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The 'Wall Of Money': A guide to QE2

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Paul Mason | 09:18 UK time, Tuesday, 2 November 2010

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The US Federal Reserve is set to launch a second round of quantitative easing, known as QE2, on 3 November 2010. It is probably the US policy community's last shot at averting a double-dip recession and it may work. But there is an argument raging among economists over the dangers. Here is a brief outline of what they are doing and why, and the arguments for and against. If you can improve on it, fire away and suggest changes; ditto if you disagree. I've talked to a number of financial sector economists to try to get this right, but it's still a think-piece rather than definitive.

Oh, and the whole future of the world economy depends on who's right.

1. What is QE?
QE involves the central bank creating money and using it to buy up pieces of paper known as bonds. These are IOUs issued by government, companies or banks, so it is effectively the central bank printing money and lending it to the government or others, with the aim of boosting spending power in the economy. First tried by the Fed in April 1932, it was also deployed by Japan in 2001. Both Britain and the USA adopted the policy in March 2009.

2. How much have they done already?
In the USA, $1.75 trillion dollars; in the UK, £200bn (this latter representing an input equivalent of 12% of GDP).

3. Why are they doing it?
To stimulate growth in a severe recession, you have two macro tools: monetary and fiscal. Fiscal is where you either cut taxes or raise public spending (or both). Monetary is where you cut interest rates in the hope of boosting demand, and in the process, the money supply. Early in 2009 both central banks reached close to zero interest rates, and were forced to consider unconventional measures to stimulate the money supply. QE is the key unconventional measure available.

4. How does it work?
We don't know.

4a. Come again?
The advocates of QE - the so-called monetary Keynesians who see April 1932 as the key turnaround moment in the 1930s -- thought it should work like this: you pump money into the banking system until the risk of the banks lending falls. Your first effect is to reduce the cost of borrowing for the government - the so-called risk-free rate; the second effect is to reduce the difference between that and the real cost of borrowing.

However this did not happen. Or rather it only happened for big business - not for small businesses and consumers.

The money got locked inside the banking system. It raised prices on the stock market, and for banks. And it also probably kept house prices from falling further. This is the so called "wealth effect". Also it allowed big companies to "become their own banks" - issuing their own bonds as a way of borrowing, rather than using the commercial banking sector. However the money never flowed through into final demand - small business loans, higher credit card limits, mortgages, cash in the high street. Or not in large quantities anyway.

There is even a flow-diagram produced by the Bank of England to show how it thought it might work: but the flow is stuck somewhere between the wealth effect and the boost to final demand. The money supply is only growing at 0.9% Q-on-Q - compared to 9% average for the 10 years to 2008. The Bank was insistent that QE would boost the money supply - it currently has no public explanation as to when the 12% of GDP pumped in flows through into 12% extra demand. Or as the Bank puts it: "it remains difficult to judge with any precision the ultimate impact of asset purchases on nominal demand." (May 2010 Inflation Report)

5. What did the Americans do differently?
Bernanke had already intervened to start buying up $600bn of distressed debts of the state-owned mortgage companies with central bank money, and he always argued QE should be done in this targeted way. He even travelled to the London School of Economics to warn against doing classic QE in January 2009. But the recession turned out worse than expected and he had to do full-blown QE anyway. However the US version of QE always had a much bigger targeted aspect - ie tactical buying of bad debt as well as strategic buying of safe debt, and therefore probably had a more benign impact on the mortgage market.

6. So what's gone wrong?
In neither the UK nor the US has QE led to a concomitant boost in demand, or a rapid growth in the money supply. It did lead to cuts in the real interest rate (between 30 and 100 basis points in the USA, around 100 basis points in the UK according to the resepective central banks). In fact the short-term inflation protected interest rate is now negative in both countries.

But credit conditions did not improve for consumers and small businesses.

In both countries there is a key symptom: the banking system is hampered by bad debt, while the private sector - consumers and companies - are trying to pay down debt, using any boost to credit conditions to effectively shrink the money supply "from below" just as the governent tries to boost it from above.

The USA has an additional problem: a much bigger overhang of mortgage debt: 1.5m repossessed properties, a rising foreclosure rate, etc. The UK took micro measures to guard against a wave of repossessions; the US took one big micro-measure - a fund to compensate mortgage lenders against foreclosure - that has now run out.

