crash factor, and now the owners of these gilts can in effect dump these in a wholesale fashion and de-stabilise the already shaky Stirling. Therefore the hush money getting paid by borrowing even more money, sort of paying the protection racketeers with promises of more money next week.
,
Meanwhile the trend is to make people poorer and as the rabid right wing scum would wish to stop minimum wage, and take away the barriers to competitiveness, which basically means making everyone across the globe as poor as the next Indian untouchable, or Chinese farmhand. This is then prescribed as a nostrum to “stop emigration” and “start industrial rejuvenation”.
,
Slight problem with this model is; money that is getting extorted from the various governments through various tricks, is then invested in the commodities that is pushing the prices of commodities even higher, promoting hunger, homelessness, further depressing the internal markets, while the money made from the ripping off the poor finds its way as loans of high interest rates in the foreign capital markets.
,
The spiral of degradation then becomes to be a race to the bottom by all those engaged in the merry go around of the “Conventional capitalism”. This then will result in one outcome; poor eating the rich.
,
However those crooks selling snake oil and creating the phoney bubbles, ie the great amounts of debt that is to be paid by majority to the crooked minority, have so far got away with their ill gotten gains, without so much as getting fined the value of a parking ticket, such is the wonders of the deregulated markets.
With £350 billion we could have …
.
Probably not. The HS rail from London to Aberdeen would have taken the lot and why should the English taxpayer subsidize railways in Scotland when the Scotch are planning to leave the Union the year after next?
.
But in any case, what is the use of a subsidized steel industry? Who’s going to buy the output? Are you proposing tariffs? But if you impose tariffs and exit the WTO, then you don’t need to subsidize steel, entrepreneurs will build the plants to profit from the high prices available in a protected market.
.
QE makes good sense in a depression when money supply collapses due to debt deleverage as is occurring now.
.
Problem is, for the West, that when the government prints money little of it remains within the community to stimulate production and employment, since you can buy cheaper stuff and services offshore. The only industries that benefit are the distributive trades and the factories that snap together cheap Chinese components.
.
There appear to be only two possible solutions to this problem. One is an end to free trade with the low-wage economies, i.e., through the imposition of tariffs, quotas, capital controls, etc., the other is to achieve wage convergence promptly. Since Chinese manufacturing wages are not going to match those in Britain for many years, that means lowering British wages. This will happen automatically if you abolish the minimum wage law. But because at internationally competitive wages some people would starve, you need to introduce a wage subsidy scheme too. In time, low wages will drive down the cost of living and make survival for the working poor possible. And as they gain skills, the lowest paid workers will increase in value and hence in the wages they command.
.
But everyone seems convinced that we’re the victims of some monstrous capitalist scam and nothing can be done except hand money out to the deserving poor, without expecting them to do anything for a living.
.
Actually, the problem is probably that David Cameron is a pleasant young man with very little practical experience and really hasn’t a clue about what he is doing. Oh, he has civil servants to advise, but who in the right mind would leave the management of the country to a bunch of civil servants who never met a payroll in their lives.
“Hence the gilts bought are by issue of further gilts.”
.
Not so, if what is happening has been correctly reported as quantitative easing.
If there is QE, then the gilts bought are bought with money the BoE does not have, i.e., ink money, money out of thin air, money that did not previously exist.
.
That’s the point of QE, to get money into circulation, which in this case is done by buying bonds from the public.
.
If the bonds were paid for through the issuance of new bonds, there would be no QE.
.
Here’s my primer on money printing.
Not so, if what is happening has been correctly reported as quantitative easing.
,
Where does this money come from? Ink money?
,
So the real IOU/gilt is replaced with imaginary I Paid the bearer/ink money!
,
You are deliberately obfuscating.
@writerman – comments may not show up straight away if they are caught by our creaky spam system. It is best to assume it will show up when a mod approves it, rather than posting again – I have done this just now for you.
The idea of QE, which is simply creating money out of thin air, is to increase the money supply.
.
.
