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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  • Clark

    Ruth, the parties you name certainly wield vast power that is unaccountable, but I’m not sure that they can be regarded as a government. As to permanence, I suppose members must come and go. Obviously, some of them must die from time to time, but there must be other replacement, too. Occasionally someone gets caught and has to be taken down a peg or two. Then there are new arrivals, as some person or organisation acquires more power than they/it had before.
    .
    Then there’s the matter of national boundaries. Does it make any sense to consider the “secret government of the UK” as separate from that of the US, Russia, or France? These parties that you mention – “key figures in certain city and financial institutions, key industrialists and directors of major monopolistic companies” – are members of multinational or global organisations. If their power is wielded in the “secret governments” of multiple countries, then these multiple “secret governments” have some degree of overlap.
    .
    Maybe this is all just semantics. I suspect that the only qualification for being a member of a “secret government” is the possession of power itself. So long as someone holds sufficient power they’re a member, but if they lose that power, well, what use are they then?

  • Mary

    Some quantitative killing and injuring by the Israelis overnight.
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    12 February 2012
    .
    One killed in Israeli air strikes on Gaza Strip
    One man has been killed and four others wounded in Israeli airstrikes in different parts of the Gaza Strip.
    .
    Israeli warplanes fired three missiles shortly after midnight on Saturday.
    .
    A field to the east of Gaza City was hit, with another missile landing near the border with Israel and the third near the city of Khan Younis.
    .
    The Israeli army confirmed the strikes and said in a statement that “the aircraft targeted sites belonging to terrorist organizations.”
    .
    “These sites were targeted in response to the rocket fire on communities in southern Israel,” the statement read, according to AFP news agency.
    .
    The statement noted that a rocket fired from Gaza on Friday had lightly injured an Israeli woman in the Hof Asheklon area.

  • Rose

    Writerman/Iain – I echo Ingo – nomenclature. What to call it/us? I would place myself into some of the groups you name – certainly resentful – but recognise that like all of us here, am an awkward bugger and not easy to classify – the “sky ” bit of the Eternal Jigsaw if you like.
    And come on Iain – add to the gaiety of the nation and show us what you did all those years ago. Let us be the judges of what is pornographic.

  • amanfromMars

    Clarke,
    What I mean is that ‘… a vast apparatus of permanent unelected Government exists. This permanent Government consists of senior civil servants, intelligence and security officers, key figures in certain city and financial institutions, key industrialists and directors of major monopolistic companies, senior politicians.’ I also mean that they control a vast web of secret companies and resources. ….. Ruth 12 Feb, 2012 – 10:33 am

    .
    And of course, Ruth, one mustn’t forget numerous other old government cabals, for whenever parties lose power and supposedly then slip into opposition, those who then leave the immediate media spotlight of daily soap and political punch and judy stage would still have old alliances and past acquaintances/sensitive, national secrets to nurture and milk to keep them in clover.
    .
    One needs to look no further than Blair to see the truth in that. And all of them working against each other and trying to prevent their powers/controls from being outed/eroded. No wonder there is collapse and chaos.
    .
    And yes, I suppose Mr Brown is an exception, but then he never ever did really “get it”, did he. And quite what Cameron is hoping for, with his headless chicken routines and posse of populist SpAds, suggests he’s never gonna make it out of the baby pool, which is just as well considering what tender, easy meat he’d be for the sharks should he ever venture into the deep lawless waters of the Great Game.
    .
    Do the intelligence services, as a matter of routine, monitor their every communication? And if not, why on earth leave such a glaring hole in international security wide open to abuse? It is not intelligent, is it? In fact, it is incredibly stupid and naive, methinks.
    .
    J’accuse, MI5/MI6/GCHQ.
    .
    Hell, Werritty and Fox and Gould were pissing all over them, weren’t they?