In short, the pro-QE critics say its failure is due to the unwillingness to nationalise the banks, inflict one-off losses on savers and investors, write off housing and commercial property debts etc. Such critics thing the Fed and BoE should have set a target interest rate - rather than a target volume of QE - ie specified the output not the input. And then printed money and manipulated the banking system until that target rate was reached. For the pro-QE crititics, the Fed needs to do a lot more QE fast. They point out that in the 1930s it was only when the Fed doubled or trebled its initial QE purchases that it had a dramatic impact on real interest rates.

The anti-QE critics say it did not work because it could not work.

6a. Do they get it?
Economists at both central banks have produced learned papers on the subject. The Bank of England (Joyce et al) says:

"Our analysis suggests that the purchases have had a significant impact on
financial markets and particularly gilt yields, but there is clearly more to learn about the transmission of those effects to the wider economy."

Which kind of confirms what I've been saying.

The Fed economists (Gagnon et al) say:

"Based on this evidence, we conclude that the Federal Reserve's LSAP programs were successful at lowering longer-term private borrowing rates and stimulating economic activity. While the effects are especially noticeable in the mortgage market, they appear to be widespread, including in the markets for Treasury securities, corporate bonds, and interest-rate swaps."

So the Fed can claim to a greater extent than the BoE that their particular type of QE worked better in the mortgage market. But they do not demonstrate any lasting positive impact on money supply and final demand.

7. Has it caused inflation?
The UK is certainly seeing persistent above-target inflation, and the anti-QE critics predicted this. However the pro-QE people see this as entirely due to the VAT increases. The Bank of England is in a bit of a bind because of the conceit that it has to construct all its policies around is the inflation target. It has to say QE is just an extension of interest rate policy, with the aim of getting inflation within 1% either side of 2%. It has no target for growth, demand, money supply - only inflation. So this justification is wearing a bit thin - as inflation is on the high side of target. Much was made of the undershoot to inflation when QE was launched, in this explanatory document.

7a. However, in the USA there are warning signs of deflation. That's the qualitative difference between here and there. A certain double dip in the housing market, falling real incomes and inflation at around 1% - which is too low to sustain demand.

8. What's the objection to doing more?
This is where we hit the global macro-economics of QE - obvious to people in the market, completely opaque to the ordinary punter. I will take you through it step by step:
a) QE depresses the value of the currency of those printing the money, and forces the value of other currencies upwards.
b) It also depresses the returns savers get on long-term investments.
c) Therefore, in anticipation of more QE, massive amounts of capital have begun to flow out of the USA to the emerging markets. This is known as the Wall of Money or the "global search for yield"
d) Bad outcome #1: emerging markets accept their own currencies have to rise versus the dollar/sterling: but prices of goods coming from the emerging markets now rise. Companies in the west have two choices: pass this on in the form of cost-inflation or take a hit to profits. We get stagflation. This is the critique favoured by a some people in the UK investment community, and sees the West finally and painfully pay the price for allowing so much of its manufacturing industry to move south and east.
e) Bad outcome #2: currency war, already under way, intensifies as emerging markets resist appreciation of their currencies and this this spills over into trade war. The rebalancing of the globe takes place not within a single global market but a fragmented market of regional trade and currency blocs.

9. Is there a danger of monetisation?

When QE was first mooted, some tabloid newspapers predicted it would bring Zimbabwe style inflation because the central bank would use the money printed not just to buy and hold the national debt but to pay it off. That is known as monetisation.

Generally it leads to high inflation because in monetary theory, if a larger amount of money suddenly starts chasing the same amount of goods, the price of the goods will rise. Some commentators think that the Fed has already begun tactically monetising the debt; others believe it's a matter of quantity - that as long as the amount of Treasury debt is smaller than the amount of money in circulation it does not lead to monetisation. So anything between an extra $500bn to a trillion - even if signalled rather than purchased - could be read as an a signal that the US is about to monetise its debt.

FT commentator Martin Wolf has even begun to advocate a form of monetisation. What is clear is that, if you believe you face deflation, then monetisation makes sense: but it is the ultimate form of beggar thy neighbour - because it signals that holding dollars is a bad thing it is an overt signal to devalue the dollar and an overt act of currency competition.

