Will QE work?
The Great British Experiment begins today, when the Bank of England's wades into the market to buy £2bn of British government bonds for ready money.
Note it down in big red letters: it's Quantitative Easing Day, QE Day, when the Bank of England attempts to stimulate economic activity by its new initiative to reduce the interest rates we actually pay and to increase the amount of money in circulation.
Actually, the Bank of England's announcement that it was proposing to spend up to £150bn - and £75bn initially - on public-sector and corporate debt has already had a substantial market impact.
The price of medium and long term gilts (British government bonds) has risen between 17% and 20% over the week since the size of the operation was disclosed.
The corollary of that is a fall in the yield on gilts to levels we've not seen since the 1950s.
If you'd bought gilts yesterday, the yield was around 2% for a five year loan to our government, 3% for ten years and 4% for 20 years.
For the Treasury, this looks like a triumph.
The Treasury has to pump out over £100bn a year of new government bonds over the next two or three years, to finance the ballooning gap between what the public-sector spends and what it receives in tax revenues.
And the device of authorising the Bank of England to buy up a huge proportion of these IOUs has apparently reduced the cost of all that borrowing to an astonishing degree.
Which seems a bit bananas, since surely all we're talking about here is one arm of the state buying debt issued by another arm of the state.
Surely if markets were rational and efficient, there would be no impact on gilt prices, or yields or interest rates at all.
Isn't there a kind of Ricardian equivalence going on here, where nothing of economic substance has actually changed?
It seems to me that this policy only works on the basis that markets are irrational and short-termist.
All investors apparently see is the volume of Bank of England money going into the market that's increasing demand for gilts and driving up their price.
In a way, investors are not wrong. These are real purchases.
But what I find slightly odd is that investors don't think through what the Bank of England and Treasury are trying to achieve by doing this - what a successful outcome might look like.
The point of the Bank of England's exercise is to increase money in circulation, to ward off the threat of deflation and to stimulate economic activity.
In slightly simplified terms, if the Bank of England today buys a load of gilts from pension funds, those pension funds will put the money on deposit with our banks (the reason I mention pension funds is that the Bank of England tells me it wants the bulk of its purchases to come from non-bank financial institutions, such as pension funds and insurers).
Two things should then follow. The liquidity of our banks should improve - and with any luck they would then lend some of that cash to businesses or households, who would then do a bit of useful spending or investing.
And the pension funds should use some or all of that cash to buy other assets, anything from more gilts, to shares or property - which should have a beneficial downward effect on yields and interest rates and also a helpful upward effect on asset prices.
Now it's very uncertain how much of that good stuff will actually happen.
In an extreme case, where banks and pension funds are terrified of taking risks, the money could simply sit in the banks, doing nothing.
And one important reason why it may be naïve to anticipate any significant impact on real lending to the real economy is that banks are still engaged in the vicious process of reducing their excessive exposure to other banks and financial institutions - and the new money injected by the Bank of England may be totally absorbed by that so-called "deleveraging".
But let's look on the bright side and assume that at some point the new money starts to do its job: lending increases, spending increases, prices rise, investors' appetite for risk returns.
Now guess what one inescapable consequence of that kind of economic recovery would be?
Well, interest rates would rise and the price of gilts would fall.
Here's the funny thing, therefore.
If quantitative easing is a success, the Bank of England will inevitably make a loss on the gilts it buys.
How big could that loss be?
Well the Bank of England may buy £100bn of government bonds in the coming weeks and months, or possibly even more. And if there were then a bit of a rise in inflation, coupled with investors becoming keener on purchasing riskier assets (such as equities, property and lower-grade corporate debt), well a 30% fall in the price of government bonds would not be out of the question.
And that would generate an eye-watering loss for the Bank of £30bn.
Not nice.
There's also a worse case scenario - which is that inflation could take off with a vengeance. And in those circumstances, the Bank would probably have to dump a load of bonds on the market to drain surplus money from the system as quickly as possible.
In those circumstances, goodness knows how substantial the losses could turn out to be.
That said, many would see that as a price worth paying, however chunky, if it helped to deliver an economic recovery.
But there is a paradox here - which I have already alluded to.
If investors have confidence in what the Bank of England is trying to achieve, the price of gilts would not have been rising over the past few days - because if Quantitative Easing were to work, demand for gilts and the price of gilts would both fall very substantially.
So in a curious way, markets seem to be voting that QE won't work (unless you believe that markets are wholly irrational, which may well be the correct explanation).
I'm 
© MMIX~RS~q~RS~~RS~z~RS~07~RS~)
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I don't understand, why would anyone buy gilts then?
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This policy amounts to colluding with issuers of debt to misprice risk.
In the marketplace, investors price risk and discount accordingly. There is always disagreement over value, but where there is a bid and an ask, there is a potential trade. We are undoubtedly in a mess because for a variety of reasons bidders were not given accurate information to support the ask. Now that we have belated price discovery, the information coming to light is unwelcome. By design, QE will outbid other bids for bonds, and in suppressing yields, will prevent true asset price discovery, concealing the price of risk. However, whatever the short-term political benefits of lowering borrowing costs in this way, it is powerless to change the underlying risk. The private capital that stays in the game, will have to tolerate masked price signals.
In a way, the "printing" aspect of QE is a red herring. This is where past foolishness in risk evaluation gives way to conspiracy.
It will work... until one day, it does not. Who wouldn't like to lock in the capital gain at these prices? It could be the high water mark, or close to it.
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To finance large stimulus spending, the British government sells gilts to the Bank of England.
If it were that easy, governments around the world would be doing it all the time, and there would be no such thing as poverty or unemployment.
Keep an eye on sterling, that's the weak point in the equation......
The government is hoping future tax receipts will be large enough to repay all the government borrowing. That's their gamble (using our money).
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Can anyone explain why we didnt use QE right at the begining of this mess?
Surely it would have been better to do this before cutting interest rates? or perhpes at the same time?
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Robert, perhaps the markets work on the basis of what market-makers expect the market to do, that is on the psychology of fellow market-makers. The markets would therefore be neither rational nor irrational, but simply imitative.
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So if the Government prints money and uses it to buy things, thats ok. But if I do it then its not?
This sounds a bit like Zimbabwe to me.
And of course Robert all the PFI debt is now being counted in to the overall Government debt.
Now that off balance sheet stuff is being brought home, what is the nation's debt?
Where's prudence Gordon. A bit of smoke and mirrors again.
And does he get a pension too?
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Is there an insolvency practitioner is the house.......?
All very interesting, but there can be no resolution - and foundation to build again - until the true toxicity of bank (and insurance company) assets has been established.
That we still do not know would strongly indicate that it is very substantially higher than has been admitted.
A strong, practical approach would be to draw a line under what has happened. We must take an insolvency practitioner's eye to the problem: what is the vale of assets! We still don't know where the line is and we have very definitely not yet hit bottom.
Until we do, then all the money that is being poured out is going straight into a black hole.
The government's actions are perverse.
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Of course markets are irrational. There are also rational. That's their beauty.
On any given day only a tiny percentage of shares are traded; so they are inherently stable. But share sellers and buyers are subject to emotions so they markets are inherently unstable.
In times of financial doom the markets move to instability and emotionally driven response - hope holds as much sway as fear. Yesterday saw some of the worst news about the depression but the markets rocketed because of a dodgy memo and the prognostications of an idiot.
So the smart money will not be going on gilts though the herd maybe - but hey look at the banks: all those people can't be wrong... oh hang on.
As for Queasing: it is doomed to failure whichever way the economy goes and the British government is destined to lose maybe 100s of billions of pounds.
For the sake of argument lets say it does work: what then happens when the Chinese economy crashes or the Euro disintegrates. Brown is right in one respect this is a global problem - in scale - and the efforts - brilliant or misguided- will be swamped at national level.
As for the impact on gilt prices this IS a zero sum game but as this is government activity on behalf on the nation the cost will not be borne solely within gilt markets. They will rise when they shouldn't so the pound will fall when it oughtn't.
The BofE is playing fast and loose in situation which it doesn't understand. Only recently it predicted a fall in GDP only a little worse than the last recession - I don't remember the Major government pursuing this "radical" policy. The fact that the authorities are pursuing this policy means that the situation is as bad as the '30s i.e. 90% fall in stocks and up 40% fall in GDP OR they have over-reacted and will bankrupt the country.
Either way it is tinned goods and ammo time. There are only so many times leaked memos from idiot bankers and vapid predictions from discredited central bankers can obscure the facts that the situation looks grim.
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Is this not the "Grand O' Duke of York" strategy? March the pension funds et al half way up the yield curve, then march them back down again when the bulk of the gilts needed to finance the PSBR need to be sold. Incidentally I assume this year's PSBR is going to be unfunded thus increasing the money supply.
Manipulate the yield on gilts is an old trick, finally although the loss of the gilts bought in how will be substantial, letting inflation rip for 3 or 4 years from the mid 2010s will reduce the true value of all this debt.
There more recycling going on here than just flared jeans!
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sorry, I posted on the wrong thread.
rule no. 5
...never trust the boys in the markets.....
I just visualise Merv. & Al and big Gordo-in-denial, pushing out this little Q.E. boat (with all of us on board) and waving a hopeful goodbye.
I fear we are going to sink when we clear the harbour walls........ gawd help us.
The fleet-of-foot and devious in the markets will look after themselves pronto. This Q.E. is not for our benefit.
We do not need to take these crazy risks, we are all prepared for tough times ahead, especially if we can have an election, clear out the dead wood, and give the bank high-flyers some serious pain.
That's not much to ask.
Regards
and bin veyoooge.
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Everyone presumes companies want to borrow money ? They dont, they want more customers. Those elusive customers have seen their pensions and now any chance of interest destroyed by Browns policy and they will not come back to the market anytime soon.
The car industry and others just better get used to lower volumes, propping up busness up with more of the "Customers" cash (tax payer) will keep those customers out of the market for even longer.
AND we dont want Brown to say sorry, just an election where the people of Great Britain (Once Great) can say "Guilty as Charged" OUT ! along with all his puppet MP's who have snouted the trough instead of doing their duty.
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Hi Robert,
The eye-watering £30bn loss which you are writing about is not in fact what the public understands a loss to be.
Since the money was created out of thin air, there is no loss per say. In actual fact the consequence of this loss will be for the supply of M1 money (money held within the reserve system) to be permanently expanded by the loss incurred.
Through the multiplier effect and once the banks regain the appetite to lend again, you can expect the real consequence of that loss to be the expansion of the money supply by a factor which is inversely proportional to the reserve requirements of banks (something tells me that it will be higher in the future).
To recap, it is not a loss to the taxpayer, the consequence will be a permanent increase in the money supply.
Duncan
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Readers might be interested in an article in the NY Times which you can find in the most blogged section.
Its called 'A Rising Dollar Lifts the U.S. but Adds to the Crisis Abroad'
Basically its referring to the fact that, as I have said before, 'cash' is piling into the safe haven of US bills and notes.
So I'd be interested to know what controls there are if any to stop the new 'cash' released by purchases of UK Government debt from whizzing elsewhere, based on sentiment or confidence, rather than returns.
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Will QE work?
I wonder what odds a Cheltenham bookmaker would give on today's runner of last resort ?
Because that is what QE is... a huge bet on an unfit horse.
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4 - The reason it wasn't done earlier is frighteningly simple - and I mean frighteningly. It's the only weapon left and is literally a 50/50 gamble.
If it works we'll experience a decade or so of public spending restraint and marginal tax increases and a bit of general all round belt-tightening (wage restraint in the public sector etc).
If it fails we'll see rampant inflation and the destruction of sterling and the gilt market.
There is no middleway left, just this way and to make things worse if a major nation such as China or the USA decides to become protectionist and inward looking, we lose there and then.
Ohh happy days.
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Will QE work? - Of course it does !! Just look at Zimbabwe !! There are more trillionaires in Zimbabwe than anywhere else in the world !!
If Crash Gordon keeps it up, we'll have many more trillionaires in Britain, too !!
What you can do with your trillions is quite another question altogether ??
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I find 'printing money' rather frightening.
It would help if I thought GB & AD knew what they were doing but they don't and the whole thing is so beyond anyone's experience that the consequences are completely unknown. We all know the world economy is in a dreadful mess and the UK economy as bad if not worse than many others. 'QE' is desperation.
However I suspect that the consequence will be:-
1) A fall in the pound £
2) An eventual rise in inflation partly caused by the fall in the pound.
3) Minimal effect on the banks ability to lend because the borrowers are still seen as desperate and the risks too high.
Worst of all I suspect that these desperate measures, because of their uncertain outcome, will lead to even further loss of confidence in the whole financial system. We have been close to Total Economic Meltdown before back in October. I hope we dont finally get to the point where the ATM's all say 'Sorry - this service is no longer available' and all banks close. It is the only time in my lifetime when such a possibilty had a serious chance of happening.
I wonder if this economic collapse is the mechanism by which a much needed halt is called on the destruction of the planet by the human race. A revenge of Gaia. We also hear today about predictions of sea levels rising by a meter this century as a result of global warming. I am glad I dont live in the Maldives or Bangladesh.
I just hope to survive it
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I simply dont know enough about economics to have a clue whether QE will work or not, but then I suspect neither do the experts. My problem is a very simple one: Is it reasonable to expect people who are already heavily indebted to take on more debt? On top of this you close down the spending of a sizable portion of the population (the retired)by reducing interest rates, which incidentally also hurts those foreign investors with money offshore, and if they have any sense will move to the Euro or Australian dollar or some such other beckoning currency.
I reckon the pound will weaken, maybe not to recover easily. With a weakening pound in plausibility and in numbers can inflation be far behind. Will the UK apply to join the Euro within two years?
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#8 "Either way it is tinned goods and ammo time. "
Tinned goods are no good without a tin opener and ammo is no good without a weapon to fire it from. Just thought you'd like to know.
/end pedantic rant
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I love you for making QE something I can understand.
Thank you
a heterosexual male
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I guess the jury is still out on this one. Much of what I have read seems to make the case against QE rather than for it.
It will most likely achieve the short term goals of the BoE and the Govt but at what cost down the road.
One thing`s for sure and that is QE won't help the already struggling saver!
Quantitative Easing - It Could Get Ugly
http://creditcrunchedoutinuk.blogspot.com/
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Nothing is bigger than the market in a world economy. Draw a line in the sand and watch the sea of the market wash it away! The intended benefit of this excercise will be filtered out by internal barriers in lending institutions making any assessment of effectiveness difficult. In the meantime some Government debt is about to be bought back expensively.
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Robert
what you're saying is all very good and quite right but one thing I wish that at some point you sould start to do is get across that regardless of the wrongs or rights of this or any other strategy, it is vital that something works.
Yes markets are irrational, look at the additional risk premium for Investment Grade Corporate Bonds over Gilts, look at markets allowing people to bet on the loser of the horse race (which is a simple version of short selling) rather than the winner and above all look at a situation where Banks balied out by the Government have spent most of the last six months making profits at a far higher rate than on the most secure loans that rational people would call extortion were they not in need of funding.
All in all, whatever governments are doing, right or wrong, they are doing something which is at least positive. if you have the magic pill that they are floundering around looking for, for everyone's sake give it to them. If not why not try and look at it from the positive side. As with any disease (as this recession could be seen as the same as a self infllicted heart or cancer problem for the economy) positive mind set and mental attitude go a long way to getting over the pain and discomfort and potentially hasten the recovery
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What I cant understand is the governments failure to notice that every business, bar a few, is reporting losses on the year of between 10-30%.
It doesnt matter if you are a large business or small, the chancellor still wants his full take of business rates.
It is this tax on runing a business that is killing the small independent and turnig our high streets into ghost towns.
When the reccession is over and shops once again being rnted, you can bet your bootom dollar that they will all look the same.
Yet nothing has been written about this. No blogs, no Peston report, nothing.
And speaking from a personal point as being a small business on the high street, its disheartening that no-one seems to give a damn about us.
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To my mind markets are totally rational if you are a sheep. Once one starts running they all follow even if it is over the edge of a cliff.
Bank of England is like the farmer standing in the middle of the field with an unreliable sheep dog. It may save tehm from going over the cliff but it may also drive all of them over. Possibly even following itself.
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NO!...it won't work.
If Gordon Brown thinks it will work...then you can bet your last dime on it not working.
I like the way no exit strategy has been defined. What style!
As I have stated before, this is the biggest Ponzi scheme in history. Gordon Brown should be sharing the dock with Bernard Madoff.
Just watch the GBP slide now...whilst inlation soars big style.
Now might be a good time to secure a longish fixed rate motgage deal...while they're still available!
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If the bank is creating money and our interest rates are effectively zero the result must be that the money will simply go to another country, probably in the euro zone, and encourage growth there. We will fund other peoples' recovery because the bank's governers can not do joined up thinking.
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My main question after reading this is why you (Robert Peston) don't appear to believe the markets are irrational? Shares seen to go up and down for the most fanciful (and often farcial) of reasons. For example Mircosofts share price falling when announing a 30Billion Doller proffit compared to Googles going through the roof for a loss of a few hundred million (albeit a profift of about 100M before write-downs), now what investors in their right minds think that 100M is better than 30B? This sort of thing happens all the time as far as I can tell, Oil prices being another prime example, a large cloud forming off the gulf of mexico these days is enough to send the price through the roof!
The markets are blatenly irrational as they are based (as all good economic reports will attes) on peoples emotions who are doing the trading, and trading based on emotions is as irrational as it comes!
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In short this is all about saving GB's skin - if you can't afford to borrow any more because you've mortgaged the nation up to the hilt and sold the family silver (sorry gold) then just print some more money. It looks like the pension funds will lose out again but then again he's clobbered those since day1 - a cynical move since the full affect of his actions won't be felt until he's long gone. Even then he'll claim "it wasn't me gov".
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I'm still not entirely sure what the incentive is for anyone (pension funds, insurers or people) to put any money they might get from the sale of gilts to the BofE into any commercial banks.
I must have missed something about this whole mess, because I just can't make anything add up.
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Perhaps up to a trillion pounds worth of "damage" has been "parked".
How to deal with it?
QE? or taxation?
QE may be the best option if done internationally, no one can do it alone without further damage.
I believe, however, that exchange rates need to be fixed at "respectful" levels for all countries, to allow their QE programmes to repay international debt.
Remove the currency speculation, or matters will get worse.
Now I must get away from this laptop.
After long periods of close use I get skin irritation and hair folicle irritation.
Does anyone know if laptops emit harmful radiation?
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#12
"To recap, it is not a loss to the taxpayer, the consequence will be a permanent increase in the money supply.
Duncan"
ie. a loss to anyone with a sterling position - savers and pensioners..
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I THINK ROBERT, THAT WE SHOULD ALL KEEP SCHTUM AND KEEP OUR FINGERS CROSSED AND NOT SPREAD ANY MORE TALES OF WOE AND DESPAIR.
AND IT LOOKS LIKE QE IS HAVING THE DESIRED EFFECT.
SO, A BIT OF RESPONSIBLE CIRCUMSPECTION FROM YOU WOULD BE APPRECIATED BY THE WHOLE COUNTRY NOW ROBERT, WE CERTAINLY DO NOT NEED ANY MORE PESTON-FUELLED PANIC BOUTS.
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It has never worked, ever. Why should it now. When a Prime Minister states on R4 that our debt is not a problem then goes down this road, what possible reason is there for it to succeed?
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There are undoubtedly risks to this course of action, as there are to any other course of action. Intellectual honesty requires that we put ourselves in the position of the decision-maker and decide what we would do in this circumstance.
The fact remains that the spending, lending and investments needed for economic growth have all but stopped. What would we do about it?
To say that increasing the money supply carries risks of much higher interest rates or inflation, perhaps massive inflation, if the economy recovers is to state the obvious. So suppose we do nothing. What would the consequences of that be other than almost certain economic stagnation. The economy will find an equilibrium, but we might not like where that equilibrium settles out.
No matter what the course of action anyone who is not charged with the responsibility for dealing with the problem can come along and point out the flaws in the action. It is much more difficult to suggest an alternative that does not have any trade-offs involved. In fact it is impossible.