  • CanSpeccy

    DWoTSOT,

    I’m perfectly well aware that we are in a depression. I have attempted merely to point out that:
    %
    (a) Craig’s comments about QE are all rubbish, and that what the BoE is doing is what it says it is doing, which is buying gilts on the open market to inject newly created money into the system;
    %
    (b) that neither you nor Anon_TOAO, nor anyone else seems to grasp the reason why we are in a depression, which is globalization.
    %
    James Goldsmith spelled out the consequences of entering into free competition via the 1994 GATT agreement with four billion people accustomed to wages about 3% of those prevailing in the West. So far, convergence has raised manufacturing wages in Asian from 3% of the rate in Europe to about 4%. So any stimulus mostly flows offshore, and is gratefully received, no doubt, in Asia.
    %
    Contrary to your assumption, I have no special preference for protectionism. What I have stated here is that Britain will either have to resort to protectionism or it will have to achieve wage convergence with the third world before the recession, as measured by unemployment, is ended.
    %
    There is nothing mysterious about the strength of the stock market. Corporate profits are at an all time high — that’s what globalization is all about, cheap labor big profits. So why wouldn’t people with cash buy stocks?
    %
    And when the BoE and every other central bank engages in QE on a regular basis what better assurance can you ask for that we are not heading for a 1930’s-style liquidity trap, which A.J. claims is already here, although the inflation numbers refute that.
    %
    The parallel to worry about is Weimar or Zimbabwe. If you have cash, the smart thing is to invest it in real assets, stocks of multinational corporations such as Apple Inc. that benefit most from cheap Asian brains and manufacturing skills being, it would appear, a good bet. Not that I’m recommending AAPL. Like Warren Buffet, I don’t understand tech companies and wouldn’t buy them.

  • Mary

    Behind the paywall of course but I noticed that the S Times Magazine has this today so if anyone can find a copy or have a Times sub, perhaps they could tell us more.
    .

    Sunday Times
    http://www.thesundaytimes.co.uk/
    Magazine; Papers Section …. The bizarre death of MI6 agent Gareth Williams has been shrouded in ….

  • Mary

    or have a Times sub s/be or has a Times sub
    .
    I hear that Murdoch Snr is hastening over to save what’s left of his tabloid following the arrest of five of its executives. I have heard it being said that there is going to be a big clamp down on ‘press freedom’ (?what press freedom?) following Leveson’s findings.

  • Rose

    Writerman et al

    How about the term “clerisy” to define the aware, literate, disenfranchised, “pissed-off” brigade?

  • Ruth

    Maybe the new social order could be called neo-feudalism. With the ‘aristocracy’ holding most of the companies, banks and resources here and overseas. As there will be vast unemployment, people will be desperate for a job and willing to take anything, however low the wage. They’ll do whatever to keep their jobs and become servile to their masters. Maybe they won’t have to go and fight for his wars but they may have to carry out corrupt practices for him, which might indirectly involve wars of acquisition. Any social benefits will be reduced dramatically so they’d be no reliance on them and anyhow receipt of benefits would involve compulsory unpaid work. People will gradually lose their homes which will be bought up for a pittance by ‘the aristocracy’. Government organizations such as the NHS will be in private hands, with ‘the aristocracy’ gleaning their share of the profits. Courts won’t serve justice but the master’s needs. The process of the courts becoming secretive instruments to hide the ‘aristocracy’s corruption and greed’ is becoming increasingly prevalent

  • Clark

    Ruth, that’s possible. Or maybe money will become worthless and lose its hold over the minds of the majority, who will begin working with and for each other instead of for the elite. Perhaps, with any luck, when the markets crash a load of the bastards will jump out of windows like they did in 1929!

  • Clark

    I was very moved by a documentary about the Mir space station after the collapse of the USSR. The Russian space programme continued, its employees worked on for no pay, and their communities supported them.
    .
    We don’t actually need money at all, not like we need air, water food etc. If the money became worthless, but everyone just accepted it and carried on doing just what they always had done, everything would continue to work.
    .
    Still, there’s little point expecting sane behaviour from humans, of course.

  • Fedup

    Anyone seen the Greek riots?
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    Looks as though the Greeks are no longer buying into the crap fed to them, half want out of Euro, and all want to stop all the debt repayments. The world has become Africa at this time; massive debts taken out by corrupt ruling elite, at extortionately high rates of interest, and paid for by the poor nations that will remain poor for eternity.
    ,