10. What needs to happen to unblock the logjam?

QE1 stabilised the banking system and global trade; it has also filled big companies' coffers full of cash. But they are not yet prepared to invest it; meanwhile small businesses and consumers still face a credit crunch.

There needs to be a defibrillating moment where - in addition to QE2 - large amounts of bad debt are written off in the private sector - above all in the housing market. Then consumers suddenly get access to credit again and then the big cash mountains of the private sector get thrown into the economy in the form of investment.

But for that to happen somebody has to take losses who has not already taken them. That means the banks: they have to take the big hit on mortgages and commercial property they have refused to take; that in turn hits the government, which in the US and UK has "guaranteed the losses" on hundreds of billions of bad debt for the cost of a few tens of billions.

In other words, the final destructive power of the bad debt in the system has to be allowed to work itself out.

On top of that, once the final cathartic moment is over, the central banks then have to get out of money printing in an orderly way, allowing quite a bit of inflation to avoid choking off the recovery. One way to do this would be to temporarily abandon inflation targeting - to say: we will keep printing money whatever happens to inflation, until growth reaches a set target and stays there. Bernanke has toyed with this, and it will be interesting to see if he keeps the idea alive.

It's quite tricky, basically - and it involves dragging the politicians back into monetary policy making, ending the fiction that it is somehow "apolitical".

QE2 will buy time. But in that time the governments have to act at micro-level to restructure the finance system so that it starts working again.

11. Could we see another "cathartic moment"?
Some bank analysts believe the second downturn in the US housing market, with the threat of deflation, poor numbers in general etc has created a new pool of undeclared bad debts in the US banking system, totalling around $500bn. In addition, the long-postponed accounting for bad debt in the commercial property market has to happen at some point.

Both politically and economically there could never be a "second bail out" in the USA - the restructuring would have to look more like what happened when Yamaichi Securities went bust in 1997 - a state-controlled insolvency process for one or more banks. Or, of course, the Mother Of All Cathartic Moments, the enforced bank holiday of 6-9 March 1933 when Franklin Delano Roosevelt - one year into the Fed's quantitative easing spree - forced 2,000 US banks to close for good, followed by a massive injection of taxpayers' money into the surviving institutions (and of course their breakup using Glass-Steagall).

What we know from the 1930s is that QE was not enough: it had to be accompanied by massive restructuring of the finance system and in any case led to a beggar-thy-neighbour exit strategy, rival currency and trade blocs and an extended Depression for the countries that lost the exit battle because they clung to their old orthodoxies.

Addendum: Another theme you should be aware of is the danger that QE causes a "bond bubble" that then collapses, above all in corporate debt. An amusing, if slightly Newsnight circa 1982-style, video from the FT explaining this click here.


  • Comment number 1.


    Fire - farming - technology - science - global aspiration - traded imaginary money. A road to ruin.

    As currently configured, the aberrant INEXORABLY rise to power/wealth.

    Only a god of infinite wisdom could steer a critical path through the mess now in place. The Ape Confused by Language has not a hope.

  • Comment number 2.

    OMG Paul your impressive article frightens me. I am booking a one way ticket on the next spaceship out of here! More later when I have digested your thoughts.

  • Comment number 3.

    Good explanation about what it is and certainly helped me understand what is going on. With regard to the likely outcomes your analysis seems to assume that Banking system continues as it is, would the bad outcomes be less likely if we carried out reforms similar to those suggested by Amar Bhide (and others) link to recent presentation here

  • Comment number 4.

    Paul, this post is one of your best!Bl...y well done. Dare I add a few points :-
    1. US QE 1 was an exercise in preventing a fire-sale of securitised private assets which could have imploded on the banks, whereas UK QE 1 was a supposed attempt to boost nominal demand via the 'portfolio effect' - reducing yields on gilts/public debt to encourage gilt holders to buy riskier assets - BoE didnt want the credit risks of the US approach so kept to buying gilts.BoE tried to take care of implosions with liquidity lifeboats and repos, which drew them in to some credit risk.HM Govt aided with recapitalisation and insurances. King said UK QE wouldnt work without the banks being fixed - they werent.BoE are now standing in to a greater degree as short term financiers to banks.
    2. Credit is no longer a matter for banks, but now under the control to a greater degree than hitherto of capital markets and shadow banking systems - how do monetary tools affect these?
    3. Re 1 above, central banks are taking market risks on to their balance sheets indemnified by taxpayers - success of QE ( resumption of above trend growth) probably guarantees losses on central bank balance sheets, and therefore for everyone - fiscal capture risk
    4. Re 1 above, markets are gainsaying central banks actions creating asset bubbles which could pop
    5. Massive risk transfers to public balance sheets kicks problems down the road where contagion is the big risk meeting fiscal consolidations - National Commission on US Fiscal Responsibility to follow...
    6. I have not read a single learned article as to how QEs are reversed or exited and the possible adverse effects of such reversal or exit or how to mitigate
    7. Zero interest rates can cause liquidity traps
    8. Monetising debt is illegal under EU rules, I have read.