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Perhaps, as a complete non-economist, I can ask a naive question: If the Government has decided that it's ok to spend £150bn, why did it not inject it straight into the economy at the bottom by giving every taxpayer £3000? I'd far rather stimulate the economy by buying a new kitchen (or something) than watch money markets implode.
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Does it really matter any more, if it does work then money will be devalued, savers and low wage earners will suffer.
On the plus side people in debt will be better off, the housing market will become overvalued, yet again and we will just have the same situation in 5 yrs time.
If QE doesnt work, run on the pound, further crash on the stock market, pensions devalued, money worthless.
As a low paid saver trying to start my own business im ruined either way.
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Dear Robert
Doubtful weither this will have any effect what so ever, 0ne thing it definately will do
is increase inflation in the long trem
The Government has spent hundreds of Billions of pounds of tax payers money and printed new money to get the country spending again, and they could have done it for just £60, millions, by giving the head of every British family £1 million pounds to spend.,
NOW THERE'S A THOUGHT !!
iT DOES NOT ANSWER THE QUESTION 'S THOUGH "WHY ARE THESE BANKERS STILL IN A JOB AND WHY HAVE' NT THE sERIOUS fRAUD OFFICE MADE ANY ARRESTS --- AND WHY ARE THE BANKS STILL HOARDING TAX PAYERS MONEY?""
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The mention of big red letters brought red noses to mind. Is someone doing something funny for money?
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This comment was removed because the moderators found it broke the House Rules.
This comment was removed because the moderators found it broke the House Rules.
Comments made in post number 35 intellectual honesty should have recognized the role of free discussion in the development of public policy. The press has the obligation to ask the difficult questions, but we should all recognize that any answers do not come without difficulties.
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I am not happy with the manner in which today's article on the main site was written.
The general public is already misinformed enough with regards to the banking system, without the implication that creating money is somehow a new occurrence.
The fractional reserve system means some 95% of money in the system was 'created' from the issue of loans.
Then further on, to have 'Deflation' as a bold subtitle, surely this should have read as 'Devaluation', because that can be the only outcome from pumping in more money from nowhere, the devaluation of our current money in circulation.
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The only inevitable outcome from all this is that Sterling will suffer and the UK will have inflation.
All the rest is just traders making a quick buck for now.
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in my opinion it equates to finding a big pile of poo buying it and then sweeping it under the carpet and hope nobody realises what the smell is and where it has come from .
How can bying up bad debt be a good thing ?, everyone with half a brain knows thta in the long run it will only fester away and turn everything else in the bowl rotten .
They should have put everthing out to the wolves and let the market fight over it , the market will out in the end any way
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I think we should be patient.
Once everybody has finished clearing their cupboards of previously undisclosed rubbish (and skeletons), we will start to see the effect of all the measures that have been taken to get the show back on the road - including QE. I think the results will be positive.
It's about now that we should start to focus on the future...ther are going to be some amazing opportunities...
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Did I hear Mervyn say last week the interest rates were used to control money supply, but Quantitative Easing was a more powerful tool for that some purpose.
Two questions;
1. Why didn't we use Q.E at the outset, if the problem economy was that serious (O.K. I'll agree it would have been political dynamite, but so's bailing out the Banks)
2. If we're now using Q.E, can the interest rates go back up again please, to help savers...
What nobody has said yet is that interest rates also damage the economy when they are too low. 5.5% was actually quite a good level for them to be. Fair to everybody.
I'd like the G20 to discuss that point and agree to push interst rates back upwards across the whole world, in a week or so's time. It'll help many people around the world who have to live off capital and the interest accrued on that capital. This isn't just a problem iin the UK. If that section of the economy is spending again, recovery will happen sooner...
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It seems obvious to me that the government wouldn't dream of giving debt-laden individuals the same advice they're taking themselves - borrow lots more and spend, spend, spend. And what is an economy if not a collection of its individuals and the results of their actions? Maybe proper economists, unlike me, can explain the difference.
Grumpy Bob in this blog is right on the button - companies want customers, not more loans, which they only need because they haven't got enough customers. Of course, jumpy banks taking existing company funding away doesn't help. But lending them more money has no effect at all on their ability to get customers - and the interest rate, be it 1% or 5% doesn't make that much difference - further loans just allow them to stick around until customers return, perhaps with the benefit of more time to cut costs and improve efficiency, surely something which they should already have done.
And some companies, whose products are desperately out of tune with today's needs (GM in the USA for example) may have a very long wait indeed for customers to return. Hyundai's US strategy of giving purchasers a guarantee that they will buy the car back if they become unemployed in the coming year and using the money saved through giving lower discounts to insure the deals (see Economist article 5 March) makes much more sense and their market share is doing well accordingly. Even GM is considering it!
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i wish some of this quantitive easing would actually go towards buying up consumer debt instead of government and corparate debt
as we the consumer ultimately decide the fate of the economy by deciding what we do with the money (not that there is much)that is buring a hole in our pockets.
maybe im talking a load of bull here
but this idea of effectively electronicly printing money is as daft as any other idea that gordon brown and the boe has dreampt up.
face it people
the uk economy is is sliding down a river that is ultimately gonna see a bottom...but not even anywhere near it yet.
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A couple of recent articles in FT have indicated that pension funds are working to set up direct lending to small and medium-sized enterprises. And how about our solid, "does what it says on the tin", existing building societies? Could they too increase lending? Might go some way towards easing the credit prob?
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Lets face it we have all had a really fat time!! With our flat screen tvs, obese eating, £5 frappochino and our £50-100 night out benders.
You didnt all think it was going to last for ever did you?
Its not a case for tighting our belts its a case of slimming down to get in our old one!!
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I'm just a simple woman. Can somebody explain two things I didn't understand:
1) What are we doing differently from Zimbabwe so that this strategy will work for us since it clearly didn't work for them?
2) How can the Bank of England make a loss on money it has created out of thin air?
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The fact that the money is being lent (rather than given away or used to pay wages etc) is only going to low back up in all of our faces. Sooner or later the money has to be paid back, with interest, which exacerbates the problem.
In the opinion the problem is that too many people have too much debt and have hit their credit limits. The thing is, noone will take on any more debt because they'll only have to pay that back later too.
Surely then, if QE is to be used, it should be just used as payrises for public sector workers, and also as interest rate subsidies for savers (as one previous poster suggested). This would mean that more REAL money is available for others to pay off their debts. Eventually it will trickle down to poor old us in the private sector.
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I really find your dee jay stle of commentary irritating. These are serious times with a country facing really serious issues. If we think of the United Kingdom as a company trying to be successfull we would never behave in this way. Our news these days is overwhelmingly depressing. It is bad news not news any more. If a company constantly talked itself down and was contantly talking about the negative it is unlikely that company would be successfull. At the moment the pound is cheap and the cost of british made machinery has gone down substantially. The UK needs to be out there selling our qualities, British business nedds encouragement not the cynical views you seem to display most often. I sell my products around the world. I have travelled to China 6 times in the last four months to increase sales and I will continue to invest in my company and my country. BC news is certainly not helping in any way in increasing the confidence other counties have in us. The trouble with most commentators is they have never had to sell anything in their lives. If you had you would maybe find something positive to write. I have had enough of 24 hour bad news.
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Robert, you have pinpointed the devastating flaw in the government's whole approach to this - "One arm of the State buying debt issued by another arm of the State."
The QE policy is actually, in effect, cancelling out the "stimulus" policy. This QE policy amounts to an admission by the government that THEIR OWN BORROWING IS PART OF THE PROBLEM with lack of credit availability.
Overall, the government's whole "smoke and mirrors" approach to all this amounts to one very simple policy: create ("print") additional cash and spend it. We know from experience that "stimulus" of this kind has no effect on national output. The only long-run effect will be on the value of money. It will tend to increase prices in the UK, and reduce the value of Sterling. Give it a year and we will be facing a Sterling crisis and roaring inflation. It's the Labour way I guess.
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When are people on here going to realise that GB doesn't care about GB.
He's a globalist, and is actively working towards creating the New World Order with all the other globalists.
Why else do you think he's always banging on about the crisis being a global problem; it's because he's wanting to engineer a global solution, which in globalist terms means global government, which in turn means an end to national and individual freedoms (because these become harder with governments of scale).
What we will witness over the next few years is the sovietisation of all national governments in order to solve this global problem.
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Debasing the currency causes inflation. Inflation is a hidden tax. I learned that from reading this blog. How come Gordon and Alistair don't seem to know?
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18,
Very depressing but let me tell you this, the euro IS in trouble 'mark my words'
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QE = Quantitative Easing = Borrowing from Peter to buy a cosh to mug Paul in 10 years time. I Ease Quantitavely every morning = same thing.
@parkylondon on Twitter.
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#32.
I should have made it clearer:
Ultimately the loss will be to those who receive a Sterling fixed-income, including pensionners and those without assets.
The reason for the above is that the loss which the treasury will incur will cause inflation and generally wages & pensions lag behind the inflation rate meaning that those 'far away' from the 'hot' money or do not receive income which can quickly adjust will lose out.
Duncan
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Far too clever for me.
If it's all about getting the banks to lend money, then - seeing as we own most of them now anyway - why doesn't the government make them disgorge some of it?
As well as discouraging saving don't low interest rates also discourage lending? - if the banks are not going to make money from it then why should they lend?
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Note sure if anybody has seen this already... The effects of QE explained very nicely.
http://www.youtube.com/watch?v=t_LWQQrpSc4
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Could it be that the prices have gone up ie yields fallen precisely because the BoE has announced it will be buying?
If I know you MUST buy my product and I am the only seller I will certainly put up the price to as high a level as I think I can get away with.
If they had just got on with it quietly we would have saved billions.
IDIOTS
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36,
I have had those same thoughts, it sounds crazy to some folk (because they do not understand the nature of money) but in actual fact it makes perfect sense.
Pay every taxpayer the sum for 15k, think that’s mad?
Have you seen the new bankruptcy law that will come into effect in April? I’m off to get my free 15k right now! Only it will invlolve more paperwork that doing what 36 says.
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Robert,
Interesting. See my post to Stephanie below. I suspected that Insurers and funds would be the buyers. Because they have long positions to cover, arent they likely to buy fresh gilt issuance instead of buying riskier assets or putting the money into bank accounts at siltch interest? IF so, what the government are doing is creating a liquidity platform for new government issuance, arent they?
"Stephanie,
I saw excerpts of your interview with Mervyn King. He emphasised that central bank money used through the Asset Purchase facility will find its way into the "wider economy", not the banks per se and has as its objective the maintenance of CPI inflation at 2% - the inflation brief. My previous posts seek to test this assertion.
Alistair Darling set the remit for the APF at 50billion for purchase of private assets to include corporate paper and bank debt guaranteed by HMG etc.
The investment strategy under the APF is key to testing the asserted objective of inflation management as opposed to HMG debt management / Bank Bail Out Number 4 .
The lion's share of gilt holdings are owned : as to 44% Insurance and Pension Funds ; as to 36% Overseas investors ; the remainder Other Financials, building societies, local authorities and public corporations - not Joe Bloggs down the road. The reverse auctions organised will have a restriction on gilt stock size of not below 4billion GBP? HMG need to raise 146billion GBP by issuing gilts to finance public sector borrowing for 2009. Alistair Darling has coincidentally authorised purchases of gilts in the secondary market to a similar level at up to 100billion central bank sterling - purchase strategy targeted at medium/long gilts.Institutional demand for gilts can be 'lumpy'.If these positions are liquidated in the secondary market by BoE, Insurance and Pension Funds would reinvest in new HMG issuance to substitute and cover their long positions, wont they? Banks are being told to increase their Tier One capital by purchasing gilts. If Overseas investor gilt positions are liquidated, how does this cash in their hands get to the 'wider economy' in the UK ? Wont they reinvest in new HMG issuance or take their profits home? If they are holding gilts, they arent going to invest in riskier classes of assets, are they?
What reason is there for us not to conclude that central bank money is being created, in the larger measure, to provide a liquidity platform for purchase of new HMG debt to raise the 146billion needed and lower cost of government borrowing - I dont see how this boosts money in the 'wider economy'. How much of the 50billion for private sector asset purchase will be used to buy bank paper and other illiquid assets on their balance sheets ( asset backed securities etc.) How much will be invested in riskier corporates?
I cant find any answers, can you?"
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A nice story and headline, but factually incorrect.
The Great British Experiment started last Friday when the BOE led it first Asset Purchase Facility auction financed by created central bank reserves and not T-bills.
It held them again on Monday and Tueaday this week, as well as today.
Today's "other" action is the first reverse gilt auction under the process.
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It seems to me that this is the equivalent of Gordon Brown selling off the gold - but worse.
The announcement of the gold sell off put downward pressure on the gold price, ensuring a massive loss.
The announcement of QE has put upward pressure on the bond prices that the B of E will have to buy. You suggest 20%.
At some point the B of E will announce that they are reversing the process, so putting downward pressure on the price at which they ultimately sell.
Whereas with the gold UK Plc took a single hit, with QE we will take two hits.
However there will be more gilts being issued by the Government, through the B of E throughout the year, ensuring that once the £75 Bn - £150 Bn has been spent, and demand returns to normal, the new issuances will increase supply, so gilt prices will again fall back to an equilibrium clearing price.
When the B of E later sells the assets purchased through QE, at a time of massive gilt issuance on behalf of the Government, supply will be massive.
A 30% loss on the round trip is probably underestimating the cost of the action. It appears we suffer 20% before we even start!
If people thought Browns gold sell off was foolish, and lost money, they haven't seen nothing yet!
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#31 stevewo
Wise words indeed.
As far as 'irritation' and 'radiation' are concerned - not sure.
I do tend to scratch my head but I think this is disbelief at the twists and turns of the incumbants at No's 10 and 11.
Or maybe your keys need a clean?
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It's always good to see to government raiding my ever-diminishing pension. Pension funds have become the staple diet of the squanderer. But this business about "quantitative easing" - counterfeiting surely?
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Rather than just print money - surely it would have been far better if the Government brought forward as many major infrastructure works in times of uncertainty in the wider economy. Many of these large projects would provide real business and contracts to private businesses who in turn provide business to ancillary enterprises. Confidence will only come about when people start to see their neighbours doing well and printing money smacks of desperation.
Unfortunately, by 2012 we will have witnessed the largest transfer of power the world has ever seen as oil rich Gulf companies hoover up our corporate crown jewels whilst Mandy and Co vehemently stick with the free market principles that they didn't understand in the first place or use properly for the advantage of the UK.
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Here is a funny thing – we the tax payer loose if it works and loose if it doesn’t. If it works the most likely thing to happen is the big investors who were on the losing side will cash in their investments making them appear more stable IE the pension funds. However as interest rates are so low they can’t afford to let this money sit in an account – the answer is that the money will be put to work somewhere else IE not in the banks. So will liquidity improve, not massively for the banks. The banks themselves have raked up massive loses so will need to cover these so their investment arms will also be cashing in their lot as well. However can they afford to lend this money out on or around the current BoE base rate? No once again I am afraid it can not, as with a lot of things this government does there is a hidden agenda. The so called money that was apparently being thrown at the banks had some conditions and these conditions where somewhat onerous. EG the interest level preferential shares Etc. Etc Etc So the banks will need to make bigger returns than the 1% above base rate that all are looking at. No their money will be going else where. So the big QE experiment will not in the short term make a big difference to the UK economy. What is needed is a radical rethink in where and what we tax and then how we spend the revenue. At present we are loosing companies abroad due to high taxation. This needs to be addressed. We tax our populous from cradle to grave and spend the revenue not that wisely with regards to what we spend it on and the value we get for our money. Until the UK realises that we need to encourage wealth makers to stay here in the UK and start spending the revenue more wisely we are going to be in trouble. What the government were elected to do was to manage our country in terms of economy, regulation and provide services. So far they have over spent in a time of plenty not only leaving us with an empty purse but also a rather large overdraft. They have not just let the financial industry run muck they have actively encouraged them. In addition they perpetuated the myth of easy credit and money for nothing through a housing boom that was built on foundations of sand and walls of smoke and mirrors. In addition they threw money at our services, such as the NHS and education with little thought or planning. Which has resulted in a health service which is again in crisis and is having to be turned around by third parties! An IT system which has costs us billions and is still not fit for purpose! Hospitals which have been built with private money through the PPP/ PFI schemes, or as my old mum used to say on the never, never, as we will pay over the odds for the cost of building and running them and end up not actually owning them. The same appliers to our new schools programme. Indecently our money is now having to be put into these schemes to bail them out as the private money is not forthcoming. So not only are we paying through the nose to these companies we are having to finance them as well.
If this is not insanity then I do not know what is.
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When it fails and typical Labour will flog the dead horse and do it again, will it be called "QE2"?
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The Government announces a major new player is the market for Gilts (itself) who is going to spend £100bn. Hey presto the price of gilts goes up-what's hard to understand about that? Incredibly, given our catastrophic financial position, the Government has managed to create a market where there is a potential shortage of medium term gilts.
The problem arises at the other end. When the Bank becomes a net seller they will find yields ever increasing, a genuine double whammy for the poor UK tax payer!
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The important thing about printing money is that the right amount should be printed. Too much and the currency will depreciate and asset price bubbles will form if too much is left in the hands of the wealthy, too little and the economy will be slowed. Before the credit crunch it was left to the banks to do most of the printing, by providing plenty of credit, and in the UK and US they did rather too much.
When the banks stopped, governments should immediately have ordered central banks to start printing, by lowering bank rate and QE, to compensate for the reduction in the money supply as the banks pulled in their horns. Unfortunately they were so obsessed with preventing the inflation caused by the banks' earlier excesses coming through, that in the UK they actually did the reverse and raised the bank rate.
Nearly a year later, the UK is finally doing the right thing. The BOE must be ready to reverse the policy, if and when the banks start lending freely again. It should not purchase corporate paper, unless it is sure that the money will be used to resume production.
The government should directly spend the new money on infrastructure and increasing benefits and reducing taxes for the less well off. Taxation on the wealthy, however, should be increased to reduce the risk of the formation of asset price bubbles. This will become easier once tax havens have been eliminated.
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QE has been sold on a false prospectus. We have been told that it is "not the same as printing money". Untrue - it is exactly the same.
We have also been told that it does not risk creating inflation, because we are in a deflationary environment. Again, untrue - once certain one-off effects (like the fall in oil prices) have gone through the system later this year, we will be into serious inflation caused mainly by the slump in the value of the pound.
The real tests now will come on the forex markets, and in the willingness, or otherwise, of foreigners to lend to HMG.
One cannot solve economic problems by diluting the currency. You cannot create wealth with the printing presses. If this gamble goes wrong, we will be heading for catastrophe. For pointers on quite how wrong it is going to go, keep a keen eye on the exchange rate.
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Never mind QE Robert - what about the car industry bailouts!
Am I the only person who can see why this is so, so wrong....
'Land Rover, which is owned by India's Tata Motors, said the car would be the smallest, lightest and most efficient it has produced. '
.....so we've handed 27m to a foreign owned company in order to save a few British jobs in an industry that should have died years ago.
Already the theft of public money has started. Read carefully and you will see this is Land Rover we're talking about - it's not much of a benchmark to produce something smaller and more efrficient than previous vehicles (which were all large and in-efficient).
So 27m for the promise to not build big old tanks which should have been made illegal (excluding farmers) 20 years ago!
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±11
So true - I have now shelved my plan to buy a new car
just too worried about what will happen to my savings/pension when the high inflation kicks in
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#36
Why doesn't the gov just give money to taxpayers instead of buying gilts and bonds to stimulate the economy.
It is because they are getting something in return which they would not if they simply gave the money.
If the money was given, that would result in the money supply being expanded and the currency would be debased.
What they are doing DOES NOT affect the money suppley, UNLESS we see serious losses on the value of the securities which they receive in exchange, smt which Robert pointed out in his article.
Duncan
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I know we're all supposed to keep up with all this economy stuff but is the average reader expected to know what a "Ricardian equivalence" is?
