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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  • Oz Yer Man

    Never expect anything but corruption and crime from the scum in power. If they’re doing anything with the word billion in it they’re trying to enrich their mates at the expense of others. Be grateful we’re only handing over treasure to them. The brownskin people have to pay in blood as well.

    Vive la revolution.

  • Rob

    When QE first started it also seems to have been significant in fuelling the massive increases in commodity prices a couple of years back. What’s for sure is that precious little of it is filtering into support for small businesses, which constitute the vast majority of employers in the UK.

    It’s curious isn’t it, how economists – or it it just the media? – seem to go through such angst about the fashionable ‘index’. I remember decades ago the news was full of worry about the ‘balance of trade’; then it was all those money indicators – M0, M1, M5 and the rest. Then the exchange rate. Now we all get the heebie-jeebies about ‘growth’, which as you point out above, Craig, is full of daftness. You know what? I don’t think they have a systematic theory at all. I don’t think they have a clue.

  • Rhino

    Thank you for pointing these things out to people. Not many have the time these days to think about what’s really going on, but people need to know. Our future and especially our children’s future is being majorly undermined in England and all over the world.

    The 99% need to get out there and say: Stop it right here and now.

  • TFS

    If you want up-to-date info look at the ZeroHedge website, and check out Max Keiser on Sky(RT), past episodes are available from his website.

  • Demeter

    Using the money to rebuild in this way is exactly what I’ve been advocating for years now, mainly to deaf ears, albeit to people that have absolutlry no control over anything much really. Amongst other thins, I envisaged a massive solar / renewable building programme, generating thouseands of skilled jobs, new technology, with the added benifit of removing the dependancy on the energy firms and subsequently, no gas / elec bills leaving more moiney in peoples pockets to spend, if they so wish wish.

  • Iain Orr

    Craig, it’s worth buying this week’s Spectator for the articles on QE by Fraser Nelson (“QE is the transfer of wealth from the poor to the rich. It floods banks with money, which they use to pay bonuses” and Bill Jamieson.

    .
    As a bonus you will also get an excellent review (pp34-5) by Rory Stewart (Con MP for Penrith and Border) of Andrew Alexander’s ” America and the Imperialism of Ignorance: US Foreign Policy since 1945″. “The world is a much more dangerous place as a result of America’s determination to save it.”
    .
    Stewart notes that Alexander “builds his case through quotes from primary sources, from National Security Council documents, speeches, telegrams, presidential letters and Soviet archives. Here is a general, commenting on the Japanese: “When we knew we didn’t need to do it and they knew we didn’t need to do it, we used them as an experiment for two atomic bombs.” ” Comment is superfluous.

  • capmint

    I’ve an economics degree, which included econometrics, and looking at my ISLM model, still cant for the life off me figure out how QE or TAFT work, Japan came up with it, having worked on FSA projects (dodged Basel 1 and 2) it appears to me that the only alternative is smoke and mirror approach as Craig concludes, namely a figleaf for trading banks toxic debt,and would explain why UK banks tier 1 capital is looking so healthy but absolutely no mechanism for Keynesian trickle down

  • Mary

    There was an announcement this morning that the major banks have failed the coalition targets on lending to small and medium aized enterprises. If you google banks fail lending targets, you see links going back through every month of last year saying the same thing. And then they announce their annual profits in £billions such as Barclays who announced £5.6 billion profits for 2011.
    .
    Project Merlin!
    .
    Project Merlin proves less than magic
    Net lending to small businesses is down 6%

    .
    Lord Oakeshott, the Liberal Democrat peer, resigned a year ago over the Project Merlin deal.
    .

    Even with targets for the major banks, net lending – the amount repaid and the amount of loans granted – to small businesses in the year to November was down 6%.
    .
    The official verdict on the Project Merlin agreement, signed a year ago on Thursday, will be published on Monday and, given the data published so far, will again show that net lending will be negative.
    .
    /…
    http://www.guardian.co.uk/business/blog/2012/feb/08/net-lending-to-small-businesses-down-six-per-cent?newsfeed=true

  • TFS

    You think the bailout form Germany to Greece could be made a little less onerous on the Greeks as part of the deal, if they weren’t (apparently) required to buy numerous planes, tanks and submarines as required in bailout no1?

    You think your average German knows they are paying for these via the backdoor?

    Love to see the detailed elements of the Aid package.

  • Mark Golding - Children of Iraq

    The same logic is again without doubt true with the third IMF loan to Greece. Germany has ordered Greece to buy military arms such as German tanks and German artillery. Thus the tools of death idle ready in austere compounds while thousands of Greek children bawl “Είμαι πεινούν mummy.”

  • Siôn Jones

    And meanwhile, having done the approved, virtuous thing, putting a significant portion of my income aside into a pension pot, I find as I reach retirement, that a large part of its value has been stolen by bankers, and the value of the annuity I can expect is negligible because of artificially low interest rates, and the erosion of the value of money through QE. If I had ,my time again, I would have spent it all on travel, alcohol and wild women, and borrowed to the point of bankruptcy, like the bankers did.

    There is still a massive private debt mountain out there, that hasn’t been called in yet, but has the makings of crash that will dwarf the banking crash. That is why the government is favouring borrowers over savers with their interest policies. I think it is immoral.