  • Comment number 5.

    "2. How much have they done already?
    In the USA, $1.75 trillion dollars; in the UK, £200bn (this latter representing an input equivalent of 12% of GDP)."


    So this must mean that "real" UK GDP is around -9% over the last year and a half?

  • Comment number 6.

    Looks like it's QE2 (non-lite).

    What ever the Fed has done in this crisis, the BoE have immediately copied.

    Fill your boots with gold mining ETF's.

  • Comment number 7.

    Why is Nick Robinson winning prizes when the BBC has this level of output going on? I'm joining Wat on his spaceship - well, I would if I could afford it!

  • Comment number 8.

    My reading of the article is that monetary policy has failed The MPC is a consummate waste of time and nobody seems to know what to do next but events will happen. What is also clear to me is that referencing back to the Great Depression of the Thirties is no use because the world, economies, business, technology and the state are very different to seventy plus years ago. Hopefully there will be no world war to lift the economies out of depression but it was not monetarism that carried us through financing the war and recovery - it was fiscal and direct economic management. Certainly the banks should be supervised and the government has two major players in ownership already which should be exploited. The CSR as underlined by the CIPD today will make things in the UK worse.

  • Comment number 9.

    This is what I call a proper article. Good stuff.

    Banks and financial institutions have to take a big hit on residential and commercial property. Can they do this? As argued previously, an important factor that did not exist in previous recessions/depressions was securitization, and the sheer scale of the derivatives markets etc attached thereto. Dilemma: manipulation of securitized products has allowed future 'profits' to be brought forward into the present and spent/extracted as if growth in property assets generally would never cease. If banks and other large institutions have to accept heavy falls in asset values then it will soon become evident that money extracted via securitization over the last ten yeras or so did not actually exist and never will exist. Securitization, therefore, cannot be restarted, which is one of the principal hopes for a return to normal (actually it never was or can be considered normal) pre-2008 conditions.

    I suspect that was/is one of the key reasons this subject has been avoided and ignored like the proverbial plague by investment bankers.

  • Comment number 10.

    Good grief Paul! Your blogs are getting longer and longer. I am scared about even starting to read this one.

    I think you have moved beyond blogging into academia. Am I doing an Economics' degree?

    Must admit though, it makes a welcome change from some of the 40 character limited Fivelive presenters views of the World.

    Others are saying it is one of your best so I assume I must... drat, forgot my spring rolls in the oven...

  • Comment number 11.


    Masses of erudite discussion - but should you not first define 'money' as it now manifests? Isn't its nearest relative Scotch Mist?

    Religion was here way back. Cosmological Physics has now 'arrived' where reality only manifests on a blackboard. I suggest global finance is in a similar non-place.

    More tea Vicar?

  • Comment number 12.

    so why does the world economy not naturally rebalance like all the 'market theory' textbooks say it should?

    because china is preventing it.

    they want to keep their artificial 40% devalued 'edge' in the price of their goods and so increase their surplus by another trillion.

    given commodity prices are equal around the globe how can a uk manufacturer compete and create jobs against at least a 40% discount? Lets not forget all the other costs china doesn't pay like intellectual property rights, environmental costs [we give them money for that through the carbon tax], human rights, worker rights etc.

    as long as that is the case the govt will have to keep pumping money in to fund the chinese surplus [that, in a zero sum game, has to come from somewhere]. QE forever.

    yes banks are hoarding the qe cash. They can put it in austrialian investment vehicles and get easy interest [the BOA put up rates again].

    until people wake up to mervy's 'the world economy is a zero sum game' idea and take measures to offset the piracy of other states then we shall watch our poverty increase and the wealth of others rise. China is a pirate state.