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#57
They are NOT debasing the currency, that would imply printing monet and exchanging it for something that is not resalable (food+ services).
The only debasing that will occur will be if the treasury makes a loss on those securities, as RP explained in his article.
Duncan
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The only "quality" investments held by banks these days are sovereign debt (including gilts) and cash on hand (there seems to be a shortage of that!)
Shares, company bonds, toxic assets, mortgages, etc are all much higher risk than they would have been classed not too long ago.
If the Bank of England buys gilts upto say, 140 in price as the federal reserve did in the states with their T bonds - then each and every bank that is a holder of those gilts or bonds will find their "marked to market" value increased by the same percentage that they have moved up.
One danger here is that at a stroke, the Bank of England has rebranded banks on the edge a few weeks ago as now being solvent, since their asset sheet has improved maybe even beyond the "insolvent line" and into the black!
There is a big gamble here of course. Who is going to keep the gilt price at these new sky high levels? More QE money? Surely that would be inflationary. More purchases by asia? What if they have enough of our debt for the time being?
There is a setup coming that might indeed stave off deflation (which personally I don't see as a real threat) but within two years or so could bring in runaway inflation!
A warning to those with savings - What would you do if you KNEW 2 years ahead that your money will be worth a lot less in two years time? - Where is the safe port in this very unusual storm?
Shares, Bonds, Savings accounts? - All seem to be no good.
Precious metals gemstones old masters?
These items have seen a bubble like so many other investments.
Another way one could put it - "If everything on earth were worth the same, what would you choose to possess?"
My own choice would be people and real talent, but that of course is another story....
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Great article Robert. It seems that the key performance indicator seems to be "Confidence" and that is dividing line between rationality and irrationality.
BoE seems to be acting rationally, but bearing in mind that confidence is at a low ebb perhaps this needs to be implemented alongside an injection of "Confidence" - a completely subjective (or irrational) benchmark to get the markets moving in a rational manner.
When governments and corporations usually do this for their own means it is referred to as spin, so we know that there are some real experts out there.
So based on the assumption that Spin works to inspire confidence, perhaps the old lady needs to embrace our irrational side to inspire us and demonstrate clearly how this is going to work.
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Could someone just give me one example, from all the centuries of economic history, of printing money having a beneficial for the economy?
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#53
Money is not being lent, the treasury is buying assets.
The sellers have no obligations to buy back those assets.
All they are doing is exchanging an illiquid form of asset for a highly liquid one.
The aim of such policy is not clear as it does not affect the root of the problem.
The banks have access to liquidity, further increasing their liquidity will not intice them to lend since they know that any money they lend will likely not generate a profit.
Duncan
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Might it be time for radical action? QE may be extreem but is it not very predictable?
The complexity of the situation in which we find ourselves is beyond the preconception of any analyst. Hindsight is now the only instrument by by which we will discover which 'guru' got it right and I suspect who they are will be determined by chance and not art.
Irrational? Rational? Perhaps just human, organic and moving some focus to this psychological/philosophical line may be a more fruitful?
Implementation of QE in the UK is predictable within the complex global game. Will this not put us in danger of becoming merely a pawn?
Skilled coaches/negotiators/parents? intuitively use shock tactics to 'shake things up', I believe we call this creating cognitive dissonance? Get's people curious and off balance.
The analysts and chessmasters of economics have had their shot, and frankly it's beyond them, it's beyond the modelling of anyone. Is it not time to open a more philosophical debate and strategise accordingly?
We're in the big risk bold moves game anyway!
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#49
Consumer debt = mortgages/credit cards.
That would generate huges losses for the treasury.
Duncan
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This comment was removed because the moderators found it broke the House Rules.
I don't understand why pension funds are being targeted. The vast majority of pension funds (as opposed to individual pension savers) work on fixed asset allocations. As a result, if they sell any bonds to the BoE, they will only have to reinvest the money back into bonds when they next rebalance to their asset allocation benchmark. They are not going to permanently transfer the money to bank and leave it there.
Actively managed funds could take short term positions, attempting to profit from the current high bond prices and buy them back when prices subsequently fall, but that doesn't increase money supply.
The ultimate outcome is surely to reduce the bond supply, permanently pushing up prices as demand from insurers and pension funds will not change. Companies issuing bonds to raise capital might find this attractive, but it will not help smaller businesses.
It will also increase pension fund liabilities significantly, putting more companies and defined benefit pension arrangements at risk.
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Why bother with queesing , just put up interest rates and get us all saving again or is that to simple.
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This comment was removed because the moderators found it broke the House Rules.
QE is just another stealth tax, just like every other scheme Brown has had. Selling spectrum licenses, taxing pensions, selling gold, PFI, parking charges at hospitals, speed cameras.
QE taxes everybody who holds sterling by devaluing their investment while giving new money to government.
Arguably QE is actually fairer than income tax as a way to fund bank bailouts since the people who gained most by having banks protected (i.e. those with most savings) pay most. QE also has the attraction as a tax that there is no need for an enforcement beaurocracy.
QE will only work if all the major countries do it. Otherwise the QE tax is easy to avoid by moving money into other currencies. Govts may also need to manipulate the price of gold to discourage people from moving out of currency altogether.
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What is going on here is rather like Cpl Jones shouting "Don't Panic!". After all HMG needs to be 'seen to be doing something' to reassure the masses.
But if the BOE is going to create - from thin air - all this money, why then go and spend it in the financial markets that have been all over the place for many months and could even flounder completely?
I mean, there's been lots of commentators suggesting that we could well face civil unrest in the not too distant future, or even be heading for a nationalism/protectionism-fuelled war.
Why not spend this dosh on upping (and protecting) food supplies? E.g. - turn unused green spaces into productive food growing sites, ramp up the numbers of sheep, cows, turkeys, chickens and the spaces alloted to them, protect and improve water supplies to agricultural land.
Or, spend it on micro-energy projects to protect and increase energy supplies.
(If we end up with surplus food and/or energy we could trade it - everyone else on the planet is going to need food and energy too).
Or on protecting and improving the infrastructure needed to distribute food and energy around?
What's the sence in buying gilts and commercial paper with it?
And I'm not being protectionist or nationalistic, but rather suggesting increased self-sufficiency and being a tad survivalist.
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......if ever you wanted to see an example of the "law of unintended consequences" then QE will probably be the best you will see. The purely artificial nature of the device will result in all sorts behavior that simply wouldn't happen if it were a case of people simply deciding how to spend/invest their own money. QE is an illusion, the results of which will be illusionary.
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A loss of £30bn equates to a loss of around £500 per person in the UK, assuming that our population is roughly 60 million people. Instead of QE, if the BoE paid us this money (tax free) instead, this equates to:
1) Increased consumer spending (increasing business income)
2) 1-2 months payment(s) on a mortgage (reducing arrears and repossesions)
3) A form of compensation to the retired who have suffered reduced rates of interest on their savings
4) Helps to supplement the expenses of people who have been made redundant
5) Increased bank/building society deposits which then funds mortgage lending
6) A little help to those saving up for a deposit in order to get a mortgage
Though, if any of you spot any flying pigs after reading this post, please let us know.
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Thank you Mr. Peston for leaving such huge gaps in your analysis. Could this be because the experiment does not stand up to rational enquiry?
You say "many would see that (the costs of QE) as a price worth paying, however chunky, if it helped to deliver an economic recovery."
However immediately before you draw this conclusion you confess that "goodness knows how substantial the losses (associated with QE) could turn out to be."
Why would anyone pay any attention to some un-named people who want to buy something (in this case economic recovery) even though they have no idea as to whether economic recovery is for sale, and if it is what it is likely to cost.
The next stop on the logical bus ride would be to define what is meant by economic recovery. In macro terms it would probably sound something like "a return to the ordinary functioning of markets, so as to facilitate the efficient and rational allocation of capital and other resources" (Obviously this would be jazzed up a bit by a PR specialist).
Unfortunately Mr. Peston you appear to have boarded the magic bus, as opposed to the logical bus, because what do we find you concluding? Why nothing less than "unless you believe that markets are wholly irrational, which may well be the correct explanation."
So, what have we got for entertainment? Some un-named people want to incur un-known costs to achieve as a best possible outcome the resurgence of something postulated as being wholly irrational.
As they say - You couldn´t make it up. But you reach conclusions as to the competence of the ruling elites.
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QE won't work. It will make things worse
It is our behaviour towards money that created the credit crunch, not the amount of money available.
Stop printing the drug and maybe the junkie will be cured?
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@67 egrid
Thats good analysis of the mechanics of the governments actions.
Incompetant to the last
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What the British Government has been doing hasn't made sense at all. This is yet another example of that lack of sense. For example, the so called stimulus package ended up taking more out of the economy than it put in. In very simple terms when the government decided to reduce VAT (as an example), it funded this reduction by increasing borrowing. Because of the big fall in Sterling (and expectations of further falls) most of the gilts issued went to British institutions. That took cash out of the economy. Worse still, the cash went out of an efficient part of the economy (private sector) and into an inefficient part of the economy (public sector). This effectively contracted GDP. To understand this, ask yourself the question, "How much is this pound in my pocket worth?". The answer may surprise you. It isn't worth a pound. It is worth a pound multiplied by the number of times it is used in a year. If that pound sits in my pocket for a long period of time, it does not contribute at all to GDP. If I spend the pound, then the person who receives it spends it the next day, and so on every day for a year; the pound is worth £365 towards GDP. Private sector for various reasons (leverage being one of them) uses money far more efficiently than the government, so the stimulus had the perverse effect of contracting GDP and worsening the crisis.
Now, take a classic quantitative easing. The concept as it was originally designed is supposed to be a helicopter drop of cash. What happens is the government announces some sort of stimulus (let's say a tax rebate). And funds it by issuing gilts, but then lodging them with the Bank of England as collateral against a loan. Since the transaction doesn't take place on the open market (and is essentially between the government and the central bank) nothing will be lost in either direction in the transaction. All that has happened is that the Bank of England has put money into the economy (by printing money essentially) through the government. In this case, the Bank of England is setting itself up for a big unknown loss as you explain. This loss will effectively be a stimulus, but it will still be a loss.
Finally, Peston is completely wrong about rationality in the markets. The gilt markets are being entirely rational. The markets are simply responding to a very strong indicator that someone (the Bank of England) is about to be a vast buy side participator in the markets. This will push prices up regardless of where they are at the start of the operation, so it makes sense to be holding gilts at the moment. Once the transaction has completed, expect the price to fall as people profit take from the market impact of the Bank of England purchasing loads of stuff. This is completely efficient - markets don't just price in long term moves, they should price in any move from which you can profit take with expected liquidity. In a very liquid market like bonds or equities that includes very short term effects as well as long term ones. Think about any short squeeze - that is an efficient market effect, but can have a big effect on prices in the very short term.
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`helpful upward effect on asset prices'
Higher asset prices also mean businesses and individuals have to pay more to obtain assets. Recent high property prices, and the debts taken on to try to pay these, and debts secured against these high prices (assuming prices = values) are all at the heart of the current problems.
Do you have any evidence that asset prices are currently too low? If the falling of asset prices is the problem, surely its best to get it over with quickly than to try to slow or reverse the fall with QE money with all its risks.
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Of course it worked. It worked for those who swindled from us tens and hundreds of £billions and £billions over the years and got a few more £billions even now.
A member of the Question Time audience asked "there were money before, so where is the money now?"
The question should be
"Will QE work to stop killing the victims so they can be robed again in a few more years"?
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A pointless blog entry - why theorise on the potential outcome of a decision that has already been taken and is now in motion?
We'll find out in due course whether QE works or not.
Instead of mock debating irrelevant points, why don't you go and visit some Eastern European countries where due to the lack of available work, there are increasing levels of racism - people here are losing money, people there are losing their lives.
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will the last person to leave the planet please pay the milkman and turn out the lights!
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We are where we are and the government is doing what it wants to do despite any other views and opinions. So much for democracy!
Furthermore the outcome is uncertain. Part of the problem is that there is not a lot of confidence about; does QE help that situation? The short answer is not at all.
So where do we go from here?
I think that given that each UK citizen has now had a debt in excess of GBP30,000 and rising settled on them by this very discerning government, we, the public at large, should now start demanding our slice of the pie.
For years there has never been enough money for this and that as we are told it cannot be afforded. Now seemingly it can.
So where are the goodies for this conscripted shareholder? How about some discounts when, in a fit of absent- mindedness, I use public services? How about a rebate on my taxes? Perhaps some living expenses can be remunerated?
If you don't ask you won't get. So I am going to keep on asking. I want my share, Mr Brown!
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UK QE is aimed at pushing down the long end of the yield curve which should in theory push down the yield curve for corporate debt, making it cheaper for all those highly leveraged in debt businesses to roll over their debt. I believe that the UK is aiming to buy the equivalent of 25 percent of all 5-25 year gilts whilst still issuing shorter term debt. They are hoping that the likes of pension funds will sell and deposit the money into the banks which should help them. Foreign central banks tend to buy gilts with a maturity of less than 5 years so to prevent them selling and causing sterling to tank these will not be purchased. Notice that they will not be buying index linked gilts and many investors will be selling their gilts for index linked ones or inflation protected ones.
At the minute it seems to have had little impact on short term corporate debt, sterling as drifted down and a switch to index linked gilts has been clear. Time will tell whether it works, but it would appear to be setting up some perverse incentives for certain types of trade which could well come back to haunt the decision makers. I would be very surprised if the market had not worked out a way to scam this so that they can skim of the benefits, rather than it having the desired affect or reducing loan interest rates. The end result will most likely be a bill for the taxpayer on the inflation protected gilts and the continuation of hiding and miss pricing risk which is what got us into this mess in the first place.
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laughingdevil, 28, you're confusing absolutes with relatives. If something is expected to be fantastic and it's only good, then that's a comedown; similarly if something is expected to be awful and is only slightly bad, that's a relative plus. Current share prices represent expectations of the future, based on knowledge of the present. Expectations of high or low earnings are priced in, in that the current price of a share will carry a premium if there is reason to believe the future will be strong. The moves in price after results are released are due to comparison with expectation, not based on the absolute nature of the results. The market is made up of many participants; while some might be trading on emotion, many others are trading on cold facts.
On QE, it's just the last resort in trying to sustain implausible spending habits. Suppose I have a high-falutin lifestyle, but lose my job. At first I can move my savings into higher-rate accounts and rent out my assets to increase my income (cf. Govt taxation). If that's not enough, I can borrow money from the bank, my friends, anyone who will lend it, legitimately (cf. Govt bond market). If even that dries up, the only way I can keep spending is by making money up from somewhere (cf. Govt printing/QE). And eventually, I realise that I can't sustainably spend as much as I have been and have to reduce my spending, having done a vast amount of damage in the interim, rather than just accepting the false nature of maintaining high spending with low income.
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"And the pension funds should use some or all of that cash to buy other assets, anything from more gilts, to shares or property - which should have a beneficial downward effect on yields and interest rates and also a helpful upward effect on asset prices."
Pension funds buy Gilts to protect their future pensions. If the government buying gilts brings down the prices aren't the pension funds and Insurance companies going to take a loss?
Is this not just another case of MacBrown raiding the pension funds to extricate himself from a mess of his own making i.e irresponsible lending by Scottish Banks?
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My head hurts.
HMG is issues IOU's (gilts) on behalf of the taxpayer. That is we owe the money for the debt.
We owe this money to the BoE who lends new money to HMG. My mind thinks this money must be valued againts something in some way e.g. gold. If not it devalues all other money in circulation. Is it taxpayers money?
In any case 1 arm of HMG borrows from another arm of HMG and pays interest to said second arm for the privilege. Seems crazy. I'm having a seizure trying to work this all out.
In any event we got into all this trouble through over borrowing, over consumption AND all the dodgy banking accounting practices that nobody understood.
Looks like this is the final piece of the engine to take us back to square one.
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Surely if markets were rational and efficient, there would be no impact on gilt prices, or yields or interest rates at all.
This explains a lot about your naïve belief that some of your past comments and rumors had no effect on the current situation we find ourselves in, markets are made up of people who do irrational things in reaction to rumor and speculation, from time to time we do go through periods of calm where the markets will return to fundamentals and they will become very rational and efficient that is until some so called media expert decides to make the headlines with their one sided ill-informed rumor.
You also seem to have missed the point that the government will benefit from the fact that all the gilts that mature in these times of low rates that would have had coupons of between 4 and 7% on them will be replaced with new Gilts with much lower coupons thereby benefiting the government.
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As always, the bottle-neck to credit for business are the Banks.
Set bankers income-tax in proportion to unemployment levels. As their income-tax goes up with unemployment, they will be encouraged to keep businesses afloat, and unemployment therefore down.
1% income-tax per 30,000 unemployed will mean 100% income-tax if(when) unemployment reaches 3 million.
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#57 maimondes wrote
Debasing the currency causes inflation. Inflation is a hidden tax. I learned that from reading this blog. How come Gordon and Alistair don't seem to know?
....they do - but they're hoping you don't!
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Time for some quantitative easing of the moderation queues?
Ah forgot, it's the BBC lunch break. In these days of 24-hour news, live streaming and instant communication, it's reasurring to know that the time-honoured insititutions are sacrosanct.
Hey, take some more from the licence fee! Oh, you already are?
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#15 If it was a 50/50 gamble, it would at least have a chance. I fear that this horse is only fit for the glue factory.
My question is this ...
Robert Peston writes "all we're talking about here is one arm of the state buying debt issued by another arm of the state."
Wouldn't this be called money laundering in any other part of the market ?
Robert - all this mess was start way back in the late 90's when Brown disbanded the SIB and the other organisations it regulated, and replaced it with the FSA, but with a significantly different agenda. It was he who caused the deregulation, and he (along with his boss - a certain Mr Blair) who encouraged the Banks to lend lend lend so that we could spend spend spend. They did it to create a never ending boom, because they were far too short sighted to see the inevitable bust at the end.
They then sold the idea of their new free-reign banking system around the world, and in so doing sowed the seeds of the present disaster that our children's children will be recovering from in 30 years time.
When will you, as a reporter, hold Brown and Blair to account for the mess they have gotten not just us, but a large chunk of the planet into ?
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#66
Nice response, and yet still factually incorrect ;-)
Surely The Great British Experiment came in 1997 when Brown first came to power as Chancellor, but was clueless as to how to run an economy ?
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You worry about the potential losses the Bank may make. But it isn't the job of the central bank to make a profit but to stabilise the economy.
By achieving the latter it will anyway cover any notional losses -- by increasing the tax take out of higher national income.
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#80 super_bean_counter: If they print monet (sic) then they debase art.
Your main argument is fallacious since it is the planned intention that a loss is made on these securities, and hence it is the planned intention that the currency be debased.
You may as well argue that dropping nuclear bombs is, of itself not harmful, since harm only arises should the bombs detonate, and no-one can be certain that they will detonate until they are dropped.
Do you work in PR by any chance?
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ha.
ha.
ha.
we are so screwed.
brilliant.
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It will and it won't work..... either way the cost will be too much
It will work for any one supporting the Gov - Unemployment would have been higher, more business would have failed, etc....
It won't work for anyone opposed to the Gov - uneployment will still go up, businesses will still fail
Truth is they are clueless as to what will happen either way... and for me the cost is to great..... it feels a little bit like putting a £1,000 on a horse in a race, but picking it out at random.....
I DO NOT WANT MY KIDS OR ANYONE ELSES PAYING FOR OUR MISTAKES - IF THERE IS HARDSHIP WE TAKE IT ON THE CHIN UNTIL IT IS OVER!
#5 achaean57
You're right - just look at the BBC markets graph, most days it flounders around in the morning and then follows pretty must what the USA does in the afternoon.... idiots
... and while we are on the subject it is pretty much what seems to happen throughout the financial services sector...
We are talking about what will happen in 2 or 3 years time and yet the guys making the deals are bonused to think by the day, week or month.... there is a great paradox in this industry........ we invest money for year, they bonus people by quarters and half years.....
#33 onward-ho
My guess is you maybe work within the industry that is part responsible for this mess - what the hell does it have to do with poor old RP?
