The Mystery of Quantitive Easing 234


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.


234 thoughts on “The Mystery of Quantitive Easing

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  • CanSpeccy

    Craig Murray wrote:
    .
    “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”
    .
    This, as I pointed out and several others have confirmed, is bollocks.
    .
    Since pointing it out, I have been subjected to abuse by the usual suspects, apparently as ignorant as Murray himself.
    .
    But let me say it one more time. The money was not given to the banks because it was not “given” to anyone. It was paid to the vendors of bonds, mainly gilts — vendors who had previously paid real money for the bonds that they held.
    .
    But who here cares for the facts? Where abuse is the currency of debate, nothing will be learned.

  • nuid

    Why’s my post disappeared. Is that …. Other Mod, fucking me again? – Alfred/Canspeccy
    .
    Oh fuck off Fedup. If you haven’t anything intelligent to say, why not shut up. – Alfred/Canspeccy
    .
    Where abuse is the currency of debate, nothing will be learned. – Alfred/Canspeccy
    .
    I couldn’t agree more, Fred.

  • Canspeccy

    And rather than piling on the insults, do try to remember the topic of the thread, which is Murray’s claim that the BoE is “giving money to the banks,” a claim that I maintain is false, mischievous and ridiculous.

  • AJ

    @canspeccy

    Who has been trawling google desperately looking for supporting evidence?

    Found the same link with the same quote on my first search.

    Never heard of Auburn University – I doubt you had before this either. Also never heard of either of your new favourite economists and I am absolutely certain you hadn’t either.

    Nice try.

  • ingo

    Oh what luscious lines linger amongst the seriously perilled. Thank you Ian, for this brief encounter from years past, it has changed my perception of you and I hope to be able to return the favour one day.

    Can speccy be jealous? when live is such a short span? But then, he returns, a true fan, again and again.

  • Fedup

    FCS said; “….. I maintain is false, mischievous and ridiculous”,
    ,
    There are others who maintain they are Napoleon, Churchill, etc. too, any episodes of delusional psychosis is a very real experience for those afflicted with unsound minds, but that somehow cannot make it plausible for others who do not suffer the same afflictions.

  • johnm

    As far as I can figure this out the gov gives the bank an iou[+3% interest] the bank creates a deposit[of fiat] in the gov. name, the gov buys old gilts the bank uses that ‘money’ to buy new gilts [at 3%] then the bank uses that as collateral to borrow same amount at .5% from gov. job done

  • Agent Pete 8

    @Rose 12 Feb, 2012 – 4:05 pm

    The new name has yet to be decided by the as-yet unrepresented constituents of the new Group that encompasses All groups.

    But the Tooling to peacefully operate IT has been named.

    Hi Ingo, I really dig your new threads – Fun Key 🙂

  • Agent Pete 8

    @Ian “OK Iain, we can shake hands metaphorically and make up although I cannot let it pass that apparently you do not know the difference between your and you’re.”

    Yore talking about 7 billion+ here, right?

    Metaphor is such a powerful word and sword – now derived from IT’s source, “Metaforia”. Peaceful Solutions and Medutainment.

    Thanks Craig Murray and herein, for all this.

  • CanSpeccy

    @AJ
    *
    “Never heard of Auburn University – I doubt you had before this either”
    *
    I actually know quite a lot about Auburn University and some of the faculty. In fact, after giving a presentation at a conference at Oregon State University many years ago, I was greeted by the Dean of one of the Faculties at Auburn State, who had the rest of his faculty lined up, each and every one of them to greet me personally and shake my hand, which was nice gesture.
    *
    Though you are unaware of it, Auburn is quite famous if only for an incident that occurred in 1896 on the eve of a football game against Georgia Tech.
    .
    The night before the game, Auburn ROTC cadets sneaked out of their dorms and greased the railroad tracks with pig’s fat for about half a mile to the the West of the railroad station. In the morning, the train carrying the Georgia Tech team slid through town and didn’t stop until it was halfway to the neighboring town of Loachapoka, Alabama. The Georgia Tech team was forced to walk the five miles back to Auburn and were quite tired at the end of their journey in hot weather. This likely contributed to their 45–0 loss.
    .
    But good try at a diversion.
    .
    Why not now address the question of whether the BoE really gave money to the banks or not?