  • Comment number 13.

    Is it an extract from Meltdown V2.0?

    I was just looking for a good primer on the subject. I'm going to print this, bind it and take it to bed tonight.

    It's a great read and again, hats off to Paul for going to the effort of expanding on this beyond his allocated Newsnight slot.

  • Comment number 14.

    Let them eat quark ?

    2000 Bc - I trade you a goat for a sheep, we both go away and kill and eat them ( or they die and start stinking )

    2000 ad - money becomes messianic, eternally deferred and delayed. You lend me ten dollars for a goat, it may die but the loan lasts forever and the loss is never made concrete UNLESS IT IS MEASURED .

    So with the cunning invention of QE no loss need ever be measured, the messiah never comes ! What could possibly go wrong ? just keep programming more electostatic money into the machine ?

    Alas no, we don't quite live in a quantum world, but in the nasty old newtonian one, with gravity and time. Eventually the loss will be concreted, the only question is who will pay ?

  • Comment number 15.

    "QE involves the central bank creating money and using it to buy up pieces of paper known as bonds. These are IOUs issued by government, companies or banks, so it is effectively the central bank printing money and lending it to the government or others, with the aim of boosting spending power in the economy. First tried by the Fed in April 1932, it was also deployed by Japan in 2001. Both Britain and the USA adopted the policy in March 2009."

    Japan of course, was effectively colonized after WWII and turned into an offshore manufacturing site at the expense of USA domestic production.

    QE: The creation of a new set of IOUs (Central Bank issued money) in order to buy another set of IOUs (Government/Public Sector bonds) which are used to buy up yet another form debt which is in the Private Sector. The security? Decades of tax payer funded Public Sector assets.

    Hence Public Sector staffing cuts now and very probably in the future, the selling off of state assets in order to pay off the borrowing and satisfy the IMF/World Bank/Wall Street? Note how the NHS and schools (which together employ about half of the 6m Public Sector employees) are ring-fenced - they will be pressured into becoming TRUSTS which will probably become SPVs which have control over the land etc. As the population starts falling as projected, these assets will be sold off and staff made redundant. The tax revenues are demanded by law (kids have to be educated, people have to pay NI). This is a guaranteed income stream for those who are trustees etc.

    Libertarianism is anarchism. It hates nationalism. Most people in the UK still think nationally, Note how this has been being discouraged?.

    "2. How much have they done already?
    In the USA, $1.75 trillion dollars; in the UK, £200bn (this latter representing an input equivalent of 12% of GDP).

    80% of our economy is in the Private Sector (80% of economy is Services) and 10% or so of taxpayers contribute 50% of the 140B a year income tax revenue, but is it all collected from them, the stats from the ONS don't make collected revenue clear, just what is due. Corporation Tax is only about 1/3 of that revenue. So, where is the money available to government? Only 3 million are employed in manufacturing, mots of it light, so what are he exports and how does the Government benefit from these now that so little manufacturing or the economy is in public ownership?. What control does Government have over the Private Sector and its assets? Why has the Armed forces halved in size in recent times?

    It's now tiny. Presumably it won't be much use as an enforcer domestically in times of Martial Law, especially if sent away to protect us from ....umm terrorists?

    "3. Why are they doing it?
    To stimulate growth in a severe recession, you have two macro tools:
    monetary and fiscal. Fiscal is where you either cut taxes or raise public spending (or both). Monetary is where you cut interest rates in the hope of boosting demand, and in the process, the money supply."

    I repeat, 140 Billion in Income Tax, 50% due from the 3 million or so earning over 48K a year. Then there's VAT and NI. Corporation Tax contributes little relative to that. So what other assets? NS Oil? Land?
    So, Public Assets firesale? Desperate measures to bail out the feckless Private Sector's behaviour? Why? Yes, they do amount to 80% of the workforce. Yes, that is where the problem is. Libertarianism.

  • Comment number 16.

    "In both countries there is a key symptom: the banking system is hampered by bad debt, while the private sector - consumers and companies
    - are trying to pay down debt, using any boost to credit conditions to effectively shrink the money supply "from below" just as the governent tries to boost it from above."