We are in a mess, I (and a lot of others) want to know how deep... please, please stop hiding your head in the sand, it won’t go away ...... we are in this mess as a result of too much CONFIDENSE, not a lack of it – we all need a reality check and this is it!
If the people of this world were clever enough to run up over a trillion pounds worth of personal debt, they are clever enough - like you - to work out what is happening
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Interesting issue - but have a look at Stephanie Flanders' article on this which is not as pessimistic as Robert!
The question about traders' rationality is a bit more complex than just "rational" or "not rational". There is a whole theory of "bounded rationality" which aims to explain what limits there are on rationality. I think in this case the answer is reasonably clear - details in the following article:
http://www.knowingandmaking.com/2009/03/multi-level-rationality.html
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This seems to be more about helping pension funds out of their current difficulties rather than pumping more 'spendies' into the economy.
Not much is known about the black holes in pension funds but judging by the huge falls in the value of equities and commercial properties these must be getting bigger by the day.
If private pension funds collapse that could cause an impact equally as catastrophic as the banks collapse so no wonder it is being given such a low profile.
The 150 billion already earmarked to start quantitative easing would be only the start.
There is also the bigger headache for the government of the black holes in the public pension schemes. Who would even hazard a guess as to what they must be.
They will have to keep printing more and more and yes it could work in the end with everyone having to wheel the barrow down the road filled with fivers to buy a loaf of bread.
Should we now put our sterling into other currencies and which ones are likely to survive?
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Once upon a time we had the gold standard by which the measure of our paper money could be calculated.
Then we had purely paper money and that has been valued against what other judged it to be worth.
Now we have had the Bankers gambling so that their Banks become insolvent. Instead of them crashing and being sold to the highest bidder they are lent taxpayers money, which even Flash Gordon must realise is good money after bad. So we now do not have enough real or paper money in the system so let's print some more.
When the major economies start functioning again properly, then we shall have the reckoning, then will our pound be worth one Euro or one Dollar, more likely 50p!!
But then in the immortal words of one HW 'it's still the pound in your pocket'. The fact it buys you nothing abroad will be the next government's problem.
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BBC is still employing. Everytime I look at it there's a new business correspondent. Seems to be a new sports presenter this time. Move into journalism seems a good move.
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To me, the weak link is the bit about banks lending money to consumers. I have a low level of debt, a small mortgage (well below house value) plus whatever is outstanding on the credit card that gets paid off every month. I am unlikely to willingly increase that level of debt in the current economic climate so I won't be contributing to the spending spree that the government wants.
Anyway, weren't we in this mess precisely because of high debt levels?
Now, if they were to divide that £75billion equally amongst the population of the country and give it to us, I would happily take my family's share (about £1000/person) and spend that on stuff. Far better than wasting it on bankers who've already screwed up once.
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Remember, Economies are like oil tankers. They have a big turning circle and go slow. But, you can move a very big object accurately with a delicate touch, patience and courage. You do have to know what you are about, the territory, the environmental conditions. Get yourself a pilot and dock safely.
In my small business interest rate reduction is about to have its first beneficial effect on my quarterly charge from the bank.
Even at this micro level it has taken 3 months for a noticable effect to take place.
Consider how many economic policy decisions, fiscal and monetary have been implemented at the macro level during this period in staccato fashion. How many times has the question been asked "Why is this not working?"
Well, there is always a lag.
Markets, the communications infrastructure, the media and politics are quick. They are the instruments of "sentiment" and the movement in prices.
Much of current Government economic strategy is cluttered in the mele that this speed creates. The pilot is giving bad advice and losing courage. Government intervention creates a market distortion that allows money to be made in trading on the way up and on the way down. It is not irrational, rather calculated.
If it takes ten years to change conservative lending institutions into careless risk-takers to the extent that the international monetary system of exchange is more or less on its knees and unbalanced at best it might be reasonable to assume that it will take a while to fix.
I'm typing this between customers who are thin on the ground. Turnover is down and the overheads march on relentlessly.
Perversely the rate of interest on my tracker mortgage is now so low that the cost of this debt is eclipsed by the cost of my credit card debt even though it is about fifteen times greater in absolute terms. The money saved languishes in the bank at a low rate and is being used to reduce existing borrowings.
The banking industry, a bastion of capitalism, is now subject to Government intervention at a pseudo operational level. I cannot wring the extra finance I need out of my bank to enable more timely payments to my suppliers and facilitate trade in the short term as it has gone to ground, no longer lending on considered risk.
My small food retail business needs customers and finance (and not much more of either) to help it survive and generate wealth for all it touches, the government, local authority, suppliers, staff and me, but we are at a standstill at present and leeway is generated internally through trade goodwill and patience.
Economies, organisations and individuals need to be guided gradually into a position of more disposable income to allow us to begin the recovery in a steady fashion.
Of itself, quantitative easing is too generalised and will fall victim to the open market leading to an uncertain effect. Maybe the offer to purchase Government securities from targeted institutions would have been a better form of this policy if the charity were to begin at home. Its still a world economy though and Uk plc can only dabble on its own.
Far better to continue along the lines of accepting responsibility, recapitalising the banking infrastructure, bringing to book those who have mis accounted for a decade and setting a long repayment schedule for the recovery. Government needs to pull out of involvement in the quintessential private environment of the banking system and to create the macroeconomic and regulatory environment that will allow the banks to get back to the business of lending and paying us back.
This will take a long time.
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Firstly, Alistair Rae, number 79, has a point. This is a BBC blog, not a trade journal, and most people don't know who Ricardo is.
Secondly, I am not an economist, but don't things like prisoner's dilemma show that non-cooperating entities, e.g. the markets, even if behaving `rationally', might not always lead to optimal solutions? I had thought that all economists had to learn game theory, which is why I am annoyed that some people seem to think that the markets can really be trusted to sort this out without some pretty strict parameters to remove the dilemma from the game.
Thirdly, a POINT THAT NEEDS TO BE REITERATED OVER AND OVER AGAIN: there are approximately the same number of people as there were 2 years ago, the same number of mineral/hydrocarbon resources, and no plagues have hit the earth. The fact that that the `real world' has behaved pretty much continuously, but the markets - in full knowledge of government imposed parameters - have suddenly gone ballistic, proves that the markets are irrational.
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Now why would any self respecting pension manager choose to deposit money with a bank that is going to pay a minimum amount of interest, and may in fact be controlled by the very people ( Brown & Darling ) that got the economy into meltdown in the first place ? Why also would any bank which is struggling for capital be stupid enough to then lend any capital it managed to attract to failing businesses or to mortgages in a falling housing market ? Get real Robert , nothing this dying government does can be regarged as being of any possible benefit to the country, it may be aimed more at creating an opportune moment for an election, but Labour continuing in office, or indeed ever holding it again look more and more unlikely.
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Banana republic Britain,created by banana republic politicians in the pay of private banking cartels,and reported on by banana republic media organisations.
Am I wrong?
This is the logical outcome of "dumb-o-cracy".
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36, 49 & 64 I'm with you about cutting out the middleman and putting the extra cash in the hands of the man and woman in the street.
There is a simple reason why they don't do this. To be blunt they think they know better than us and they don't trust Joe Public.
There is an interesting analogy with this and the US government bail out of AIG. It appears that much of the AIG bail out money to settle CDS losses has left the USA being paid to such companies as Deutsche Bank; RBS, HSBC and Soc General of France amongst others.
http://www.insurancetimes.co.uk/story.asp?sectioncode=23&storycode=377320&c=2
There can be no guarantee that much of the money put in by the B of E won't go the same way i.e offshore and out of the UK economy.
If the government gave every taxpayer a lump sum which they could either spend or use to pay down debts with a 3 month expiry this would help give the economy a good push at least in the short term.
As this money works its way around the system the multiplier effect will help continue the growth.
Paying off GBP 3,000 of credit card debts or part redeeming a mortgage would help free up cash by reducing our debts increasing disposable income and could allow mortgagees to refinance at better terms as well.
As much as we may hope for it it isn't going to happen because Gordon and Alistair think they know best despite evidence over the last few years showing that virtually anyone could have done a better job.
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I reckon this is just one big ruse to get us into the Euro, Why can we not have a 'all or nothing' referendum on European membership, then after the out come we can all get on with our lives. Printed dough means one pound = one euro....
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Robert,
I go along with your comment about Quantitative Easing being the government (funded by tax payers) creating new money at the Bank of England to buy back bonds issued by the Treasury. This looks like a zero sum game.
The Bank of England creating new money out of thin air is similar to private banks doing the same thing through the Fractional Reserve Banking system (see many previous links to the "Money As Debt" video presentation).
I prefer the idea of the weakest banks being allowed to fail and the strongest ones becoming stonger and taking over some of the assets and liabilities of the failed banks.
In the UK this may mean individual savers moving their savings from the weakest banks (no names, no pack drill) to the stongest bank and better run mutual building societies. (Again, no specific names mentioned).
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Out of respect to Her Majesty the Queen, should we not call this GB Day as in Gone Bust or Gordon Brown Day.
It seems fundamentally wrong to involve her majesty in this risky exercise as she is the soul of stability for this nation?
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WHO WANTS TO BE A TRILLIONAIRE!
Robert's stream of consciousness explanation is not the easiest to follow, so some might want to refer to the Stephanomics blog for a more careful discussion accomapnied by some graphs etc
but ultimately it is all an experiment, as is economics at the best of times
answering Robert's question about markets:
yes obviously they are extremely irrational, particularly in times of fear like this; look at the 6% upswing on the Dow yesterday when Pandit of Citigroup told his butler that he had found some loose change down the back of his sofa
the only thing more irrational than the markets is a politician but to be honest I can see why they are trying the QE thing now
sure it's a gamble but the alterntive of a deepening recession turning into depression is far worse and no-one under the age of 90 would have any idea what it would be like!
personally I would not be so worried about high inflation 2 years from now; it will be bad for pensioners and savers but if you can, just spend your money on something that will hold its value before it gets going too fast
I'm going to kit myself out with a brand new pirate ship and extra cannons and grappling hooks in the prospect that global trade will eventually pick up
it's slim pickings out there at the moment; never seen it quieter!
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"And one important reason why it may be naïve to anticipate any significant impact on real lending to the real economy is that banks are still engaged in the vicious process of reducing their excessive exposure to other banks and financial institutions - and the new money injected by the Bank of England may be totally absorbed by that so-called "deleveraging"."
HBOS intrest payment £7bn last year. So what is the size of the Debt. I thinK they will keep on "deleveraging" woun't you?
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QE ? Quantitative Bleeding seems a more appropriate term, having more in common with the quaint fashion of the barber surgeons to bleed a sick patient to let the evil humours out without knowing if it will have any effect.
QB will only be:
Bleeding the life out of pension funds
Bleeding the life out of sterling
Bleeding the life out of taxpayers
Opening up the circulatory system of the real economy to the infection of inflation.
The bits of the economy which are already bleeding need a sticking plaster not to have more bloodvessels opened up.
The only reason El Gordo is pushing for the world to follow his lead is that if everyone does it it might just even out.
The real economy is suffering from a significant contraction not in mickey mouse trophy numbers but real activity - automotives off more than 20%, building slowing to a crawl, overall manufacturing 12% off, manufacturing sectors I deal with are down 20% or more for anything other than food related product lines.
There is no sign of recovery yet apparent, in some aspects it may yet get worse as the feedback loop of unemployment has yet to really kick in.
El Gordo and Comical have chosen the worst possible route to using created money - far better to have done a salvage credit for old cars as in Germany or other selective stimulus plans with created money - or here's a thought - built something with it which could be sold later at worst, say a high speed broadband network, some wind turbines, some houses.... At least there would be something tangible to show for it. All we seems guaranteed to see for it is a tax rise.
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Sounds like a big game of roulette to me...
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Umm seems to me alot like the BoE giving a bunch of money to rich people, even if only for a year or so until the 'storm' is over.
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What next if this fails to work?
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ONCE AGAIN...
anyone have a problem with Deflation?
Appanrently I won't buy anything bacause it will be 2% cheaper next year..... right!
Food?
Clothes?
A car - it will lose 20% in the first year I have it anyway
A TV - you can always get the same model a few months later for less
We aren't talking inflation levels of 10% and 15% we are talking 1% or 2%.... and guess what, you savings will be worth more !!!!!!
Makes you wonder why this is such a problem when it seemed to be fine to let people pay stupid money for houses because they were going to be 15% more next year!
#56 scotbot
Or he's trying to just dodge the blame for getting us into this mess
Not the best reverse engineering Ive seen, I think you might have too much spare time!
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#86 Super_bean_counter. I think you are counting magic beans.
It is true that should the government pay down consumer debt then huge losses will accrue to the Treasury.
It is also true that as consumer debt defaults then the Treasury will incur huge losses. This is true because the Govt. has made it very clear that it intends to compel the taxpayer to meet all losses that may arise to the initial issuers of such debt.
The chosen route - to bail out the issuers of debt as opposed to the debt holders may very well result in larger losses than would have been the case had the holders of debt been bailed out. (Consequential adverse impacts of a large debtor population, the fact that anyone with money who doesn´t fancy funding corporate banks is able to leave the country and take their money with them, the consequential impact of impaired assets in close proximity to other wise unimpaired assets etc. etc.)
The fact that the bailing out of debt holders is not even worthy of serious discussion is one more demonstration of the contempt in which the ruling elites hold the ordinary population.
Let´s just hope that the average Joe remains happy to be played for a patsy.
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Robert,
You've said so many things in your blog that it's easy to feel overwhelmed and just give up with the whole argument. Instead however I will just make one point:
Quantative easing is a redistribution of wealth from those that have earned it, to those that haven't !
Why don't you shout about that ? I hate the way the government and the media plays with words to cover up the simple facts.
This is not the great British experiment you mention. It's a deliberate strategy and the consequences (in terms of the one point you fail to mention) are known.
Why not make your blog more personal !
Tell us how you feel about the injustice in this state of affairs. Forget all the technical details for just one blog, all those details that just diverts us from the really important things that matter.
Is it fair ? Is it just ? And if it isn't what should you and I be doing about it ?
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Coincidence? The number of stinky news reports coming out about Barclays; account holder from corrupt regime shocker!
Hardly worth front page news, unless the spin doctors are at work? Now lets see why would they want to undermine confidence in Barclays, here's a theory the price that Barclays will pay for entry into the APS will be directly linked to the share price.
Wouldn't surprise me if the government had a hedge fund out there shorting Barclays shares on it's behalf.
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This is actually yet another failing bank rescue measure. This time the fig-leaf is just a different colour. Its fairly obvious that people who are overstretched would be completely bonkers to take out new loans when they are fearful of redundancy. The value of the pound will sink (QE isi effectively devaluation in any other language.. if we had a fixed exchange rate). If real interest rates drop (as opposed to BOE joke rate) then savers will be even more stuffed and will move their money someplace else which pays better rate of interest (than 0). This will remove money from banks and will reduce purchasing power of savers who will be more likely to horde. With Interest rates dropping international investors will ditch pound causing further drop. I suspect the recent bounce in markets may have something to du with automated trading which may not have this QE measure built into their algorithms. But expect that to be taken care of pronto... amd then the fall!
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Buying up Bonds is not at all abnormal in principle. It's regularly used to ensure that the BoE's prefered interest rates are actually implemented in the credit market.
Nor is the expenditure a 'cost' to taxpayers because the Bank's purchases are of valuable assets that taxpayers don't have to pay for.
Those valuable assets become BoE property and can be sold in the future. Unlike, for example, hiring people: because labour is an unsavable purchase.
What's new is the huge value of the assets to be bought. That has already ensured that British long-term interest rates have fallen by almost half a percent since announcement. Which is welcomed by industry, and mortgage providers. Maybe they'll fall even lower?
Like some US commentators, I agree that QE will increase cash-flows and will be more effective as other countries follow the UK lead. Which is what happened after the UK announced it was to re-capitalise and take part-ownership of UK Banks: other countries (esp. US) said: that's a good idea, we'll do the same!
This is a good news story!!
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I LOVE THE FACT PEOPLE ADDRESS THEIR POST DIRECTLY TO MR. PESTON. LOL!
AS IF HE READS ANYTHING WE PUT ON THIS BLOG!
LOL!!!!!!!!!!!
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Looks like GB is struggling to get cooperation from the G20.
I hope he wasn't banking on them going the same way regarding quantitative easing.
Wasn't it Dr Doom who said for it to work every country would have to have 0% interest rates and all do the printing money bit at the same time?
I thought at the time this sounded all too easy and a bit daft seeing as no two economies were in a like position.
However GB must have thought it would work and has forged ahead. Oh dear!
Apart from the US who have a global currency looks like we could be on our own. Pity the poor pound.
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Instead of QE, we should tighten monetary policy and encourage deflation. The "value/purchasing power" of the shrinking pension funds and savings can be increased with less risk than QE by increasing the value of money. QE to catch up with bubbles seem like a bad idea for most of us (very profitable for a few).
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The final part of th article interests me.
The failure to connect to the real economy...real people in the real world...has been the main keynote through the entire approach by the government.
Real world confidence doesn't spring from a few economic commentators all deciding 'there's nothing to worry about' in the FT---- a line pedalled for ages.
Real world confidence springs from real world people REALLY feeling confident...and reducing savings rates to zero (when far more people have savings than borrowings)--- doesn't create confidence.
Ordinary stuff like using the phrase 'lender of last resort' destroy confidence in real world people----
This thing, after the first few days in 2007, was never about the 'economy stupid'...it's been about the stupid economy, that's why people have no confidence because they see so much attention paid to Banks while none was being paid to the real world...people won't borrow because in the real world they are facing 20% wage reductions as wage freezes turn to 'job losses OR all round cuts'.
The govt keeps racing about behind the issue like a hapless fireman the wrong side of the flames------ they tackle everything when it's already burnt to the ground and shout to the people watching anxiously from their houses.."Don't worry...we're doing everything it takes to save YOUR house...."
Raise interest rates...disrupt the pattern
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re 107.... The measurement in this world is going to be against other people's currencies........In this world foreigners will be able to buy more companies here because they'll be even cheaper.... they'll come on holiday and we'll head off to be plumbers and brickies in Poland or Zimbabwe.
Even though the US and Europe are basket cases... our currency shows we are the most bonkers inmate in the madhouse....or rather we are led by the most bonkers inmates in the Whitehall madhouse...
One or the other!!
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The price the BOE sells the bonds for is largely irrelevant. It magiced the £150 Bn on to it's balance sheet so if it only sells them for £100Bn, it still has the £100Bn conjured from nothing, I would expect it would then remove this money from the balance sheet when the economy starts to recover, effectively removing it from the money supply. Effectively £50Bn of government debt magiced away, this is just like printing money to be spent by the government and will no doubt lead to inflation.
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I don't know what quantitative easing is but I know I don't like it.
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I've thought of another solution. Why not give £2bn to all the hapless city bankers as an immediate, tax-free bonus. Being typical bankers, they'll immediately go out and spend it. The risk-averse (is there such a thing?) will invest in property, the rest will splash out on strippers. Strippers will pay their pimps, who in turn will buy new clothing and new BMWs. In a flash we've then got happy, newly motivated bankers, the housing market recovering, and the retail and motoring trades booming once more, and all the money back in the economy.
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I agree with scotbot @post 56. This is a global issue that requires a global solution.
The great and the good are probably worried about how to tell the great unwashed (us) how we got into this mess and more importantly how we get out of it.
The funny thing is, we already know. The current lack of demand for bank loans and spending in the shops is simply each individual choosing not to spend in uncertain times.
It is possible for previously committed Marxists of the baby boom generation to see this as their idealistic beliefs coming true - through the efficient use of free market economics.
The future could be a place where individuals contribute according to their ability (we are not all created equal) and other individuals receive according to their need.
The redistribution could be local through family and friends; governmental (local or national) or interntaional.
We have the technology for instant communication and relatively free flow of information. If we allow the other conditions for free markets to operate the invisible hand of free markets should lead to a fairer distribution of wealth across the globe.
It won't happen overnight; it will always remain a distant target to aim for.