Private Banks normally increase the money supply by the amount of debt they create ( loans ). When you get a bank loan the bank doesn’t lend you meny it already has it creates the money out of thin air. however to prevent private banks creating an infinite amount of money out of thin air they are bound by the central bank regulations called the reserve requirement ( or reserve ratio ). This is called Fractional Reserve Banking and the money is created out of thin air through deposit multiplication ( also known as Money multiplier )
.
The federal reserve release a booklet sometime ago explaining the process of FRB and deposit multiplication …
.
http://www.smeggys.co.uk/smeggy_info/Modern_Money_Mechanics.pdf
.
.
… but simply put, on a reserve requirement of 10% for every £1million deposited into the banking system, the banks can create upto £10million
QE works by creating an initial seed of money to increase bank reserves by buying financial instruments like bonds and depositing the money into the bank accounts of those selling the bonds. The banks then have an increased reserve and thus can then create up to 10 times that amount through deposit multiplication.
.
.
of course the banks have to create the new money through debt and not use it to pay bankers bonuses, and of course on of the complaints about previous rounds of QE was that the banks were being too slow in creating new debt to increase the money supply even after they had the QE injection to increase reserves.
.
.
Always remember that prviate banks control the economy because they create and destroy the money and thus control the supply
.
I say ‘destroy’ becuase as well as creating new money out of thin air as new debt, the banks also destroy it again when the loan is paid back. This is why a Credit crunch ( debt crunch ) is bad. All money is debt. As existing debts are paid off new debt is required to top up the money supply, other wise the amount of money in existence decreases, people start hoarding what’s left for longer, thus the velocity of money decreases, and there’s less commerce and jobs are lost, etc,etc,etc, This can spiral down. interest rates are normally adjusted to regulate the money supply, but when that fails QE is employed.
.
.
QE is really just Open Market Operations on a grander scale.
.
.
All money is debt ( an IOU note – I promise to pay the bearer ). Even if you personally have no debts, somebody somewhere is paying back that tenner in your pocket
.
.
The big problem is the Usury, i,e the addition of interest on the issuance of the new money. Remember all existing money is all promised debt. so when new debt is created the money to pay off the usury on it doesn’t yet exist. There’s only one solution for that…. mroe debt.
.
.
.
and that’s Debt Enslavement 101 folks. it’s a clever system in which the Money lenders have got us all by the balls in an infinite run of debt enslavement and cream off a royalty for themselves for basically nothing but typing a number into an electronic account. They don’t even have to pay to print most of it up as physical notes anymore
.
.
have fun 🙂
“Where does this money come from? Ink money?
,
So the real IOU/gilt is replaced with imaginary I Paid the bearer/ink money!
,
You are deliberately obfuscating.”
.
I told you, I comes out of thin air!
.
The BoE writes a cheque, which the recipient deposits to his bank account and is then able to spend.
.
That’s all there is to it.
.
The only difference between you doing this and the BoE doing it is that the BoE does not need to have the money, just a book-keeping entry. That’s one of the joys of being a central banker. The mechanics are probably a little more complex than indicated, but not much. And the interest paid by the Treasury on the gilts that the BoE bought is presumably returned to the Treasury, as would be the case with the US Central Bank.
Canspeccy at 10.06 – it must be very comforting to have such a clear view from (I suspect) a lofty vantage point.
I do not pretend to know very much about economics; however your post chills me. It smacks of a viewpoint which regards “workers” who have a “value” as pawns to be moved around at the will and whimsy of others who by chance of birth, good fortune, intelligence, ambition, etc etc can order others to jump to their command in the interests of what? Growth?
Nah – there’s more to life than that Cantsee.
Someone tell me please, I am curious: exactly how does one become a fat cat banker of the sort that Craig and others here love to hate? No doubt we should avoid so great a sin, of course, but how exactly does one become such a bounder? Just in case I should need to know. 🙂
PS. On second thoughts I take it back, Indeed one must avoid and flee from such filthy lucre! Filth! Filth! Let the fat cats roll in their gold sovereigns, and let us value more getting to heaven (and them too if they repent of course, why not?)
PPS. Time to return to balance. If we have a comfortable life, maybe we should be thankful enough for that.