    Just bear in mind these references to 'the private sector'. It's 80% of the workforce. Of the other 20%, half are employed in health and education. Most of the Government is the Civil Service and 80% of that is employed running the DWP, Home Office/Justice, Defence, Revenue and Customs etc.

    What is the Private Sector (which is all that there is effectively so why the contrast?) doing to grow the economy rather than destroy it?

    "the US took one big micro-measure - a fund to compensate mortgage lenders against foreclosure "

    My emphasis. Bailed out reckless banks not people.

    "It has to say QE is just an extension of interest rate policy, with the aim of getting inflation within 1% either side of 2%. It has no target for growth, demand, money supply - only inflation."

    Inflation goes up, take money out of the supply, inflation goes down, so some QE.

    So, where else does the Private Sector (largely financial services and their clingons these days) make their money other than through speculation on assets and where that overheats as it has recently, through blackmailing politicians into selling off the state assets or giving financial services a controlling say via Trusts/SPVs? .90% of the population don't see what is going on, they just pay their taxes and get swept along in a daze. As time goes by they become even more dazed as they can't grasp it all, they're being ever more dumbed down genetically, See USA (NN and Andrew Neil last night). See ETS NAEP data.

    See OECD PISA data.

    "There needs to be a defibrillating moment where - in addition to
    QE2 - large amounts of bad debt are written off in the private sector - above all in the housing market."

    But what does Private Sector bad debt mean here? Does it not mean those property speculator businesses or arms of private sector big business, who want rid of their bad investments?

    There seems to be a shell game going on here with the terms 'private'.

    It doesn't mean home-owner (~14 million) mortgagees, does it! They aren't about to have their debts written off, nor are the Small Businesses.

  • Comment number 17.

    QE has had no benefit to the UK economy or to the vast majority of the 60-odd million of us living here.

    It merely went into the pockets of the banks and the banking staff via bonuses.

    It did nothing to revive the UK economy.

    The Americans are angry over the same happening there, ( I suspect they are about to get angrier this week when QE2 is announced there), but at least the US is in deflation and there is some kind of argument for more printing of bucks.

    We have inflation here in the UK - there is no reason at all for the BOE to announce QE2.

    If they do then I hope that we British get angry - angrier than the Americans have - over what the banking class have done, and continue to do, to us.

    I would write more - I would even consider protesting - but I see a few of the tabloids have some stories about what the 'nation's sweetheart' wore on The X-Factor last week and suddenly my mind has gone to mush.

    They don't put it in the water any more - they just stick it up on ITV.

  • Comment number 18.

    Here might be the real reason that Mervyn reconsiders QE2....

    Bank of England must use QE to buy 'bad mortgages', warns Fathom Consulting

    'The "bad bank" would issue bonds to fund the purchases, and "the Bank of England should use QE to buy this bond". The mortgages would be bought from lenders at a discount to their book value – possibly set using the auction price index, which currently suggests a 22pc discount.
    Fathom pointed out that the country's £150bn of buy-to-let mortgages – 12pc of the market – could be the first "zombie households" to be targeted.
    Mr Gabay said the Bank should start with £50bn of QE, which would buy about £70bn of mortgage debt.'

    This looks suspiciously like the transfer of even more 'private' (think shell game) debt into sovereign debt (aka taxpayer debt) - back by what little assets that remain state owned.

  • Comment number 19.

    I am dumbfounded that the United States is going to try another round of QE.
    The Federal Reserve will begin poluting the American bond markets with cheap cash. Mind you, the Americans have neither a clear objective nor an exit strategy.
    What will happen?
    - downward pressure on the dollar
    - upward pressure on gold, oil & other commodities.
    - The stock market might get a boost, helping all those stock market players get richer than they alreaady are.
    I do not like any artificial manipulation. This is going to play Hell with long-term interest rates. The effect on pension funds could be extremely detrimental IF institutional investors experience yet another stock meltdown (like two years ago).
    Just last week, at a meeting of G-20 finance ministers in South Korea, Treasury Secretary Timothy Geithner (of all people!) warned leaders of major economies against manipulating and devaluing their currencies to gain trade advantages.
    What is the United States trying to accomplish?
    I'm guessing the United States wants people NOT to save but to buy, BUY, BUY! Otherwise the American ionterest rate would not be next to zero.
    QE in the states will not help.
    QE in the states doesn't even make sense. It most certainly does not make sense during a weak recovery. Federal, state and local governments are already drowning in bonded debt. Artificially low rates will only allow the debt bubble to expand - dangerously.
    Something is terribly stupid about QE in the United States right now.
    It is tantamount to irresponsibility because the impact will be global.
    What's up, Bernanke?
    My warning: the American soft-money policy has the potential to destabilize global finances.
    Brace yourself, get ready for the ride. It's going to get rough!