Beware of those currently doing well as they try to protect their own position.
In the UK, Gordon Brown has the remainder of his term in office to turn things around. Then Cameron and his chums from the Bullingdon Club may get their go. Whatever, Westminster remains the mother of all parliaments.
Perhaps even the old style Liberals will get back in. Liberal on social issues and liberal on economic issues.
Perhaps we do have nothing to fear but fear itself. I hope the good guys win.
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It all has the smack of a Ponzi scheme to me.
It just does not feel right.
the market has 1000 things at 100 dopes.
I create 150 more from thin air and the price goes up to 115 dopes.
This is only as long as there are enough fools to buy an increasingly available product at ever higher prices. Assest bubble spring to mind.
Where is saturation point for the market.
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Can anyone explain to me why we are buying bonds etc as part of our QE? All previous attempts to stimulate Banks and investment houses by injecting capital, buying toxic debt, and reducing interest rates has come to nought.
Surely if you have £75b to spend give all 60 million registered UK residents £1250 each. so a family of 4 will get £5k in the form of 'free' credit.
Some will spend this amount on a car, DIY, holiday, goods etc.
Some will spend on paying off debt (but this could avoid other Govt costs if they get repossesed etc)
Some will save it (this may offset the unfair penalisation of savers with interest rate reductions). however you look at it this will DIRECTLY stimulate different areas of the UK market, unlike the hope and a prayer version they are trying.
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Maybe printing money is no bad thing in the end, most of the debt in the world is in the west and most of the cash is sitting in banks in China. Thats why cutting interest rates has no effect, because there is still no money around for people to borrow. If we print money then things like houses will be de valued in real terms but still cost the same on paper which will allow the banks to lend with more confidence because they wont see the value of their assets falling all the time and be put off lending for that reason. That said, I do believe it is a case of the government and the banks pulling out all the stops to re inflate the credit bubble and in a few years time we will all be paying the price for it. Its a good theory but it wont work in practice. By de valuing our currancy it will be seen by others as outright protectionism!
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Gordon Brown's "strategy" is all over the place.
His policies and (lack of) stewardship got the UK into this mess, and now he's floundering around making more poorly thought out policy while liberally blaming everone else for things he was in charge of.
Change is needed. Brown is tainted.
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1. This is an incredibly convoluted way to run a mint. Why? Is it because it is illegal under the Maastricht Treaty for the Bank of England to create money to buy gilt-edged stock directly from the Government as Jeremy Warner noted in The Independent on Friday 6th March 2009?
2. Is there a legal agreement between Her Majesty's Government and the Corporation of the Bank of England...which I believe is still a private company with shareholders and directors as it has been since 1694...detailing respective duties and liabilities of the parties to the agreemment? If so, is it in the public domain? If so, is it available on the internet?
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Ignore my previous comment I clearly do not know what I am talking about but then again neither does Peston.
You are better off reading Stephanie Flanders blog, a proper financial journalist.
In summary the Bank's losses on the eventual sale of the gilts it is buying are to be covered by the treasury. But the savings the Treasury should receive in rising Gilt prices should offset these losses, or so the theory goes.
Stil don't reckon you summat for nowt.
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Dear Robert
The do nothing right party are at it again. "Judge me on my economic record"- ha! ha! ha!
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#91 "Arguably QE is actually fairer than income tax as a way to fund bank bailouts since the people who gained most by having banks protected (i.e. those with most savings) pay most."
Surely a fallacy ?? Most savers, unless they are hopelessly uninformed, will *NOT* keep their savings as cash in a bank, reaping a (bank rate - x)% in interest !! They will try to invest those savings in some capital appreciating and/or high ROI-bearing asset(s) which can be converted into cash at some later date when the need arises.
Unless these assets are in foreign countries, devaluation will just reduce their value. However, all this has nothing to do with banks unless they invested in bank shares !!
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"It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued." Harold Wilson, 1967.
I feel that Alistair Darling needs a similar mealy-mouthed form of words to explain this one.
But this does not affect a bank's lending policy or risk assessments, so the banks still won't lend. the money will stay on their books.
Give the money directly to people with mortgages and businesses, who will then spend the money...
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What a mess, spending your way out of trouble creates more debt, it just does not work and never has, moving the debt around for a while is all QE achieves.
The reduction in currency value will bite hard when next years national fuel bill arrives.
Who is going to borrow the released funds car workers on short time....the unemployed......badly run companys?
Course not, banks have used that tee shirt for rags, they now want to see people who are such a good risk that they don't really need the money.
What a stupid collection we have running the show, time for a major change very soon methinks.
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Sorry Robert I still don't understand QE. The the BoE buys government bonds but what with? I assume that it is, in effect, exchanging something from the National Reserves (like gold?) for these bonds?
If this is so, then we have exchanged something a bit more risky but I suppose if it gets us out of a hole then it may be worth it. The unfortunate thing is that everything they've tried so far hasn't worked, even though they use the magic "but this will take some time to work its way into the real economy", there should have been some payback by now given the extreme cuts in interest rates.
I shudder to think what the next year(s) may bring - it just has to be bad news.
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#115 armagedion
The loss on repurchase will be minimal, the figure RP quoted of 30b seems high.
This might sounds strange to a lot of people but their is little correlation between the value of the currency and QE.
FX is driven by the demand for sterling which in terms is driven by investment opportunities (mostly) by foreign capital.
No I don't work in PR.
Duncan
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#109 "1% income-tax per 30,000 unemployed will mean 100% income-tax if(when) unemployment reaches 3 million."
A great way to drive even more money out of this country and further devalue the Sterling !!
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#119 "They will have to keep printing more and more and yes it could work in the end with everyone having to wheel the barrow down the road filled with fivers to buy a loaf of bread."
Welcome to the Weimar Republic. Oops, sorry, we're trying to compete with Zimbabwe now !!
"Should we now put our sterling into other currencies and which ones are likely to survive?"
Try the ones that actually have surpluses on the trade balances over the last few years !! A few Gulf states' currency and the Chinese RMB perhaps.
But the best bet is to stick your surplus cash in gold !!
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QE won't work but it`s not a loss.
Boris is giving away FREE rent in London!!!
http://creditcrunchedoutinuk.blogspot.com/
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I think bottom line is, whatever it takes the government and BoE will create and spend it. I sort of understand Q.E. but ultimately it won't solve the problem.
Banks are lending to solvent businesses (witnessed on BBC TV yesterday) but not to those whose position has become precarious and cash flows too risky. Banks cannot do a 'Gordon' and just pump money in to keep businesses afloat, they are businesses too!
I agree with the sentiment let weak businesses fail and loan to those who can show a strong business case to pay back.
One last note - even with the latest billions, the markets are STILL trailing behind!
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Q. Will Queasing work?
A. No
We the general public will just start to ask difficult questions like:
If money can be QE'd into existence, then why did Londoner's need to pay extra council tax for the 2012 Olympics?
Surely, as it is a rare event, the costs could have come from QE?
In fact if we need a new school/hospital/road system/railway/etc/etc then why not just use QE?
By debasing the currency, everyone who lives and uses these services pays their share?
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BANKS LENDING AGAIN ?
Our politicians GB and AD seem to think that the Banks can so easily start where they left off and restart "lending again"
However, in a diving Economy and Global downturn, lending billions to small and medium companies today is far, far riskier than just one year ago.
If these "Zombie" banks follow their new masters and lend billions over the next year or two, they are likey to lose billions in further bad loans, bankruptcies and defaults, unless very careful with their due diligence.
As it was the banks lack of due diligence which got them in this mess in the first place, how can we expect their culture to change overnight? We need NatWest spun off from RBS so that it becomes viable and RBS stays toxic. The same split off for Lloyds and HBOS with the Halifax becoming another toxic State Bank. We keep the apples and pears together at our peril as billions are thrown at this lending problem.
It is easy to lend, difficult to repay, if you have no job or your company profits drop or dissapear. The UK needs to painfully and ordely contract, not expand butb Brown is too scared to tell the Public this difficult truth. There is overcapacity, too few new markets, there is no point leding more and more. We need far more self sufficency and high tech R and D companies, the days of long running debt on multiple credit cards is OVER. House prices have another 30% yet to fall too.
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One of the saddest things about this is that nobody will probably ever know what worked and what didn't. So many things have been tried and many of them have a delay of many months, if not years, between applying the remedy and seeing the result, so the effects are all mixed up together.
Also, assuming we all come through this there will only be one outcome - the one that happens - and however long or deep the recession is, people will still be able to claim that it is either better or worse than it would have been if the actions hadn't been taken.
I foresee years of arguments ahead for the pundits.
When this QE fails, I expect a wealth tax to be the next thing that's tried. Just like a negative interest rate - if you've got any money, the government just comes along and takes some of it out of your bank account and spends it for you.
Very effective stimulus.
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"The liquidity of our banks should improve - and with any luck they would then lend some of that cash to businesses or households, who would then do a bit of useful spending or investing."
I've got bad news, Robert.
I don't want to borrow money.
I certainly don't want to borrow money to spend it on stuff like a new car (my old one runs perfectly well, thank you) or a new house (I have nice neighbours, my house is big enough and there are some very good local schools) or new electronic gadgetry (how many televisions do you need?) or a fancy Caribbean cruise or an entirely new wardrobe of clothes and shoes or more restaurant meals and other nights out.
I think we're headed for a really deep slump, and I am hunkering down, spending as little as possible and only on essentials.
The banks can go lend this money to someone else.
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Back in the 1960s, when I was a student of economics, I can remember reading J.M.Keynes's "General theory", being greatly impressed by it, and then doing a little calculation.
My conclusion was that Keynes was saying that the key to it all was CONFIDENCE.
That is the thing that's missing now, not floods of newly printed banknotes.
Liam Halligan has repeatedly put his finger on the answer.
It's banking honesty.
Banks must be made to confess the extent of their errors. They must come clean and tell us exactly how much they've lost.
When this has been done, uncertainty will ease and confidence will return.
Nothing the government has done so far addresses the problem of shifty-eyed bankers who don't want people to know EXACTLY how badly they've run their businesses.
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Oh dearie me. Time to get into cash. I can only see QE working one way.
BoE buys gilts from Pension Funds and Investment Funds. £75bn worth. What would you do as a Fund Manager.
1. Sit on cash.
2. Buy undervalued assets e.g. property, equities.
3. Buy defensive commodities e.g. gold.
Will our bankers see this "new money supply"? If yes, will they
1. Lend it to SME's and individuals for mortgages and unsecured loans?
2. Write off even more toxic debt outside the asset protection scheme?
3. Sit on cash (and boost their solvency)?
Methinks "bunker mentality" will prevail. Precious little new money supply will hit the streets. When it does, this will happen over months/years not weeks. The existing stimulus packages in the market place are showing no signs of emerging.
2011 seems to be my bet before any signs of credit easing occurs. By then, asset values will continue to fall, gilts will plummet in value and sterling will be even weaker. We should, as a nation, plan for 2011 now. It is a long bleak period ahead of that and I haven't dared mention 3 million or more out of work, a dwindling under 66 year old workforce, and increasing benefits and pension claimants by 2011 (or sooner).
We are borrowing more money now in the vain hope of financial salvation. We have now burdened our children with a poorer country for decades to come. I hope those in power both in business and government sleep well at night. The stain of guilt on their collective consciences should be indelible. I am incandescent with rage about this. Morality and leadership has escaped us at a time of real need.
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133
No
The reason GB is trying to get the world to do this is so he can blame them when it all goes wrong.
I am not sure the world is certain to follow. Watch sterling and the inflation indicators.
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2.5 hours to moderate
USELESS
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This post by Robert i feel has exposed his shallow understanding of money supply.
The BOE continually issues new money as do commercial banks in the form of debt. New money is created daily and always has been since banking began in the middle ages.
QE may be a far better way to control the money supply than the blunt instrument of interest rates.
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My degree is in economics. I got it 45 years ago, so what I was taught is now hopelessly old fashioned. Robert, you do not mention printing money but surely what is going on is an exercise in circumlocution to avoid using those two dreaded words together - printing and money.
Did not John Law try something pretty similar in Paris in about 1720? That led to disaster. Why won't this?
My memory from my degree course is that nobody then had cracked the problem of how to calculate how much money you could safely print. I have not heard that anybody has cracked the problem since. The Bank's finger in the wind approach seems to suggest that they are hoping they can get the print order size right.
I do not look forward to my savings becoming worthless. Does anybody think I should rush out and spend them while they are still worth something?
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i would like the BOE to buy a few of my assets, then what would i do ? not put it in a UK bank at no interest but into my french account paying 6% (yes 6%) surely insurance companies need to get the best return on the money so will do likewise.
even if the money does go into UK banks has GB any guarantee that they will lend it out, or that there is even a demand for credit at the moment.....
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"I LOVE THE FACT PEOPLE ADDRESS THEIR POST DIRECTLY TO MR. PESTON. LOL!
AS IF HE READS ANYTHING WE PUT ON THIS BLOG!"
There are enough disappointments without you adding to them, quiteLondonlad (#143)
You'll be telling us next there's No Sanity Clause.
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I am still puzzled why inflation of property prices and company share prices is considered good. While inflation of wages and food prices is considered bad.
Conversley, deflation of high tech gadgets and imported clothes is considered good but deflation of property prices and share prices is considered bad.
Perhaps there is a fair price for all goods. Somewhere above the cost of raw materials and labour required to make them.
For property prices this may mean the fair price is somewhere between the historic cost of building the property and the current replacement cost of knocking it down and replacing it with a contemporary design.
The underlying value of the land is still an issue. It begs the question who owns the land? The leaseholder leases it from the freeholder. The freeholder owns on it behalf of the crown (I believe). In which case, the rateable value of each plot gives an approximation of the notional rent each plot would generate.
The rateables values would need updating but the task is not monumental.
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Robert
Your blog is graced by some very intelligent and perceptive people (bar a few).
In fact far more intelligence than the collective of the Government, Bank of England, FSA et al.
The question we shouild be asking (as several have already alluded to) is if QE is so good why hasn't it been tried before on a systematic basis? (the old economics joke about the £20 note on the pavement)
There have to be a negatives (no such thing as a free lunch).
I presume sterling and inflation are the two main favourites of which the government will have no control.
Is the UK facing economic armageddon?
Over the past few months if I was a bookie I would have shortened the odds quite considerably.
It's not a nice thought but one has to face upto reality.
I suspect that all of these recent desperate measures suggests that the incumbent government does actually have a grasp of the gravity of the situation.
However its attempts will merely prolong the agony..........
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This is`nt the first time that financially "historic" days have been very slowly moderated,is it,oh wonderful upstanding purveyor of truth and decency(the BBC,ha,ha)?
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quantitative easing, sounds like a good laxative; let's hope it works.
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Dear Robert,
Please tell me that 143 is wrong... and that you DO actually read every single one of our comments to add to you rich store of knowledge of us ordinary folk.
If you don't, there really is no point me posting any more...
Yours sincerely,
;-)
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Been thinking about buying another motorbike watching about five diffrent bikes since August 08 and prices have dropped 20-25% over the last 4 months, but this last two weeks they have nearly all sold. Mean time new bikes coming in to the shops are going up 15%! People are taking advantage of bargans now because inflation is going UP VERY FAST!
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"Oi, Steve! That new Government-funded scrappage scheme to help us sell more new cars.... great isn't it?"
"Certainly is, Alan, my son! Means we don't have to give any more of our own discounts against our hideously overpriced stock and can now offer customers "£2k off " using their own money to pay for it. Priceless, isn't it?! I just love selling cars..."
"Sshhhh.... here's one now...hmmmmppphh"
"Good afternoon, madam. Nooo, you certainly won't have to haggle with us. Honestly, we're giving you £2000 off any car you like, up front. It's our way of saying thank you for choosing our showroom today. Tea, coffee...? "
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THE FACT THIS LUNACY HAS BECOME SO
NECESSARY (COUGH) JUST CONFIRMS HOW
INCOMPETANT THE BANK OF ENGLAND HAS
BEEN SINCE 1997.
RESIGNATION MR KING?
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THREE HOURS TO MODERATE??
THIS IS A TOTAL JOKE!
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nearly 2.5 hours mediation delay......... must be something brewing somewhere.
When I was a lot younger, and making the mistakes you need to make so you can learn the hard way, I had a wily old boss.
We would go to meetings where things had to be agreed, instructed, sorted out, whatever. And there were usually three or four sides to the meeting who all had different agendas.
(I work in the construction sector)
I would be desperate to get sleeves rolled up and stuck in, so that we could get to the crux of the matter and sort it out.
My old boss would say we are going to sit at the middle of the table, dominate the room, and say nothing. Eventually someone would crack, the meeting would degenerate into a rabble, and my boss would calmly offer the 'compromise' deal (that suited us 'cos it was the right and equitable solution).
I think Gordo the Grate needs to shut up now (well he should have shut up ages ago) and let the banking sector sweat. I don't think he can stand any silence at all (in case someone pipes up that he's to blame) so has to keep coming up with initiatives.
If you have to do anything Gordo, can we just wind the clocks back to useful interest rate levels and no Q.E please.
Regards,
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Will Queen Elizabeth work?
I'm not sure Robert.
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Still, she did manage a speach at xmas showing great concern for the peasants...............
And the pope?
Well make your own mind up!
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#131 Somali_pirate. Ah yes, now I see a new aspect to your piracy - flashing out a false light so as to entice the ships onto the rocks.
I suspect that you know only too well that there are other methods available to introduce money into the economy. It could for example be provided to the general population.
As for the argument about QE being a gamble, but worth it if it prevents a recession turning into a depression...well. Hopefully you are not considering a career as a councillor in gamblers anonymous. "Yeah go ahead sir, sell all your food and gamble the proceeds, because if you win it prevents your house being repossessed and it will be worth it."
In any situation anybody can deal with the upside, it is the downside that needs managing. Gambling is not a notably succesful strategy for managing downside risk.
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The banks won't lend!
Really? Applied for a couple of substantial loans just there, approved immediately.
Whats all the fuss about Robert?
p.s I won't be taking the loan to boost consumer spending, wonder if thats the problem?
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This comment was removed because the moderators found it broke the House Rules.
It is all about rigging the rules of a previously rigged game. I welcome the Banks initiative as it does have the merit of putting money back into the economy, whereas simply issuing gilts, if purchased with money from within the UK Economy only serves to decrease the money supply or at least be neutral.
Foreign capital is still more likely to invest in US Govt debt and not the UK. I think buying Corporate Bonds is a good strategy and in a sense we are only following the US. What I am less sure of is buying Gilts - I am not sure pension funds and other holders of Gilts are ready to swop them for cash although in time they may be forced to do so.
The other big question is "Even if you put money back into the economy via Corporates and Pension Funds it may not filter its way further down to those who need it.
Sadly the only thing that we know works in History is infrastructure spending, creating innovation and lastly a good war always seems to help.
Unfortunately there is no real precedent to help anybody - we know what we should not do ie protectionism, but there is very little evidence that fiscal measures really work.
Doing nothing is not an option and action can only be applauded.
Finally a word about blame. It is true to say that the Government cannot shoulder the whole blame for the global crisis, however they are to blame for how the UK is badly place to weather the storm and Brown needs to apologise for that!
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The quid has dropped 30% against the Euro, house prices have fallen circa 20 %.
Can anyone guess the REAL devaluation? Anyone at all? Tell the FULL story Robert, we are a banana republic now.
Further,
How will we trade out of this mess? Manufacturing? Nope, our bestest Industry ever (Banking) Your having a giraffe!
What about the knowledge based economy?
Has anyone seen the latest set of graduates? Poorly educated, clueless, opinion less x box droids that do what they are told!
Thats my last Rant, off to plant the totties!
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In all of this buying and selling that is happening, is there a broker on a percentage?
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For Greyhawk 2 (# 162)
"The the BoE buys government bonds but what with? I assume that it is, in effect, exchanging something from the National Reserves (like gold?) for these bonds?"
It's worse than that, Greyhawk - the bank of England simply says it has an extra squillion to spend, makes a bookkeeping entry to that effect and all the banks fight to get their hands on this amazing new money that has appeared out of nowhere.