  • guano

    Canspeccy
    I know you would like to squeeze the square peg of QE into the round hole of job exportation. And this time you have cleaned up the ecoli-like bugs of racism or protectionism that lurk around job exportation. What’s good for the third world is ultimately good for us, I agree.
    But the problem is that the gamblers in the banking world get a high from boasting about their wins, without mentioning the other punters who are losing, like Greece, Iceland, Ireland etc. The gains in the third world and Global companies are real and profitable, but the gains squeezed or rather throttled out of these loser countries are false and toxic/ virtually untreatable.
    You’ve mixed them all together. QE is not needed for the purpose of creative productivity, it is needed to lie about and perpetuate rotten gambling risk-taking in places like the City of London. The depression is not caused by exporting jobs to foreign workers, but by allowing criminal activity to syphon off the affluence created by exporting the jobs instead of the promise of Mrs T. that it would come back into the pockets of UK workers.
    Which criminal activity? 1/ Interest which is a tax on borrowing. 2/ War-making which is transfers wealth from us the people to arms manufacturers. 3/Printing money QE which pays real money to bankers and leaves IOUs in the banking system.4/Profiteering from shortage of money supply so that real-money can buy up assets and companies for bargain prices. 5/ Covering-up the truth about the economy. (Chris Huhne didn’t resign for speeding but for the accusation of having attempted to pervert the course of justice i.e. lying.
    .
    The government is not doing ‘exactly what it says it is doing’. It is using a manufacturing boom in the third world/ financial markets to cover up these deeply corrosive criminal practises. I can go and find a job elsewhere, but if the police are turning a blind eye to the criminal activity, the whole of the rest of this society will be sucked into the degradation of their criminality. We need to ‘hang’ many more Fred Goodwins on ‘gibbets’ round the City of London.
    By which I mean of course expose their crimes in reputable newspapers to make them wince a little out of loss of pride.
    The government is not governing and they have stitched up the ability of any one else to restore government to governing.

  • CanSpeccy

    “What’s good for the third world is ultimately good for us”
    .
    LOL, I didn’t say that, and in any short-term perspective it is not true and as the socialists have been telling us for decades, Western prosperity has all been the result of a zero-sum-game that pauperized the third-world for our benefit.
    .
    “QE is … needed to lie about and perpetuate rotten gambling risk-taking in places like the City of London.”
    .
    Twaddle. Bailouts are bailouts, QE is QE. The QE recently reported by the BoE is just that, and has been undertaken for the reason stated by the bank: to prevent inflation falling.
    .
    “The depression is not caused by exporting jobs to foreign workers”
    .
    This is just the cloud cuckoo BS continually pumped on this blog. That it is BS is evident from the fact that no one here, certainly not Craig Murray, ever rebuts the James Goldsmith thesis; namely, that competition with people earning pennies an hour means a collapse in western living standards.
    .
    But although as I pointed out above, QE does little to stimulate the economy because any resultant extra purchasing power mainly flows to the benefit of those in low-wage economies, it will in the long-run serve to achieve the wage convergence that is necessary in a globalized market if employment in the West is to be revived. It will do so by lowering real wages, while nominal wages remain stagnant. In the last year, the pound has fallen around 5% against the US dollar and the dollar isn’t exactly rising against commodities like oil and gold. So, yeah, QE is the only solution, if you reject protection, as does the elite for whom you and Craig Murray knowingly or otherwise speak.
    .
    I wondered who would be the first to use the race card in a debate purely concerning economics. Your moniker suits. Crap indeed.

  • Courtenay Barnett

    @ Fedup,

    The people across the world can rise up and change the process.

    The Germans and French through a banking three card trick, have been able to inflict austerity on the Greeks. One might consider , a recent study found that further cuts making the economy worse and contract rapidly. Some 14 % reduction in household income for the Greeks with these policies, and thus continually downward with reduced spending power and the economy further contracts. The interest payments on the debt are estimated to escalate to some 77%. In the final analysis, if the people want to eat, the women become prostitutes and the men are the pimps. The global system, as we know it will implode – this is starting point and kick off.. So these cuts would, at best, allow the nation to keep its debt load where it is.

    http://www.youtube.com/watch?v=rshdJZruH_0

  • CanSpeccy

    “The Germans and French through a banking three card trick, have been able to inflict austerity on the Greeks.”
    >
    What was the alternative?
    >
    The Greek government was spending more than it took in, while Greek government employees received, in many cases, better wages and pension benefits than government employees in more successful economies, particularly Germany.
    >
    The only options appear to be (a) spending cuts and higher taxes, or (b) Greece to exit the Euro, and the resuscitated drachma to to have an exchange value that in effect lowers all wages in Greece. That would provide Greece with an economic stimulus to boost employment and hence government revenues.
    >
    The only other possibility that has been raised is for the Germans and a few others to pay Greece subsidy in perpetuity, something the Germans object to and something that the Greeks feel the Germans should be obliged to do as war reparations: not a promising basis for an agreement.

  • Courtenay Barnett

    @ Cabspeecy,

    Here is my reply and answer:-

    I would concede a point in terms of a social aggregation, but the point at issue is the financial/economic aggregation.

    There are discernible differences in social and cultural practices between, say Germany vis-à-vis Greece. However, the Greeks too have their intellectuals, scientists and highly competent people. Others also exist – hence my use of the term “aggregation” – social/financial/economic.
    The debt to GDP ratio is one point of reference. Some 175% – so how does one address Greece’s national debt exceeding 175 % of GDP?
    Did Germany and France find a way to have bonds and debts impact Greece, or did investors view Greek debt so risky and bonds were deeply discounted in the resale market? This then escalates yields. With those high rates can , Greece then refinance existing bonds as those come due.