  • Comment number 20.

    Ladies and gentlemen if you'd stop listening to the men of Westminster trying to sell you that bridge they've eternally got for sale, you might find your good selves interested in some lovely wheelbarrows I've got for sale.

    They're ideal for the financially well-endowed in the up-and-coming quantitatively eased economy, with copious room for transporting all your dough to get your daily bread from the supermarket.

    That is all.*

    * moderators, please note this satire, not spam.

    (I'm really not a purveyor of gardening equipment come money transportation devices.)

  • Comment number 21.

    Thanks again Paul. My work on the founding of the Bank of England (as part of my nearly completed PhD thesis [Personal details removed by Moderator]) suggests that QE long predates 1932 and is far from unconventional. William Paterson's proposal for the founding of the Bank included printing £1.2M alongside the £1.2M borrowed and lent to William III to pay for the war with France. This was carried out with the founding of the Bank by act of parliament in 1694. The second tranche of money was in the form of printed promissory notes and was secured against the hoped for prosperity of the state and the increased taxation to come as a result. The immediate rise in prices and 25% fall in the exchange rate which it caused was put down to the clipped coinage of the day. The QE 'worked' and the economy recovered. My point simply put is that the western financial system started with a gamble on the western nations prospering enough to cover the black hole that artificially creating money left in the foundations of the system. That hole is getting bigger and deeper. Plugging it with more artificial money and hoping for the unending growth of the nations making up the core of the now global financial system is the only consistent thing to do. But it indicates that our economic system is a matter of faith in an original decision that is dependent on an eschatological hope that increasingly looks like it disappear down a chasm of its own making.

  • Comment number 22.

    What is missing is an explanation of value.
    But that really would stretch everyone.

    Incorporating value would show just why money is being hoarded.
    That is, because profitable investments are not available.

    Printing money to generate demand is largely fictitious capital, which will only lead to the debasement of the currencies; particularly the US dollar.

    What do the Tea Party think about QE?
    Or do they want to go back to the gold standard?

  • Comment number 23.

    QE is part of an ever increasing Welfare State for the Stock market parasites !

  • Comment number 24.

    For the past two years I have marvelled at the effects of QE in the UK. In the many market towns and high streets that we have visited, it was not evident that we were in a recession due to the increased or steady economic activity brought on by the Labour Party's policies.

    I have no doubt that these positive signs will not continue as the Coalition brings in its spending cuts. Even people not directly affected will be tightening up on the purse strings just in case they are affected.

    I am really concerned that the current policy is neither reducing taxes or increasing public expenditure, nor increasing the money supply and the effects of that will be a slow grind down to a halt and perhaps even negative growth.

    As far as Cameron and Osborne are concerned "They know not what they do"!!

  • Comment number 25.

    Whenever I think about the BoE and QE for some reason it always puts me in mind of Inspector Clouseau and his deflating parrot...

    Are we in the position we were in before the original bout of QE? No.
    Originally we were sold the story that it was to stave off deflation and prevent a 1930's style depression. There was no other option we were told.
    We were reassured by Mr King that inflation wouldn't be a problem because even with £200bn of new money pumped into the economy it would only be 1% at worst.
    Today we are no longer in recession, inflation is high and not forecast to fall in the medium term, and what we've got is a slow but steady recovery. Certainly not the situation that justified QE1.
    Maybe it just gets easier to do the more times you do it.
    Or perhaps they have another reason all together and just don't want to share it with us.

    I notice the news that 37% of all mortgage holders would be judged as not being able to afford their repayments if interest rates were to rise by just 2% has gone more or less totally unreported today. The implications of that on house prices might go some way to explaining why QE2 is on the cards.

    It would seem the entire economy is to be bent around the iron bar of the housing market no matter what the cost.

  • Comment number 26.