Because it's the Bank of England, everyone believes that the new money actually exists, so all is well......
Down the Rabbit Hole, with a terrified yell....
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blimey!
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New Labour has managed to dilute our culture with immigration, abandon our soverignty to Europe and wreck our economy. I think Hitler did less damage to Britain in WW2.
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Today I received a leaflet from the BNP. I must say that I agree with a lot of what they are proposing and they will become more and more popular unless the main stream political parties stop all this human rights and political correctness rubbish and start to listen to the average working class British people. We are heading for desaster unless the government start listening and stop preaching to the electorate. We are all becoming VERY fed up
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THE SKY IS FALLING! THE SKY IS FALLING!
You're all a bunch of old women. Print money and use the reserve ratio to control the multiplier and inflation.
Increase the reserve requirement until all of our money is "printed". No more boom and bust.
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Am amused by the idea that this is some kind of inciteful plan. Surely it is the inevitable consequence of a government needing more cash than the market can supply. In effect, if you are to believe that this will ever be payed back, the bank is moving debt off balance sheet. If the government was Northern Rock would that make BOE into Granite?
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#163 Super_bean_counter.
I think we are agreed in that the planned intention of the QE policy is to generate a loss.
I made no comment as to the likely magnitude of these losses or as to the reasonableness of RP´s estimate (so my next guess is that you are a lawyer).
I think the real point is that no-one really knows whether the losses will be small or large - and that is the basic gamble.
The currency is clearly being undermined since all markets ultimately take account of both supply and demand - not just demand. Indeed there is an argument that QE will also serve to undermine demand. But again, no-one knows with certainty.
More generally the government is clearly pursuing policies designed to weaken sterling, and are just hoping that the rest of the world doesn´t see it for what it is - namely a protectionist policy by any other name.
The domestic population will be held out to dry to provide plausible deniability in the event that any foreign johnny dares to point the finger and to utter the P word. If the ordinary man in the street raises a murmer of protest about the export of both their jobs and their future they will be immediately branded as stupid, brutal, racist, xenophobes. Who could ever take the concerns of such brutes seriously?
The general thrust of the future is not so hard to predict - i.e. a massive and permanent transfer of wealth from poor to rich, and it will be broadly in line with the vision of the corporate bailout and QE zealots.
Should be cushty as long as the average Joe just keeps smiling through the impoverishment and servitude.
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If Gordon Brown is printing more money why not just give it direct to the people to do as they please with it?
If I was given, say, £50,000 I would pay it straight off my mortgage. The bank would immediately have more money in its coffers.
Others with high credit card depts etc could pay off their bills. Everyones a winner.
People without debt now have even more money and will either save it (allowing the banks to lend it out) or use some of it to purchase luxury items such as cars, furniture. holidays etc. Again, everyones a winner as the economy is kick started.
Of course I must be wrong as this is just too simple?
Leave the banks out, show us the money Gordon.
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I don't understand what is going on but I'm not alone because neither does our PM nor his black eyebrowed sidekick.
What I do understand is that the markets are irrational as are the people as are the government.
I also understand that the government are using political 'sol-ew-shuns' to solve 'glorbal' economic problems (which no doubt started in America).
And one last thing before I feel totally inadequate and out of my depth, it would seem that you too, Robert, have no idea whether this QE will work or not.
If you have done your homework and have listened to the pick of the bunch of economists, even those Nobel Prize winning economists as Yvette Cooper keeps telling us about who agree with her government and QE, it is very worrying that we are completely and utterly in unknown territory.
The fact that GB wants to lead us to possible financial armageddon so that he can attempt to win another term is not just selfish but despicable.
If it works, he will have won the lottery; if it doesn't he is dog meat. Either way, you can't have such a madman running the country in such a carefree way.
GB is 'Scare in the Community'.
He must go now!
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#173 PrisonerNumber6 - You are wrong. Morality and leadership escaped us a long time ago. It´s just that people are begining to realise its gone as they look for it, for the first time in a long time.
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#143
maybe, maybe not, I do know that Paul Mason (newsnight economics editor) reads the comments posted on his blog though.
He only posts once or twice aweek but it is quality not quantity with him.
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If someone loses their job (5% of folk heading for 10%) their spending will drop like a stone.
If someone is frightened of losing their job (90+% of folk) their spending will also drop like like a stone. It's doing something to remove fear from the second group that will prevent recession spiralling down into depression. Any blogging ideas ?
Yours Aye,
Graucho
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Having looked at the article about the fall in the yield on gilts, I think I may have spotted where it's all been going wrong. According to the graph at the end, the Bank of England appears to think there are 30 days in February. If they've been calculating their projections on this basis it's no surprise that the economy's stuffed!
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re: Comment 205.
When a £50 000 mortgage is repaid to a bank, it cancels out a book-keeping entry on the bank's balance sheet and removes £ 50 000 from the money supply.
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If the BoE is prepared to create £75b, why doesn't it put directly into the hands of British consumers as a way of stimulating demand?
Say 60m people in the UK, £75b would amount to around £1,250 per person - a lot of money for a family of 4 to spend. With current technology, it shouldn't be too difficult to devise a scheme whereby households could be given some form of token - special debit chipcard or similar - which they could only use to buy goods / services from British companies. The retailers then redeem the cash from the BoE, possibly through a special arrangement with their own bank.
This is about as democratic as you can get, stimulates demand directly, will promote a feel good factor and probably carries no more inflation risk than the present QE initiative.
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#124 bravenewflabby
At the risk of making this blog even more like a trade paper, I must take issue over your interpretation of the Prisoners Dilemma. Check out the work of Michael Taylor, University of Essex and now Washington, on the PD supergame. Basically he shows how rational choice can adapt naturally (in absence of coercion) to produce optimal decisions when both the participants and number of iterations expand beyond the singularity (the case to which you refer).
It is, in part, myths such as your interpretation of the PD that permit coercive government to continue to peddle their larger myth, that they are necessary. Fortunately for us all, the current so-called crisis gives us a sporting chance that government as we know it will fall under the wreckage of its fiat monetary system. For this reason, I hope QE will work – to destroy rather than salvage a failed system.
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Currency notes cost 3 pence each to print ,once the mark up is allowed for the taxipayerrs will pay £20 or £50 each [or else] for what they were never about to recieve and may they be eternaly greatfool
AMEN
At the going up of the zimbabwe dollar they will remember us
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Will it work? No. It's insanity.
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As an average Joe voter, I've just realised Gord's ploy - I think I will vote Labour at the next election so we can watch them get us out of the the ensuing mess of QE. Sorry David - retire to the shires or the south of France!
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Oh dear
http://www.telegraph.co.uk/finance/economics/houseprices/4974499/House-prices-could-fall-by-further-55-per-cent.html
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*217
(oh dear )
why do you think they want to pump money into the system. they know what is coming and it is going to be very ugly indeed. i am afraid this is only the start of pain for the majority of britons.
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GB and his crew really dont have a clue.....we were told low interest rates would help as the subsequent slide in sterling would be "good for exports"... i notice from the latest trade figures the gap has actually widened! so what chance this latest wheeze? have any of GB's schemes to save the world actually worked .......
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The proposal for quantitative easing is more of the economics of the madhouse. If the public knows the truth about the economy it is difficult for the politicians to pull the wool over our eyes. Of course, they hate that, so they try to keep us in the dark as much as possible. But we need always to bear in mind that armed with facts we can make intelligent assessments of policy initiatives, and try to nip them in the bud if they threaten disaster. Likely as not, we will have little success; we can but try.
We may know that all of our money is printed and we may wonder how the new quantitatively eased money will differ from it. To grasp the difference we need to realise that our currency is backed by nothing more than foreign confidence in it. It is nothing other than pretend money. Indeed, it is called fiat money by economists, and fiat is the subjunctive form of the Latin verb meaning ‘to be’. What the word means is ‘let it be’. In other words economists are recognising that we call it money but that it is backed by nothing. At one time our money was backed by gold. Today it has no substantive backing whatsoever. If it is all pretend money, what then is the difference between the money already in circulation and money produced by quantitative easing? The answer is that in the case of quantitative easing the BoE will be printing money in greater quantities than ever before. Already we have too much money in existence. We know that by the fact that the world has decided that our £ is getting progressively less valuable and has devalued it accordingly. Put the printing presses to work aggressively and you are compounding an already unhealthy situation. Once the money has been printed it will be used to buy up public and private debt. This in turn will mean more money in circulation and banks and companies freed of debt burdens by the easing will spend in the case of companies, and lend in the case of banks thus re-starting the cycle of boom and bust. But let us examine the quantity of debt that needs to be bought up.
The gross external debt of central government and its monetary authorities is $390bn. The banks alone have external debt of a colossal $7,070bn (i.e. $7trillion). Other sectors have external debts of $2,997bn (i.e. $2.9 r), and external debt at the level of intercompany lending is a further $813bn. The gross external debt of the UK as a whole is an unbelievable $11,270bn (i.e. $11.2tr). As a percentage of GDP (what our economy produces in a year) that is an eye-watering 400%+. Our gross external debt is only about $1tr less than the debt of the USA and economic commentators there are agreed that it is an unsustainable level of debt. But in terms of USA GDP their debt is a mere 99% of GDP. Ireland alone of the first world countries is worse off than us with debt of over 1,000% in relation to GDP. We have the second largest external debt of all those countries if debt is expressed as a percentage of GDP.
What these grim figures tell us is that quantitative easing is a deeply flawed proposal, and cannot possibly work unless it is on such a vast scale that it will wipe out a significant amount of UK external debt. And that would make the pound about as valuable as the Zimbabwean dollar - zero.
President Sarkozy has, with Gallic brutality, hit the nail bang on the head. The UK response to the financial crisis is catastrophically flawed. He is also dead to rights when he says that the problem is in the mind. People are terrified to spend. They do not trust their banks, their politicians, their local authorities, their economists, or any others of the ruling establishment. So what do they want to do? They want to save their money. And that, in the long term, is precisely where our salvation lies. What does the Government do to encourage this? Nothing at all! In fact it discourages savings by having a bank rate of 1% and set to fall further. These are the policies of an economic madhouse and they will send us spiralling into depression from which we will emerge with all the significance of the once grand Ottoman Empire in 1920 - obscurity.
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I read yesterday that food prices have actually RISEN by 10% recently as sterling has fallen.
Utility prices remain stubbornly high.
What's fallen?
The price of things we can do without (at least for the short to medium-term)- cars, electronic gadgetry, restaurant meals (check all the 2 for 1 deals), a different house (when we have a perfectly acceptable existing house), ready-meals from marks & Spencers (check all the offers).
What we are witnessing is a sea-change in spending.
People are hunkering down, fearful of what's happening and what is to come (the biggest wave of unemployment has yet to hit us).
People are spending only on essentials.
People are being sensible and realistic, unlike our politicians.
People KNOW that none of the people entrusted with the management of this country have a clue.
This won't change for a very long time - I would put the economic recovery far in the future.
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Just thinking about this flash new phrase - "Quantitative easing".
It's a fabulously soothing euphemism.
It's shorter and has infinitely less fright-value than "Turning the printing presses on".
People would run screaming to their banks to get their money out and convert it into gold sovereigns but for this neologism.
They KNOW in their water that flooding the country with new banknotes is a BAD IDEA.
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May I chip in a sad note about the effects of the reduction of interest rates to nothing?
We received a phone call from my old but amazingly generous father-in-law the other night.
He was very upset and told us that because his income from his shares and deposits had fallen off a cliff he wouldn't be able to put quite so much money into his grandchildren's savings accounts in future.
This gave me the clearest insight into the desperate problems being faced by people who have saved hard in the past to ensure a decent living when they retire.
These people outnumber the prodigal borrowers in our society by 7 to 1, yet their needs, their problems have been totally ignored by the government.
They will punish Brown severely at the ballot box.
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Surely the issue here is that the market has failed- we just do not know anymore what assets are worth. QE is the only weapon the bank has to try and prevent deflation and its role is to aim for inflation at about 2.5% if I recall. So all it is doing here is easing money supply as opposed to tightening it when inflation is too high.
As to any profit of loss made when the bank sells that is a red herring is it not as it will come out in the wash. The real losers on this are people who have to buy annuities so HMG must lift the age limit of 75 so at least people have a choice.
The logic of the BoE and HMG cannot be faulted- if we have a 10% fall in GDP with an extra say 2-3 million unemployed what would that do to HMG tax receipts that were £550billion- they would presumably drop by upwards of £50 billion at the same time expenditure on benefits etc would increase by £20-30 billion and that is in a year so the total cost of a 4 year recession would probably be around £250-300 billion. I support the risks they are taking and what they are doing but we all know it could still all end in disaster. The alternative is to balance the books and have people go hungry and not receive health care- surely a recipe for widespread social unrest and probably wars similar to Europe in the 17th century- a civil war in the UK would become thinkable.
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Did it work for Japan?
Will it work?
Nope.
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Will QE work?
Well, we have historical examples, such as the Wiemer republic, post-war Hungary but these would be dismissed as irrelevant by the government.
However, if we look at Japan, which has had no less than 8 stimulus packages as well as QE then we see that the nett result has been 18 years of recession.
This would lead a rational observer to conclude that stimulus packages and QE not only not work but also make things worse.
An irratioanl observer would conclude that if you keep doing the same thing over and over eventually you get a different result.
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223 noninflatable
What you describe also demonstrates clearly that it is our children and grandchildren who will lose out.
No doubt, the socialists will say they should not be given money but the next generation will be paying for this experiment and will need all the support they can get.
Experiment is the apposite word here.
None of those in power have any idea how this will pan out, they are guessing. Economists are divided and your guess is as good as mine and probably better than theirs because we do not have their political agenda.
I hope the savers pensioners and private sector workers, who get little from the state but have paid massive tax, throw this disreputable crew out of office never to return.
LET US CONSIGN NEW LABOUR TO THE DUSTBIN OF HISTORY.
May Bliar and Bruin be shown for what they always were; shallow spin.
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For Emgebees (#224)
"a civil war in the UK would become thinkable"
Having been born on the Right Side of the Pennines, I still have my doubts about Yorkshiremen.
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So the logic behind QE is to get banks lending to businesses and to give a boost to the housing market by making more money available to home buyers.
Is this a wise move? Absolutely not!
Taking on debt, or more debt, is the very last thing that any company or individual should be doing. Perhaps banks are at last acting responsibly by not lending and actually encouraging repayment to build up their reserves - being cruel to be kind but certainly not out of altruistic motives as one would expect.
I suspect that in the majority of cases where a loan is required by a company then that company is close to going to the wall - and lenders should be fearful of escalating bad debt.
What's the alternative to QE?
Well, it's really quite simple. Ever heard of Windows Restore? We just need to reset the economy to a time when it functioned smoothly. And how to do that?
Deflation! that dreaded word. It's going to happen anyway - price cuts, empty properties leading to rent reductions, bit by bit, slowly slowly, gradually sapping the will of business and home owners. No-one spending as we know that next day, or next week the price will be lower and thus we suffer the same effect that Japan has experienced.
So why not have controlled deflation?
What are the largest expenses for any business? Rent, rates, wages and debt repayment.
Then why not, enforced by legislation, say, reduce commercial rents by 50%, the price of goods sold by 40%, wages by 30% - all bank loans to 1 or 2% over base rate and extended to 25 years (as are business loans in other parts of Europe, so I understand) There would then be enough 'pound notes' to go round - and that, after all, is what the problem is all about.
Mad idea?
Completely, but it might work. In fact I'm sure it would and a darned sight better idea than QE.
Looking at my own business - I import from China and sell goods by way of retail sale.
If my largest cost, rent, was reduced by a half,I could reduce my prices considerably - I already sell at up to 30% cheaper than my competitors, and could even afford to take on an employee.
Looking at businesses generally, many more would be able to stay in business, many more of the population would remain in employment - and people would spend as goods become more affordable.
This time next year we even be thinking again about that little villa in the south of Spain. The pound will have retaken its high ground, the Euro on its knees - the good times could soon be back.
Fanciful? Absolutely! We are doomed by the sheer incompetence of these people who believe it the right thing to do, to prop up failing institutions - we are going to suffer very many years of a decline in the economy with no hope of an upturn for a generation at least.
Hugh
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Post 228 noninflatable wrote:
For Emgebees (#224)
"a civil war in the UK would become thinkable"
Having been born on the Right Side of the Pennines, I still have my doubts about Yorkshiremen."
I`m pretty sure that the focus of the next "insurgency" will be very "London-centric" .
Ha,ha.
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#224 Emgebees
"A civil war in the UK would become thinkable"
Sadly - unless something is perceived by ordinary people to be working soon - civil unrest / rioting / looting / protests that have got 'out of hand', or whatever are just about certain.
The riots of Toxteth and Brixton were fuelled by disempowerment and frustration.
This time round it won't just be one ethnic group within society, pretty much everyone of every ethnic group, age, class and geographical location is going to be miffed off about what is happening in their homes and to their families. And a certain percentage of all those people will be of the personality type to take physical action into about it, rightly or wrongly, legally or otherwise.
It is almost 100% certain to 'spark off' in at least in some places. And, of course, that has economic consequences as well.
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The British economy is not as bad as in US, BUT not far from. British people have and are continuously encouraged to borrow and spend more money. Per capita we have the highest debt in Europe. Quantitative Easing is just a form of printing money. The word sounds nice but the truth is that our economy is one of the worst in Europe and we will soon have 3.5 million unemployed and riots on the streets.
If you don't believe how badly it is you can check CIA's rank order of the world’s largest economies.
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2187rank.html
UK doesn't impress being 3d from bottom! What is more alarming is the Fractional Banking system were England and many country have abandoned the gold reserve. Today money is a digital figure without any securities in the background. That is why PM Brown encourages your children to spend their pocket money and borrow more! Do you really think our economy is better than Iceland’s?????
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Any one remember Black Wednesday when we pulled out of ERM, its very interesting reading Gordans comments in parmement that week.
I garantee that there will be several guilts traiders who will make an abosulte killing with QE over then next few weeks.
I strongly suspect that they will make more that the traider who betting against the pound pocket most of the monies the then goverment threw at keeping the pound within its range.
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Oh and of course if QE doesnt work, Gordan will claim that he had nothing to do with it as the Bank of England is independant.
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Double personal allowances to £12k pa in the up coming budget to get the country spending again
At least the taxpayers will get some short term benefit for the billions being frittered away
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For Halvars # 232
Thanks for the link to the CIA statistics.
Running down the list of countries with huge reserves, I couldn't help but notice that a lot were places with lots of sand and relatively few people - Saudu Arabia, Kuwait, the UAE, Qatar etc.
Here's some lateral thinking.
What if we use the West's one undoubtedly superior asset, our vast military machines, and simply move in and colonise those places?
We could appropriate those assets (mostly bits of paper with our names in them) and cancel our debts.
The places we've taken control of coincidentally have lots of oil under them, so we could then turn the taps fully on, bring the price of oil crashing down and give our economies a fine boost.
Mad?
Of course, but do you think the Pentagon doesn't already have plans to move into places like Saudi Arabia to secure oil supplies if push comes to shove?
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#231 Addendum
Oh and as well as such civil unrest, you can add the consequences and sequels mentioned in the Econocides article http://news.bbc.co.uk/1/hi/business/7912056.stm
Such tragic events also have economic consequences too.
Oh and when people project that x million will become unemployed, they never mention for how many months and years they will remain jobless. So, they don't mention effects like the de-skilling of the workforce through people being out of work for long periods or the damage to people's mental wellbeing, etc., etc.
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how much of the activities in the City is really to do with raising money ? or is it just a very large casino ?
I think the latter !
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156 williamshepherd wrote
"2. Is there a legal agreement between Her Majesty's Government and the Corporation of the Bank of England...which I believe is still a private company with shareholders and directors as it has been since 1694...detailing respective duties and liabilities of the parties to the agreemment? If so, is it in the public domain? If so, is it available on the internet?"
Please take a look at this link
http://www.bankofengland.co.uk/about/history/index.htm
it should answer your question.