  • CanSpeccy

    @Johnm
    .
    “the bank uses that ‘money’ to buy new gilts”
    .
    An interesting idea, John, but if the BoE bought 50 billion in gilts in an exercise in QE, then the 50 billion has to have been net of sales.
    .
    But thanks for attempting to address the issue.

  • Fedup

    CanSpeccy,

    An interesting idea, John, but if the BoE bought 50 billion in gilts in an exercise in QE, then the 50 billion has to have been net of sales.”
    ,
    Even a snotty nose highschooler can understand Johnm, yet you somehow fail to make any sense of what he said, that is not surprising is it now?

  • CanSpeccy

    Yes, Fedup, what you say may be true, “that even a snotty nose highschooler can understand JohnM.” However what JohnM understands is not the case.
    .
    QE through the purchase of bondds must result in a net acquisition of bonds by the bank. Otherwise its not QE. If you spoke politely, something of which you seem incapable, I would try to explain it words of one syllable. But I am not anticipating the need to do that.

  • AJ

    @canspeccy

    Just checked out Auburn on the world rankings – it ranks well below Istanbul and Tehran universities. So not exactly on top of their game. Not the sort of place I would go to for quotes. Or conferences, for that matter. If that was my thing – which it isn’t.

    Good story though.

    Back to the main discussion – I agree with you on the mechanics of QE, more or less. The BOE website is almost impenetrable where it really matters so I have some suspicions with regard to the quality of the assets being repurchased but I’ll put those aside for now. However, the main point is that I see very little evidence in favour of QE working or doing what is it supposed to do. Economic theory suggests QE will be of little benefit in these particular circumstances and the results so far (here and in Japan) bear this out. In that sense QE acts simply as a bailout for banks and I am not convinced that they are worth saving. I dont buy into all that end of the world stuff if zombie banks collapse. It would be complicated but it would get us to where we need to be much quicker than this which is just going to drag out the pain for a decade or more. As for the moral hazard issues and problems being stored up for the future….

    The reason we have chosen this route in the UK is because bankers and politicians (and journalists) have become interlinked and desperately need to preserve asset prices above everything else rather than boost employment which is the key to the future.

  • CanSpeccy

    AJ, I didn’t say I had actually visited Auburn State. However, it ranks high quite high among American schools, at least according this survey: 36th out of 100 public universities.
    .
    And while it is a long time since I read Keynes (both the general theory and his treatise on probability) and Friedman (The Optimum Quantity of Money, and other works) it seems plausible to me to say, as does the man from Auburn State, that Friedman’s monetary ideas form a logical extension of the work of Keynes.
    .
    I don’t think the public is supposed to understand too much about money printing, it sounds immoral and so it is best if no one knows what’s going on. However, the mechanics are simple. The BoE writes cheques with money it does not have either to purchase things such as gilts in the open market, or to provide the government cash to spend. Either way, it increases the amount of money in the system, which is inflationary or counter-deflationary.
    .
    Thus, in Japan, where the economy shrank at an annual rate of 2.3 percent in the last quarter the central bank will emit $130 billion, “The entire increase amount will be for purchases of long-term government bonds”. (I’d provide a link but I have one already and a second will kill my post).
    .
    I see no reason to doubt that this kind of action generally has the intended effect of preventing the economy falling into a liquidity trap, and that it therefore serves a useful purpose.
    .
    You should not confuse QE with bailouts. A bailout is a programme such as the US TARP or the transaction whereby the UK Government acquired ownership of most of Lloyds TSB. Those were bailouts, but they have no necessary connection with QE.
    .
    Which is not to say bailouts are a good thing. I think most people will agree that banks should never have been allowed to be in a position that forced governments to bail them when they got into trouble. In the states, blame Clinton for the repeal of Glass-Steagall. In Britain, I believe it was Thatcher’s government that deregulated finance, something that New Labor was happy to live with.
    .
    This is a case where lack of laws regulating markets make free markets too destructive to be allowed to operate. Adam Smith would certainly have approved of regulation that prevented the development of entities too big to fail.