    So, bondholders can accept new notes having longer maturities paying far lower effective yields and the depressed notes presently currently held, so Greece defaults re. future bonds coming due. Bonds facing longer maturities have lower effective yields and these become worthless and will be less than face value placed on the resale market. We are faced with options of default or some sort of rollover for a desired soft restructuring. Bond rating agencies now enter the picture, and considering the interests they function for and serve, what can they do but – declare Greece in default. What next – riot or revolution?

  • amanfromMars

    The Greek government was spending more than it took in, while Greek government employees received, in many cases, better wages and pension benefits than government employees in more successful economies, particularly Germany. ……
    CanSpeccy 13 Feb, 2012 – 12:42 am

    This short video is edutaining on that particular, peculiar matter, CanSpeccy ……. http://youtu.be/u24nH03NccI

  • Hydraargyrum

    If anyone here is ever so inclined, they should check-out this US Treasury website:

    http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx

    You’ll find an interesting table here:

    http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

    Note it has the UK holding $242.5 billion of US Treasuries in November 2010 and $429.4 billion a year later. That’s a >$180 billion increase in US debt instruments held by the UK in one year! Who knew the UK was so awash with cash!!! 🙂

  • CanSpeccy

    Courtenay,
    >
    I can’t say that I really follow your argument. Greece’s problem seems quite simple. The public sector has been overpaid relative to the country’s ability to pay, while the government has failed to keep its agreement to limit government deficits to 3% of GDP.
    >
    Instead, when the Papandreou government was elected, a review of the books revealed a deficit equal to 12% of GDP. This set off a panic and the IMF was called in. The IMF found the deficit to be not 12% but 14% of GDP.
    >
    Naturally yields on Greek bonds rose sharply, since the likelihood of full repayment was now seen to be slight.
    >
    Concerning the benefits of public sector employment in Greece, the NY Times reported:
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    …the Greek government has identified at least 580 job categories deemed to be hazardous enough to merit retiring early — at age 50 for women and 55 for men. …
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    Greece’s patchwork system of early retirement has contributed to the out-of-control state spending that has led to Europe’s sovereign debt crisis.
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    … As a consequence of decades of bargains struck between strong unions and weak governments, Greece has promised early retirement to about 700,000 employees, or 14 percent of its work force, giving it an average retirement age of 61, one of the lowest in Europe.

    >
    Hair dressing is one of the job categories deemed hazardous enough to justify early retirement.
    >
    The Athens rail system spends four times as much on salaries as it receives in fares. Many riders, apparently, don’t bother to purchase a ticket, but the average salary of rail system workers, including cleaners and ticket collectors is reportedly around $96,000 per year.
    >
    Then there’s the peculiar Greek custom of paying civil servants 14 months’ wages each for about eight months of actual work (the receive and extra months pay at Christmas and mid-summer).
    >
    There does not seem any evidence of bank swindling here. Just corrupt government buying votes.

  • CanSpeccy

    AMFM,
    .
    I don’t know much about the US budget problems. However, in part at least, entitlements have been paid for through a hefty social security tax — something like 15% of earnings, I believe. So, in part, those so-called entitlements are in fact bought and paid for and constitute a property right. At least, that is what Reagan’s Deputy Treasury Secretary, Paul Craig Roberts, asserts.

  • ingo

    @Ruth. Would neo feudalism not give a bad name to feudal societies that have worked, for better or for less, some still work today? The monstrous neocon activities that are forcing/determining our future, who accuse others and become judge and jury at the same time, don’t strike me as feudalist. Feudalists have an intrinsic link to their people, it is strictly bound in traditions and rituals which involve all.
    .
    I refute the blatant vogue niceties that are flying around putting the blame for the Greek insovencies, bloated and overpaid public services and cleptocratic politicians on the Germans.
    .
    Has the time come, when we need to see people who use cheap nazi slurs, as well as MSM wannabe’s and postulaters using ww2 connotations, for anything they not quiet understand, the same as we treat those who level anti semitism and racism at us?

  • Mary

    Clark Thanks for that or perhaps not! What a deeply unpleasant piece from that gay site on the Gareth Williams story. I have sight of the original now. It is a long and serious piece of investigative journalism which gives emphasis to the fact that the police have not solved the grotesque murder of this young man and that there has been disinterest by the authorities. I thought the ‘fagburn’ piece belittled Gareth Williams and his memory.

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