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231, How is civil unrest 100% certain?
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hurrah for 220 and 221; the message for ordinary people, living ordinary lives, is, save save save save save. big government both sides of the atlantic have been an advertising agency for rampant capitalism. leave them, or, their successors, to sort out the mess. try something new. let's rid the system of the money, money money junkies.
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QE is design in this format NOT to reflate the economy but to ensure that the Government's vast debt is funded at as low a cost as possible. Indeed if the seller of gilts were to place their newly created cash on deposit they would earn almost nothing a be at a possible risk of a bank failing , so why not reinvest at a 2- 4% with the Government. This is will look like a great rate of return especially as deflation increases it's hold on the UK this summer. Even the CPI ( currently 3%) will fall below zero by September / October.
So as with many things the real aim is not the one that is made public.
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Whether markets can be considered rational or not surely depends on the timescales.
Are we looking at seconds, hours, days, weeks, months, years, decades.
Likewise, which markets - the stock markets, FX, oil, metals, individual shares, wheat, rice, tulips, carwheels?
Who is the market?
Who determines rationality?
I'd say its pretty rational to bail out of shares that are going to be impacted by government intervention or ownership.
I'd say its pretty rational to bail out of 'markets' that could reduce in value
I'd say its pretty rational to plonk your 'money' in safe havens such as US Tbills or Tnotes.
Its rational to consider supermarket chains or food producers or healthcare reasonably sound
I'd say its rational to put off buying GILTS until the BoE makes an announcement about buying Gilts.
These are the actions of millions of indiviuals that make up the market, directly or indirectly.
What is not rational is to believe that you can easily get a 10% return per annum on anything, medium or long term.
What is not rational is to borrow to bet
What is not rational is to lend or commit long term and borrow short, whether you are a bank, a business or a mortgagee
Markets or the millions that make up the markets, did this too
Overall, how will these variations look in five or ten or fifty or 500 years.
Depends on how far away we are and what we are looking at. We don't have much of a market in tulip bulbs any more do we? Is that rational? Yes.
We don't have much of a market in cartwheels either or shire horses. Is that rational? We'll see.
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None of this would have been needed if the government had allowed the failing banks to fail and let the stronger banks to buy up the securitised assests. And the survivors paid off the deposits.
That is how the system was structured to work and the single biggest mistake the government made was saying there were banks that were to big to fail.
As soon as you do that you nailed on the fact that speculators would test that resolve by selling banks down the river.
IT happened to the Conservatives when they attempted to stay in the ERM, They stated the pound would be defended at its level at all costs which led to 15% interest rates and a consequential recession following the pull out.
Its obvious labour couldnt run a pie shop let alone an economy
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Years ago when the UK was in deep trouble we were told by politicians that we would get out of by through blood, sweat, and toil. Now we are told the solution is quantative easing. Which of the two solutions sounds the most realistic to you?
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Take a look at how sterling has been performing against major African currencies over the last year or so.
We will soon be getting aid from Africa.
Well done Gordon.
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QE may or may not work, and we are in a bit of a pickle, but frankly a lot of you posters need to GET A GRIP
your great English pirates like Francis Drake would be ashamed of you!
and all this talk of looming civil war etc is a load of poppy-cock; most people get on very well and it is more likely that we'll get a polite demonstration or two at the G20 and some fringe direct actions; and a general increase in burglary over the next few years
as for the QE question, it seems that most oldies, savers and home-owners are all lathered up because it offends their morals and there is a strong fear of inflation eroding your stash if you have one
but inflation would be generally more welcome and useful than deflation IMO and you can always spend your money on something rather than watch it lose value
personally I would do the QE directly to SMEs and individuals rather than through this technical means and via the banks; or set up National Investment and Savings Banks
it may offend people's sense of what's right but the best, most direct financial stimulus should be by giving the poorest people - unemployed, school-leavers, single mums etc - the money because they would spend it! oh and SMEs too, even if they are market stall traders with a business plan on the back of a fag packet
economically it would be best if everyone over the age of 50 was made to retire and even better emigrate to Australia or NZ, thus freeing up jobs, houses, school places, parking spaces and a seat on the bus/train/tube for the younger people (including immigrants) who need to get a foot on the ladder and would work hard and not moan about it constantly
and I'm a 52 year-old pirate by the way
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Nadeem Walayat has written some excellent articles on this topic. He argues that in the short term QE is simply an attempt to mask the continuing housing crash in the UK as well as the fact that the Govt has Britain on the road to going bust.
Great read.
http://creditcrunchedoutinuk.blogspot.com/
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For #224, #247 et al
"a civil war in the UK would become thinkable"
A quick (admittedly unscientific) survey amongst my work colleagues reveals that a majority of them expect to see civil war in the UK within the next 20 years. The thought of emigrating, if possible. is very popular.
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#224 emgebees Your core propositions are in error and hence your conclusions are also in error.
QE maybe the only weapon that the bank has, but it not the only option available to government. Money, for example, could be provided direct to the population. The fact that this is not even deemed worthy of serious consideration is informative as to the utter contempt with which the ruling elites hold the general population.
Profit and loss associated with QE is not a red herring. The policy specifically requires a loss to be made, and that loss is intended to be made good over time by the general population.
Any fiscal or monetary policy will create winners and losers, and this policy, as you have identified, is specifically targeted to make losers from the poor and the weak. It is also designed to transfer further swathes of the population into the bracket of "poor and weak."
The argument about inflation and deflation is complex. However it is certain that council tax bills and rail fares do not indicate any deflation on the part of government revenue collection. Some deflation will occur as a consequence of the decline in oil prices - I do not see any popular demand that we all suddenly start paying more for the price of energy than the market requires.
You say that the alternative is to have people go hungry and to not receive health care. Open your eyes - people are already going hungry (specifically those in hospitals) and are already being denied health care.
This is not caused by a lack of money - it is caused by a lack of concern, and a wilful incompetence.
Anyone who is not already a multi millionaire and who thinks that this policy is anything other than a disaster is going to have a brutal meeting with reality. It is when people form the impression that they have been lied to and played for fools that they are most likely to respond with violence.
The big bet is that the corporate media and the collapsing education system can combine to finally demonstrate that you can in fact fool all of the people all of the time.
If this proves possible then Kim Il Jong will be able to claim complete victory and the British will have succeeded in emulating North Korea.
Long live the Dear Leader!!
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Armagedion.
Look at my username....(sigh)
The answer is sometime closer than you think.
Duncan
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#247 somali_pirate You identify the altenrative method available i.e. to provide money direct to the population. The chosen method is to give money directly to the rich.
Economically it cannot work and socially the bet is that you can in fact fool all of the people all of the time.
So pretty much the best possible outcome is a collapsing economy and a docile and subservient population.
Pretty soon the British will find the culture shock of Oz and NZ too great. They will feel much more at home in downtown Pyongyang.
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Maybe the real problem is that in the boom people bought what they want and now they have to pay for it. Isn`t that what recessions are all about? How many of us have that much stuff in the house that we can`t give it away?
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#251 super_bean_counter Yeah I got it first time, just my little joke!! (albeit not very funny). Sorry if it irritated you.
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@247 somali_pirate
> economically it would be best if everyone > over the age of 50 was made to retire
OK, so we start work at about 20 after school and some training and retire at 50 i.e. 30 working years.
According to the actuaries if you make it to 50 you can expect to live to 89. So 39 years of retirement + 20 years before starting work = 59 non-working years supported by 30 working years.
How can this possibly work?
The whole pension idea is a big lie, just like house prices going up forever. It worked when there were more young people than old people and it appeared to work when stock market and house yields were magnified through excessive debt. Its obvious it cant go on but no-one in power can afford to say so.
The reality is that the pension age should be about 10 - 15 years below the life expectancy. So we should be planning to work to 75.
The unfair thing is that those of us who are not yet retired are paying to support a much better pension deal for people retiring now than we will ever see ourselves. The money we are spending on their pensions is money we are not saving for our own.
I was particularly happy to see that £800M of the govt bailout to Royal Bank of Scotland was diverted into their pension scheme. Evidently the poor things bet on their own shares and lost money.
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#252 armagediontimes
a friend of mine once visited Pyongyang on a trade mission of some sort and said the streets were very tidy
if the UK emulated NK then I guess we'd become very good at synchronised mass dancing and waving of twirly bits of ribbon
which will come in handy at the 2012 Austerity Olympics
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For DickyJ39 (#239)
"the Corporation of the Bank of England...which I believe is still a private company with shareholders and directors as it has been since 1694"
This simply isn't true. Following the 1946 nationalisation of the Bank of England, it is now a public sector institution, wholly-owned by the government, but accountable to Parliament. The entire capital of the Bank is, in fact, held by the Treasury solicitor on behalf of HM Treasury.
One of the false rumours surrounding the Bank of England is that the shareholders are the Rothschilds.
The underlying agenda here is, of course, anti-semitic (the Jews control us).
I believe there are similar false rumours about the US Federal Reserve.
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249,
I’d be interested to know a rough background of the staff you questioned, genuinely. I have performed a similar survey in my work, they all responded similarly ‘with a vacant look’’.
I’m in IT / Finance btw.
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....and did someone mention deflation? All the things I need go up(council rent 8% in April), gas and elecricity(go up a lot, then down a little),coucil tax, water.
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No 79
Alastair Rae asks "How are we expected to know what a Ricardian equivalence is?
Answer: Simple. Just Google it.
Every day I learn something new - or in the case of Ricardo's principle, something rather old.
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#245 - obviously not QE - you are so right - the problem right now is that anything that requires sweat and toil is disappearing up its own backside - another 3 months of this and there could be virtually nothing left - masses of businesses are hanging on by their finger nails.
Blood - if you mean war, either civil or international, then perhaps I prefer QE!
I agree with the general thrust that it is the spenders of money that need something extra to turn the postion round IF spending our way out of it is the way to go - unfortunately this IS the route we now are committed to - it will end badly for us all.
We should have stopped spending immediately, let the whole financial system collapse then worked out how to keep going - it would have been hard but we are very resourceful as a nation. However at the moment I fear when China move in for the kill we will be too weak to fight them off - our best chance is probably that we make ourselves so weak that other countries lose interest in us. We can then grow our own food, work out how to generate our own power and then build ourselves up again.
But as a rsult of financial mismangement at a macro and micro level by a large proportion of our governemnt and population we are in for some very very tough times ahead.
Anyone who believes we will be an economic force forever has never been to Venice. Venice, which now is basically a tourist destination plus a couple of glass factories for the tourists, used to be the centre of the trading world. Times change and the times they are a changing.
PS Number 38 - your maths are appalling although you may be right - what the government has done is given about £1million to the head of about 60 families in the UK - all the Head Bankers families!
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A good view point, it would appear therefore that the chancellor and Bank of England are gambling on our continued private pention contributions keeping the merry go round or money supply in operation.
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178 Jolo13
Please tell me which French account?
Mine is only paying 2.5% now..
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# 223 noninflatable
Your right, Crash and co ignore the grey vote at their peril.
Mature people are spenders and bankers to their children. Many must be unhappy bunnies with vengeance in mind at the ballot box.
Personally I am expecting a bribe in this years budget... a huge increase in the state pension.
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Robert,
By which metric will we judge whether QE has worked ? The primary purpose of QE in can be boiled down to increasing the money supply in the uk to create inflation thus avoiding the considerable problem the economy will experience if the inflation rate turns negative as it will based on its current trend.
The flaw I see with this policy is not the emotive issue of printing money but the problem that this is an experiment operating in an open system not a closed system. It is also not a question of whether markets are rational or not. The fact of the matter is that the money being pumped into the system buying up commercial and government paper will not necessarily result in an increase in UK money supply as if those receiving the cash are rational agents they will place the cash wherever, they judge it will be safe from depreciation and earn some level of interest which will I suspect not be with UK banks as a result the cash is likely to leak from the UK system may well improve the money supply else where outside the UK which will not help us.
It would seem to me that a better policy would have been to set up regional commercial banks to fund business enterprises or advance major programmes of infrastructure such as roads, rail, nuclear power stations green energy R&D infact anything that creates jobs or improves the UK 's skill base. Whereas, I understand that many Universities are proposing major redundancy programmes at present because of the short fall in funding resulting from a fall in their investment income.
Brown must resign before any more damage is done
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#255 tom edinburgh
my radical suggestion of forced retirement at 50, preferably accompanied by the emigration of all moaners to the antipodes, didn't mention pensions........
they would have to be much smaller if they can even continue at all; as you say, the whole pensions expectation is already currently unsustainable
in order to reboot our economy at a sustainable level, both for the narrow definition of an economy and for the planet's environment, we have no choice but to opt for a lower standard of living - at least in terms of material consumption; we already hugely overproduce in many areas and not just in plastic tat you find in Walmart - the west's automobile industry probably has 40% overcapacity that will have to permanently disappear
in these circumstances a lot of 'entitlements' will have to be severely reduced or just dropped; in the case of pensions, families will need to live under the same roof and look after one another
not everyone's idea of the good life, but could have some up side - as it would help solve the housing crisis, child-care crisis, pensions crisis, transport crisis and a few others all at once
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Economics = quackery
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255 Tom_edinburgh
There are lots of sacred cows that will need to be eaten.
Final salary, index linked pensions.
Retirement at 65 or earlier
Free universal healthcare from cradle to grave
Oil based internal combustion engines
That sufficient electricity can be generated without the nuclear option
University education for the majority.
Current levels of LA and central government expenditure on nice to haves
To name just a few.
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#249 and #258
I'm curious who your colleagues think the civil war is going to be between? and are they seeing themselves as participants?
is it going to be the Angles vs the Saxons?
lowlanders vs highlanders?
IT workers vs call centre employees
BLOGGERS VS MODERATORS (that would be a good one)
small businessmen vs bankers (hmmm this is all starting to sound quite attractive)
or just every man (and woman) for himself?
in this part of N London we would of course reawaken the Sol Campbell debate as well
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#258 Javaman - how I chuckled - I'm not in IT but whenever I ask any of our IT anything they respond with a vacant look! Try asking them what day it is and monitor whether the reaction is any different.
;-)
No offence meant by the way - we all have lots of different skills etc and I value the contribution our IT team make to our organisation - we'd be lost without them.
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Somali Pirate @ 247.
I'm 30 years old and would like to volunteer for retiremetn and forced emigration to New Zealand please.
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#258,
For what it's worth, we are a medium sized engineering company in Lancashire.
Off to lunch now! :-D
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Having done my best to follow your explanation, Robert, and being none the wiser, I just feel loathing and contempt for all the financial gobbledegook I've had to struggle to learn for the last 6 months.
Fractional reserve banking, leveraging and deleveraging, cdos, other "exotic" instruments, legal clauses that exempt bank robbers from jail, Brownspeak, now quantitive easing.
You know what, I don't know if there's a difference between a gilt and a bond!
"The corollary of that is a fall in the yield on gilts to levels we've not seen since the 1950s.
If you'd bought gilts yesterday, the yield was around 2% for a five year loan to our government, 3% for ten years and 4% for 20 years.
For the Treasury, this looks like a triumph......................................................
Surely if markets were rational and efficient, there would be no impact on gilt prices, or yields or interest rates at all.
Isn't there a kind of Ricardian equivalence going on here, where nothing of economic substance has actually changed?
It seems to me that this policy only works on the basis that markets are irrational and short-termist.
All investors apparently see is the volume of Bank of England money going into the market that's increasing demand for gilts and driving up their price."
PLEASE CAN SOMEONE EXPLAIN WHAT THE ABOVE MEANS?
Q: Why does the yield on gilts lose value when there are more of them? Why does the last sentence say exactly the opposite to the first - demand for gilts drives up their price? Why is the demand rising?
Q: Why is it a triumph for the Treasury if that happens?
I go to some trouble to understand what these economic tools mean and I do understand words of more than one syllable, but can someone describe the process of making bonds and gilts and the way they absorb debt, with some clear examples.
I truly despise this government for concealing their greed and immorality behind the secret society of banking. They're just a lot of gits chanting mumbo-jumbo in their temple dedicated to money.
*220 newProtectorCromwell
I very much appreciate the facts you've given.
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I'm beginning to wonder whether it might not have been better to let failing banks burn while guaranteeing all deposits, corporate and individual. The consequence would have been that their debt books would be sold on and the market might have done a more efficient job of finding the toxic assets (which wouldn't get sold).
This is perhaps terribly naive of me. But when my bank tells me it is currently charging 20% interest on business loans even if a businesses is sound (there's surely no chance of a loan if it isn't) I have to conclude the bank is unfit for purpose and frankly being irresponsible. And that's a major high street bank.
It seems to me that the policy of getting money into the system via the banks has already failed and is at best hugely inefficient. If they are charging more than 18% over Libor it seems to me banks are a long way off distributing money on sensible terms.
The problem for the real economy is money. Banks failed in their duty of managing risk, giving too much money away too easily. And they are doing exactly the reverse now. Meantime workers at failed banks are getting bonuses while many equivalent workers at struggling but more fundamentally sound businesses are having to agree to pay cuts.
We are at the point where we are beginning to lose valuable flesh not just fat. Too little has changed at the banks for them to be a viable partner in solving the issues.
If we want improvements in the real-world economy we need to ensure banks are living the real world.
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When will the government/BoE realise that you can't solve the broken economy with sleight-of-hand.
After a decade of being debt-drunk, it's time to sober up. Not have another drink.
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But Robert, the financial system has to be stabilised before QE can work and before the benefits, in theory, can start to flow.
What kind of stress testing is being done on the systemically important financial institutions? what is going on in non-viable banks? are viable banks recapitalising or are they still writing down? when will toxic assets on bank balance sheets be neutralised and priced via a transparent and simple formula? where are the answers to these questions?
We need decisions and we need processes to be carried out without further hesitation.
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More spin from the government to undermine confidence in the banking sector. Hector Sants has declared that the FSA is going to take a tougher stance on the supervision of the banking industry. What, you mean it's actually going to start doing the job it was meant to be doing for the last 10 years!!
Coincidence that all this latest media coverage will no doubt weigh heavier on the stock prices of Lloyds and Barclays, now why might the Government want this, does it want to prevent Lloyds shareholders taking up their rights on the new issue of ordinary shares and so limiting the Government equity stake to 44%? Does it want Barclays share price to fall to enable it to take a larger stake in the bank if it participates in the APS? Just a theory.
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Just read on another site:
Definition of QE
Ponzi scheme.
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#240 JavaMan1984
I'll try to answer that.
One of the psychological basic needs of humans is for "security" - i.e. freedom (to some degree) from (serious) threat.
As more and more people are "threatened" by unemployment, inadequate pensions, lost money in shares, etc, more and more people will become less psychologically stable as a result of those stresses, those threats to their security.
Some of that will be manifested in irrational behaviour - sadly and tragically - such as suicide (see also the item on Econocides) but some will manifest in attempts to "do something about it", or to "not take this laying down".
Whatever particular target this course of action takes, i.e. against the "establishment", the banks, particular employers, or the wealthy, there is a long history of this sort of thing happening in one form or another, e.g. the Jarrow crusade, the miners disputes 25 years ago, the Wapping disputes, the Brixton and Toxteth riots and, of course, many from the history of other nations too.
Sometimes some of these events will be well-contained and not result in violence, but sometimes, for one reason or another, they will result in damage to property and injury to people.
Such incidents can be even highly organised via CB radio, mobile phones, the internet but others can seemingly be quite spontaneous. Unlike in the 1980s, the masses nowadays have access to fast hi-tech communications and a general freedom of using those. (The fact I'm blogging on this "bbc" site probably proves that).
Now just as RP has suggested that the people in the markets can be irrational, so can the public. More accurately people are a blend of rational and irrational, they simultaneously hold the capacity for both.
But you have to factor in, also, that if a small number of 'irrational' people start off what you might describe as 'a punch-up', sadly a whole pile of otherwise 'rational' bystanders often join in. And that can be how small incidents escalate into big ones. Or 'rational' people get involved as a reaction to the force or perceived unfairness used by the authorities to deal with the event .