  • eveningperson

    I can recommend Paul Krugman as a person who explains the issues clearly, including why stimulus does not cause inflation in the current situation of a depression caused by lack of liquidity.

  • ingo

    More like quantitative schmoozing then. If the government would have wanted value for money they should have set up a community banking system that is guaranteed by its investment in local sustainable developments the banks would not fund. This story makes a point about such coyness.
    http://www.edp24.co.uk/business/wind_farms_provide_new_opportunity_for_caister_fishermen_1_1204555

    Further, monies are siphonmed off straight into low tax off shore accounts, as each and every bank has them, a bit like a mascot.

  • Joe Templeton

    Obviously, the ‘cash’ is in exchange for relatively illiquid assets, or the exchange would indeed be pointless. But I’m not sure illiquidity necessarily means ‘junk’, and in any event the exchange is presumably at post-crash prices.

  • Jives

    Sion,
    .
    ” If I had ,my time again, I would have spent it all on travel, alcohol and wild women,”
    .
    And waste the rest right?

  • MJ

    ”If I had ,my time again, I would have spent it all on travel, alcohol and wild women”
    .
    It seems to have worked for Craig.

  • amanfromMars

    Craig,
    .
    Your understanding of what is going on, is not wrong. And Henry Ford warns of the consequences …. “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
    .
    And this explains the folly of austerity measures quite well too ……. http://www.assoeconomiepolitique.org/IMG/pdf/Manifesto_of_the_appalled_economists.pdf
    .
    The banks never have a problem foreclosing on those who are negligent and reckless and unable to repay credit created to generate debt and arbitrary profit called interest. Time for the people to foreclose on the system and demand their billions/trillions back? And time for a Par;liament which acts in the interest of the people too, methinks, or they can kiss their Ponzi scam goodbye too.
    .
    There appears to be a bit of bother in Greece at the moment …. because the banking system is holding it to ransom for money which the people allow them to invent and provide for their labour and pleasure.
    .
    And this tale ….. http://nieuws.nl.msn.com/buitenlands-nieuws/griekse-politie-wil-arrestatie-leden-trojka ….. [Yes, I know it is in Dutch but I couldn’t find it English :-)] tells you that Greek police union has told its members to arrest any ECB or IMF or EU inspector who would be in Greece, presuming to tell the Greeks what to do/how they are to live.
    .
    Are you men or mice? Squeak up. I can’t hear you.

  • Guest

    “Instead we gave more cash to the bankers”
    .
    Problem is it never seems to be enough, they always want more and more.

  • Conall-Wales

    Great to see your interest and bafflement at QE. Even the delightful Steph. Flanders on the Beeb is pretty clueless at explaining Money. Yes, the BoE (Bank of England) can, and with QR, DO ‘print’ money. But this, plus the actual printing of banknotes is only 3% of all the money in circulation (M3/M4 in economists’ jargon.)

    So where did the other 97% of all our money come from? Why the likes of RBS Lloyds BoS etc can also, in effect, ‘print’ money. Shock Horror when BoE ‘prints’, just doing normal business when profit-making Banks do so. What a scam! How do they get away with it?

    To learn more about money (the stuff even commentators seem to have missed) have a look at the Positive-Money website:

    http://www.positivemoney.org.uk/

    There are some excellent short videos explaining this. You may feel inspired to join the Campaign by Positive Money to wrest back control of OUR money from these (often Scottish) spivs!

  • CanSpeccy

    This is all rubbish, except the bit about burning your own firewood.

    QE is QE. Bailouts are bailouts. The Bank of England could do a bailout with QE, but there is no necessary connection between the two. If the BOE is buying gilts it is by definition not doing a bailout, since gilts are as good as cash.

    QE is money printing, a very simple operation: the BOE writes a cheque to someone’s account with money it does not have — sometimes called ink money — thus creating money out of thin air.

    If the recipient of the cheque is the government, the bank receives a government bond in exchange: an exchange of one worthless piece of paper for another, but with the significant consequence that the government spends the money on another little war, bailing out Greeks, hiring more bureaucrats, funding HS rail or some other boondoggle supposed to be beneficial to the economy.

    If the recipient is not the government, then the an asset must be exchanged for the money. If the asset is a government bond, this is an exchange of one worthless piece of paper for another worthless piece for which someone has nevertheless paid real money. In that case the BOE is giving back the money it previously acquired by selling the bond.

    The result is an increase in the money in circulation, which means a stimulus to the economy. The transaction also tends to lower interest rates, which stimulates borrowing from the commercial banks, which adds further to the money supply and hence demand.

    So, no need for paranoia. The government is doing the right thing. Encouraging private spending, not government waste.

  • Jack

    Altogether now – in unison and harmony…
    .
    “it’s the rich what gets the pleasuuuure… and the poor what gets the blaaaaame!”

  • craig Post author

    CanSpeccy

    You are normally pretty astute, but seem not to have read what I wrote. You write:
    “If the BOE is buying gilts it is by definition not doing a bailout, since gilts are as good as cash.” Which is quite true. But you are ignoring my question – is that really what the BoE is doing, because 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? Especially when they are also, with cash, buying new bonds which have a lower rate of interest than the gilts they are supposedly selling?

  • jt

    I’ve always wondered about the utility of GNP as a measure of wealth. I think it is one of these measurements that can be made .A good crime spree would increase economic activity and thus GNP. Someone once coined the term “ilth” as opposed to wealth .

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