  • nuid

    “Mere tit-for-tat, Nude.”
    .
    Oh look, you deliberately misspelled my handle. How terribly funny.
    .
    “Try to understand the context before you comment”
    .
    The context was abuse. Not exactly quantum physics. What a shame you don’t have the balls to acknowledge what you yourself write. But it was ever thus, Alfred …

  • CanSpeccy

    Well, I guess we can all agree, then, that Craig Murray’s claim that the 50 billion dispensed by the BoE in the latest round of QE was not “given to the banks and other financial sector companies” it was payment for assets, mainly gilts, for which the owners had paid real money. In other words it was a straight forward purchase.
    .
    Oddly Craig Murray seems not to have the integrity to admit this, but instead employs a bunch of sock puppets to abuse anyone who points out his error.

  • CanSpeccy

    But what’s more interesting is the reason behind QE.
    .
    We are in a deflationary depression because of globalization, which puts the British workforce in competition with four billion third-worlders earning pennies an hour.
    .
    This as I explain here, creates mass unemployment, which can be eliminated either by tariff walls or by convergence of wages in the West with wages of the Rest.
    .
    This is happening only slowly, but could in theory be achieved overnight be currency devaluation.
    .
    Rapid money printing will sure devalue the currency and if the consequent inflation is concealed by bogus statistics, some progress may be made in returning to wage competitiveness.
    .
    So pretending QE is just a bankster rip-off is a good way of distracting attention from the real purpose, which is to facilitates globalization.

  • Fedup

    CSY,
    We are in a deflationary depression because of globalization, which puts the British workforce in competition with four billion third-worlders earning pennies an hour.
    ,
    You have proved, you have not a fucking clue, nil, zealch, piss all. The globalization is about capital, and the deregulated markets, however as ever the moron you are advocating currency devaluation….
    ,
    Where on Earth did you learn this crock of shit; you pass as wisdom?
    ,
    PS for swearing at me, go fuck yourself in the mirror, although probably you will catch pox so best to wear a condom over your head.

  • AJ

    @canspeccy

    “Well, I guess we can all agree, then, that Craig Murray’s claim that the 50 billion dispensed by the BoE in the latest round of QE was not “given to the banks and other financial sector companies” it was payment for assets, mainly gilts, for which the owners had paid real money.”

    No, we most definitely cannot agree on this point. I see where you are coming from but your logic is flawed. If bond prices were fixed and forever set in stone then I would agree with you but this is simply not the case. If you doubt this ask anyone who has bought Greek bonds in the last few years. Their losses are monumental. The reason asset prices are so high – artificially high – is precisely because of the BOE’s asset purchase programme. I mean, that’s the point. When the time comes to reverse QE everything changes and the bottom will fall out of the market. In that sense QE is a huge bailout but it is all done through the backdoor and we don’t know how much it will cost until it is all over. It will certainly be in the tens of billions and possibly in the hundreds of billions. And central bank losses have to plugged by the taxpayer. How is this not a bailout?

    All of this is just a sideshow because my main point is that QE just doesn’t do what it says on the tin. After £325bn unemployment is at a 17 year high and net bank lending has contracted by around £80bn in the last 3 years. When I say contracted I mean that the banks have received £80bn more in repayments than they have lent out. Even after all that QE and the bailouts and the rights issues banks are still not lending. You say QE is an old fashioned monetary stimulus when economic theory says that it won’t work. All QE achieves is asset price inflation at a time when asset prices need to fall. And this will happen anyway, one way or another. So why provide bankers with more money to pay themselves ridiculous bonuses when it achieves very little public benefit in the long run. Without QE most of them would be looking for a new line of work and that wouldn’t be such an awful thing for them or for the rest of us.

    You also say that QE provides a quick route to a currency devaluation but this doesn’t hold true at all if everyone tries to pull off the same trick. And the Chinese are printing like crazy too. And have been for years.

  • BullShitAppreciationBlogspot

    Love this crap. Total BS from start to finish. Keep the manure flowing.
    .
    [Mod: I believe this was a comment about many spams, since deleted.]

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