Given the large number of people negatively effected by the current crisis, and the demonstrably increasing inability of any person or group to reduce the perceived threats to their security, I believe it is almost 100% certain to spark off, somewhere (probably in the UK), to some degree, probably within the next few months.
A view - so I am told - that is held by some senior police officers.
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It worries me that this has never worked in the past and that in the MPC minutes from February they stated something along the lines of - we don't know what the effect of quantitative easing will be or how long it will take.
Now, even if they don't know, for gods sake lie to me, make me feel confident that you know what you're doing.
I read an article recently that looked at previous banking crises, it appears there have been several, and it analysed these previous situations and then looked at ours and explained expectations based on these past crises.
It doesn't look good. It states that on average, a banking crises leads to property price falls of approx 35%, and we are only less than 20% so far.
It's a very good article and I think many would find it interesting. It's titled
"The banking crisis - where are we now"
and you can read it at http://www.wwfp.net/weekly-articles/recession--the-uk-economy/26-february-09.htm
It's interesting to see a different perspective that looks at things from a historic perspective looking at real data from previous similar financial disasters.
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One rule for the bosses and another for the rest of us.
G20 dignitaries will not have to obey the law on smoking in public places.
It is OK to smash small businesses but not to offend politicians.
http://uk.news.yahoo.com/14/20090312/tpl-g20-exempt-from-smoking-ban-81c5b50.html
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270,
Your powers of observation serve you well, the clue is already in my moniker. 6 years of university education, initially as an engineer in a different field.
I even managed residency in the states, not bad some on here may say. I find it rather entertaining that you feel that this blog should only be visited by folk with useless BA / economics degrees, degrees which will not doubt soon be rendered useless.
Engineers can’t learn economics can they? Indeed some on here seem so preoccupied with whether they could when perhaps they should have been thinking whether they should ;-)
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WHY EVERYBODY SHOULD READ THIS BLOG ENTRY.
Why all this financial engineering isn't doing anything at the coalface.
I run two businesses with one being a couple of years old which started with small overdraft only.
Yesterday I got a call from my call centre-based Business manager at the bank (let's just say this bank is a knackered old 'horse' previously 'helped' by the PM).
I was asked if I needed my overdarft anymore since I was in credit.
If so then the bank would wish for me to have a loan (unspecified reason) other than for putting money into my account to use.
My reply was NO. I don't take business loans out for a non-specified purpose and certainly not for cashflow.
We agreed to disagree but with the result that I've rescinded any overdraft at all (at least I'll save on the fees).
If this constitutes the much vaunted government commandment for more business support than we are just storing up more trouble. The classic unintended solution to the wrong problem.
Perhaps Robert and his BBC pals could do a little more investigative stuff about what's really going on and why it won't work rather than pontificate over a desperate measure to reflate the economy with an unproven, speculative punt?
UK = STARK RAVING BONKERS
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rwolff number 213
I'm not au fait with Michael Taylor, or what he says, but I think that the lessons of things like prisoner's dilemma aren't so much about `big government', they are more about cooperation versus non-cooperation. In fact to have markets you already require `big government' - a concept of money, a concept of property, and legislation around these things - rules which ultimately rely on collective agreement. Are you in favour of scrapping money and going back to bartering? If not then I would argue that you are already in favour of a pretty `big government'.
Going back to markets and the issue of cooperation, a cooperative action taken by rational intelligent agents can never be worse than an uncooperative action taken by rational intelligent agents, because if required, the cooperating agents can always agree to follow the uncooperative route.
Markets are claimed to be good methods of optimisation, and while I agree that they can work well in some cases, I would claim that they cannot work well in many other important situations - e.g. situations of finite resources, situations where some parties keep information from others, situations (e.g. in retailing) where marketing can be used to manipulate consumers. The different agents in a market situation actually drive towards different individual optima, even though that might not be the best outcome for all. I might want my kid to be top of his class, and might try to weaken my friend's kid for that to happen, but when I'm older my child could become my doctor, and my friend's kid could become my dentist. So really I should want them both to do as well as possible. Markets simply don't think in these collective terms.
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279,
Thanks for that.
And this time we have the added bonus of the 3 million plus who will see the bail out of the banks with future money (from their kids) essentially helping out those that caused the mess in the first place.
Some people have made obscene amounts of money, perhaps these people could become a focus for such unrest.
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No 224 the market hasn't failed, it's been perverted by politicians. Look, interest rates should've been much higher earlier in the cycle, but because politicians took inflationary items out of the inflation figures the central banks were made to keep interest rates low, until everything got out of hand.
The market has been corrupted by politicians and now it is having its revenge. Or, to be more exact, it is having to correct the mismanagement of affairs by politicians.
Everyone loves the market in the good times, but corrections and recessions are part and parcel of the economy. They serve a function.
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*257.
Yes,but is the pope catholic :-)
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Too much money in the economy created as debt caused the huge increase in house prices, now people have excessive debt to pay back. The only way old debt can be re-paid is to create yet more new debt. See Wikepedia fractional reserve banking where £100 with a reserve requirement by the banks of 20% can create an extra £ 357 from nothing, the greatest fraud ever devised. This system is the cause of huge inflation in house prices, now deflation, or boom and bust. 100% reserve banking is needed to fix the problem, not quantitive easing where £100 of new money can be multiplied up by 5 times or more by the banking system.
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QE will not work, the money will flood out the UK.
My alternative Solution is all mortgages to be supplied by the BOE at 2% for ANYONE over 21.
Adequate housing is a fundamental human right, why should a rich doctor have a big house and great mortgage at 3%Apr while a street cleaner with kids gets a shoe box at 8%Apr, our society is broken and Bust.
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`hhyyyyyyyyyyyyyyyhhhyyyyyyyyyyyyyyh`
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If you wanted to see how worried people are about this fiasco, the fact that this one blog has produced nearly 300 comments proves it.
QE scares the hell out of me.
Gold is expensive because there isn't a lot of it around. It's "rare".
Now the BOE has printed (computer generated) all this money the Great British Pound is now abundant and therefore has lost any value it used to have on the World Markets.
In a few months time Sir Fred's pension that he acquired off the tax payer will only just buy him a loaf of bread. A bit worring for us mere motrals then!!!
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#283 RugbyProf.
I'm perplexed.
Are you saying you were paying a fee for an overdraft facility you did not require?
If that is the case, it's a bit rich to call the rest of the UK stark raving bonkers.
Aplogies in avance if I have misunderstood your posting.
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No 281, everyone knows the some are more equal than others. Now, what animal has its snout in the trough?
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#283
I got a letter from a 'knackered old bank' telling me that as I hadn't used my overdraft facility recently they would withdraw it unless I either wrote to them or paid some money into the account!
I nipped down to the bank and paid a fiver in.
I might take it out again
We shall see what happens next
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Oh and I also got an offer of a credit card that boldly stated that the APR was 46%
Yes 46%
QE clearly isn't for me
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#287
Affirmative.
Yes.
Definately.
Beyond question.
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#285 JavaMan1984
..... And umpteen hundreds and thousands of others effected by the next pieces of 'disasterous' financial news to show up tomorrow, next week or next month.
Though it is, of course, very hard indeed to predict the where and the when and just what exactly might be the (perceived) target of any civil unrest. Sometimes even the perpertrators don't know what the target is until it actually gets going, or sometimes it's just a matter of opportunity - e.g. the post office got attacked just because it was in the same street where it all kicked off.
What is more certain, however, is that it will cost significant amounts. Surveillance (such as CCTV); police; courts; prisons; repairs to vehicles, buildings or infrastructure; ambulances and medical treatments - we're talking some very expensive resources here!
Perhaps, HMG is better able, under current anti-terrorist, civil contingency and public order legislation, to deal with this sort of thing compared to, say, the 1980s.
But having the legal framework for action and having the resources and the political will for it are not the same thing.
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294 mrsbloggs
Yes, that is the Gordon Brown doing whatever it takes Credit card.
TO RIP YOU OFF
46% is the introductory teaser rate of inflation.
Read the small print, in twelve years the boom rate is refixed to 100% BUST
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It seems pretty clear that pension funds did not take part in the BoE's reverse auction yesterday - in fact, its reasonably obvious that the main winners were foreigners who sold gilts to the BoE and repatriated funds to their respective countries - hence the fall in sterling which has accompanied the BoE's auction. Why has this happened? My guess is that pension funds don't want cash - they are getting a better yeild on gilts and see no reason to give that up for cash which will get a very low yield on deposit at any British bank. All the BoE seems to have done at this stage is make gilts more liquid (and therefore more attractive in a market where liquidity is everything). That has led to a fall in yields, which no doubt suits the government given the insane levels of borrowing which are now planned. The only other effect has been to weaken sterling - but that was always going to happen if they printed money - simply supply and demand.
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#288
There is nothing wrong with the concept of fractional reserve banking but it does presuppose honest, competent administration.
This country has not been bankrupted not by fractional reserve banking or indeed anything resembling banking at all but fraud. The extent of the fraud may or may not be known by now but if so by very few.
Hardly any of us has the faintest idea therefore what if any remedial measures will work or what even the problem is. We're all just bleating in the dark.
There's no point wasting energy pronouncing on matters we can only guess at but action is urgently required in parliament. The people's tribune must make it clear that no valid distinction is recognised in banking between wilful and/or extreme incompetence and fraud, because the principles of sound banking are so long established and well understood. With this in mind they must then act and the first essential action is action is the defenestration of the wretched Gordon Brown.
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292
Don't we all know it.
http://uk.news.yahoo.com/22/20090312/tuk-uk-britain-ahmed-fa6b408.html
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More fiddled figures and spin.
How are we supposed to trust anything on QE when everything the government says is put in a lie.
http://uk.news.yahoo.com/21/20090312/tuk-knife-crime-figures-were-fiddled-6323e80.html
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Quantitative Easing Day
I dont think the Spinoza would be happy with this QED'd proof as a logical one..
We will all pay for it in the long term with high inflation.
Timeo Danaos et dona ferentes
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Seems to be that we have all fallen into the trap that we were critisising bankers for when the collapse was initiated last year.
Speculation is the problem - the will it work, won't it work conundrum that has been detailed by the press (Peston included) and created huge loss of confidence in the end consumer. This loss of confidence is the key issue; making us hoard our reduced savings until any form of stability returns, and causing loss of morale at work, which combined are the factors that have led to business collapse and loss of jobs.
I for one am fed up with the speculation - the end consumer and average professional doesn't understand QE, or how it may impact on the markets.
I think it's about time that Mr Brown steps out of no.10 to issue a public broadcast, urging us all to go back to normality and start spending again. I know there are people out there who simply can't due to losing savings and pensions, but for every one of them, I am sure there is someone else with a healthy bank balance and a tracker mortgage who has benefited and is waiting for some stability and assurance as to what the best thing to do with their money is right now.
As for the value of sterling falling to record lows, and inflation on the horizon as a result of QE, surely this should be warning everyone that if QE doesn't work, their money will hold less to no value.
Stop waiting for the incompetent leaders of this country to come up with a rescue package, they are incapable of pleasing everybody. Go out and do what you can to improve the economy, spend your money, especially at those places that need it to survive, like the SME's.
As for Peston, 90% of people don't understand your comments, and are desperately seeking advice. Maybe its time you comment on what is actually happening - QE is working now, and try for once to deliver this good news, to inspire a little confidence in all of us.
The only way to get out of this mess is to be proactive, and do something to help, rather than twiddling thumbs and continuing the speculation.
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To 291 EHBAGUM
I only mean the annual o/d charge plus any interest I incur for using it.
I've focused on cutting costs and managing that marginally better to avoid paying the bank anything. I'm ceratinly not looking to leveraged borrowing to grow.
My main thrust is that if banks are effectively reducing lending facility to Peter (who is more astute) to lend to Paul (who is more desperate) then we're in big trouble.
It effectvely means banks are just swopping general usage o/d's for unspecified borrowing so that they can tell Gordy they're lending more money which they are not.
Either way, it is the exact opposite of what Government is HOPING for (and I use hope in its literal sense).
In the end as a taxpayer and now a saver I lose both ways.
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#297 sosraboc
If I thought I could get a card that was called the
Gordon Brown doing whatever it takes Credit card
I'd have one, load it up with purchases from someone like M&S at the start of the month and then take them all back just before the due date.
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3hrs since last moderation..........will someone please explain the modding policy on bbc boards.....why not move to post moderation if you can't cope with pre modding?
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#304 Rugbtprof
Many thanks for the clarification of your former posting.
Would that all bloggers were so considerate.
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So, the BoE purchases these "bonds" from the government and pays for its purchase with electronic credits to the sellers' designated banks, which, in turn, credit the sellers' bank accounts.
These credits are literally created out of nothing.
The banks receiving the credits can then use them as reserves to enable them to loan out as much as 10 times their amount (if their reserve requirement is 10%) and it's all legal, What a business.
Imagine how rich we might all be if we as private individuals could do the same thing. Borrow a million from the BoE and like magic it becomes 10 times as much, and we get to collect interest on all but the 10% of it we must hold in reserve.
Other than the name "Quantitative Easing" there is nothing new here. This is the bankers rolling out an old and often used trick, only with a new name but the same intention; greater profits gained at our expense.
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#271 superjimbowen
cool; I'll try to buy, hire or steal the biggest boat I can get and we can then set sail and take you and a few others to the antipodes
there won't be space for all the people who moan for Britain, so I think preference will have to be given to Peston posters for a start
for a small fee we could take Brown, Cameron and Clegg away as well and dump them on the Skeleton Coast
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Blogpolice wrote:
"So if the Government prints money and uses it to buy things, thats ok. But if I do it then its not?"
No, it's like I borrow money and use it to buy things and you (the tax payers of the next Tory govt) pay it back - easy "easing"?
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#268 sosraboc
Nice to know at least one of the commentators can see beyond the end of his nose. You are 100% correct. Now work out how precisely it will have to be done. You may come up with some interesting results.
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#273 starry-tigger
I sympathise with you unconditionally. It may help if you realise that all these wise people telling you so much in gobbeldygook only speak in that way to conceal that they are doing nothing but pour from the empty into the void.
Every so called speciality has its gobbeldygook. It is invented by those in the field to keep others out and to make it sound terribly complicated and suited only to the initiated. It is all a fake.
What we are sorely in need of is FACTS. Once we know the fact we can begin, tentatively at first, but later with more confidence, to draw conclusions.
When you read these blogs, and the comments on them, you will find that people really want to vent their opinion (quite understandable), and that the facts are irrelevant to them, which is a great p[ity because the facts alone make serious debate possible.
What facts has the government given for its policy? Almost none. Have you ever heard the PM or the Chancellor telling us the facts that appear in # 220? Not on your life. And why? because then we would be able to see how insane their policies are and how they are fatally wounding this country. Some people are beginning to realise that we are terminally ill, but too few. When the numbers increase sufficiently the government will have to fall.
Let's get a handle on bonds (gilts) as simply as possible. When the people of this country demand that the government spend money on this, that, and the other, the government - to keep its popularity and not to be trumped by the opposition agreeing to do it - needs to borrow the money because it doesn't have it on hand in cash. The government therefore takes loans, very often from foreigners, and in exchange issues government bonds at a particular rate of interest, which never changes. These are known as gilts (gilt-edged securities) because they are backed by the reputation and good name
of the United Kingdom. When the government is in a position to repay the loans it does so (these loans have a fixed repayment date - some are relatively short term, others are long term but they may be redeemed at any time if the government decides so). It follows that if the holders of gilts are clamouring to sell them, it is no triumph; it means people have lost confidence in the ability of the government to honour its debts. There is a great deal more that could be said, but this is enough to get a handle on these securities.
In the meantime we have to listen while idiots cubed claim the QE buying of guilts a triumph. The rush to SELL gilts was the real story. It wasn't pension funds selling. It was foreigners. They have seen 30 per cent knocked off the pound and they are scared rotten and they are bailing out of British paper. Why? Because those gilts traders understand finance and can see that QE is an unmitigated disaster and that British paper is just about the last thing in the world you want to be in. Offer to buy $75bn in guilts and you will be trampled in the rush of sellers to your door.
We are told the USA has been doing the same thing and it has caused no problem. Indeed the dollar has not fallen dramatically, as it should have by now. But that is because of herd instinct. The dollar has long been the reserve currency of the world and now that the herd has been spooked by the credit crunch it is rushing headlong into the dollar, which will in the not too distant future take them right over the cliff and onto the rocks below.
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* 312 newProtectorCromwell
Thank you for your clear explanation! I have a thousand other questions but will be able, for now, to consider what Robert's blog is saying with a bit more understanding.
I'm under no illusions about the reason financial matters are so impenetrable, I always struggled to read anything on the subject. The clarity and liveliness of RP's style, on the whole, makes it a more compelling subject and I've begun to pay attention to these matters. Maybe that's one positive outcome of this crisis for me.
Getting to actual facts is monstrously difficult, I hope anyone out there who has them will take the trouble to post them as you have.
If reforms of the system could sweep away the gobbledygook forever, the world would be a better place.
I accidentally left the "tat" out of Quantitative Easing and now, thanks to the info you've posted, realize it most certainly must be included in this barbaric word!
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perhaps *we* are buying up the government debt?
1) forced pension schemes in 2012...
http://news.bbc.co.uk/1/hi/business/7414108.stm
2) pension "industry" buys gilts. (after trousering a commission of course!)
http://www.ft.com/cms/s/0/a898602c-f30a-11dd-abe6-0000779fd2ac,dwp_uuid=727d194a-bc36-11db-9cbc-0000779e2340.html
............is this Gordon/Darling setting up another "wheeze" here - so they can "encourage" the pension industry to mop up government debt ?
comments please!
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QE will help - by buying the risk - and spreading the cost of the solution . However - like everything in this sorry mess it will probably be badly handled by the government .
Don't forget - before all this blew up - when Angela Merkel was raising strong notes of caution she was roundly shouted down by Brown and Bush .
If they didn't know then what was going on how are they expected to fix up the mess now ?
Ultimately the cost of the solution has to be far away from those who can least afford it . And those in most need must be most helped . And - yes - we will need an inflationary economy - like in the 70's - probably starting in 2011 .
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The government seems to be gambling that if they can inject enough money into the economy we'll all go out and spend, spend, spend and the good times will begin all over again.
They want us to buy new cars, look for bigger, better houses, visit restaurants more often, buy new flashy electronic equipment...stuff like that.
Sorry, Gordon, count me out.
I am HUNKERING DOWN.
There'a cold wind blowing, and I'm not for spending a penny more than I have to.
See you on the other side of the slump, in 2012/13.
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QE does help - investors abroad, writes The Independent on March 14. I'm commenting on it on my blog [ Money as Debt also known as Credit. I also criticize the language used to camouflage what the financial economy is doing: crippling the real economy - without morals or conscience, let alone ethics.
In response to the question raised "what can you and I do?" we have launched the petition Financial Fairness for Voters and Taxpayers, please!. I am also promoting Bartercard as an ethical bank that uses "trade pounds" to help businesses do business. [Once upon a time, money was invented for that purpose!]
Robert, could you help get the government to accept trade pounds as payment from taxpayers?
Real people in the real economy would be enormously grateful!
Sabine
Organiser, Forum for Stable Currencies
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QE didn't work for the Weimar Republic.
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QE was implemented to stimulate the economy, in theory lending and spending should increase, but in reality it doesn’t. Banks are not lending and pension funds are not rushing to invest as they as scared to make a wrong move. Despite the fact that many consider it to be a success, we probably will have to wait for some time to see any results, if we will ever see them. People willing to borrow money for property purchase have very limited choice of mortgage products. Lenders are not prepared to risk; they expect that customers will put in bigger deposits. For residential properties, customers should have at least 10% and there are no buy to let mortgages above 75%, and even then rates are not attractive. What about existing customers? Some did have a decent deposit, but because value of their property has gone down, they now can’t remortgage and left at the mercy of their existing lender. Is anybody going to help them or it is just big companies we are worried about, not people?
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This comment was removed because the moderators found it broke the House Rules.
Sounds like quite a situation[Unsuitable/Broken URL removed by Moderator]
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