    A bold attempt, i think there is one assumption you make which is wrong though. Your post presumes it is within their gift or knowledge to 'put it right' within the confines of the tools they have at hand.

    ''Oh, and the whole future of the world economy depends on who's right.''

    I dont think it does, the whole future of the world economy depends on it being recognised that none of them are right and the global economic dynamic has fundamentally changed and requires a fundamental root and branch re-think.

    I was heartened to get an inkling that Merv may 'get it' and is trying to cajole things in that direction in his recent speech, when he talked about much more radical reforms than yet more QE and tinkering at the edges of regulation.

    Non of this is new, this whole saga, for me, fits within this observation on the quantum of human history.

    ''History is a race between education and catastrophe'' (H.G. Wells)

    The trouble is those that need to be educated are the ones who currently think they have all the answers.

  • Comment number 27.

    12. At 12:50pm on 02 Nov 2010, jauntycyclist wrote:

    "until people wake up to mervy's 'the world economy is a zero sum game'
    idea and take measures to offset the piracy of other states then we shall watch our poverty increase and the wealth of others rise. China is a pirate state. "

    No jauntycyclist, China is just a different type of state. It's not Liberal-Democratic state, it's a Democratic-Centralist state. Its allies are in the SCO.

    You really must make the effort not to imagine that everyone else is like yourself. That's egocentric, at the group level it's ethnocentric.
    It's all a manifestation of narcissism, which is an Infantile Disorder as Lenin once called anarchism. Children believe in fairy stories whilst adults try to self-critically learn from Behavioural Economists.

    Watch out for the rage responses, they are symptomatic of arrested development. There is a bit of a war going on.

    "The communist government of PRC has a policy of not letting their brightest students leave the country for fear of the brain drain and of forcing them to study home at Chinese universities. Then it sends the second-rate students to American universities and the third-rate students to British universities, both with falsified transcripts and exam results to make them look first-rate. Here at LSE where I teach, we receive a large number of these third-rate Chinese students dressed up as first-rate. (About 5-10% of all undergraduate and graduate students at LSE are from PRC.) Virtually every Chinese applicant to LSE boasts "the highest exam scores in their province." Apparently it has not occurred to the LSE admissions office that there could not possibly be that many provinces in China. Naturally, most of these PRC students do very poorly and fail out of the program, and, when they do, many confess to having purchased or otherwise fabricated their exam scores and transcripts before they applied for LSE.
    Yes, there are millions of bright Chinese students in PRC, but we are not likely to meet them anytime soon until or unless the political reality of PRC changes or otherwise the communist government ceases its policy of sending second- and third-rate students to the US and UK."

    Satoshi Kanazawa, LSE 2006

    Note, this has nothing to do with the excellent academic achievement of the British Chinese in our Maintained Schools. They come top in SATs etc. Interestingly, the Chinese (East Asian) academic/intelligence profile is one of greater spatial over verbal ability (good for engineering), which is the very opposite of the Jewish verbal over spatial ability (good for banking?). Interestingly again is that the latter profile is characteristic of the feminine brain whilst the former is characteristically male. What other qualities are characteristically female?

  • Comment number 28.

    I have a private group of professors about to work formally with me appraising my work on this and other structural problems linked to instabilites in banking, currency, and debt in general, including Bonds.
    We are exploring a number of totally new concepts that are about to be presented formally by me to the group for discussion in a private on Facebook. Membership is by invitation only. So far all those invited have accepted immediately.
    My own tentative conclusion (which is one of the several observations that has caused this degree of interest), is that what is being taught in Universities and Banking Circles about ‘Asset Backing’ for new money is clearly not correct. And that fact is at the root of some significant structural and instability problems. In fact the whole way in which we create money at present is both irregular and unsafe. There are even times when it stops working altogether.
    We need something more precise and we need to understand that there is no need for asset backing as defined in the traditional sense when new money is created.
    The economy needs new money to work. What is lacking is precision and balance in its creation and distribution. The asset backing needed is the need that an economy has for new money. Any excess, however created, with or without asset backing in the traditional sense, will cause inflation. So let us aim at a steady state of money creation created with precision and correctly injected into the economy. The real Asset Backing is the need for the money. Only the excess will cause inflation.
    I cannot say more without the approval of this group which is still being formed. What I can say is that no professor or other expert that ahs been invited to help has declined the invitation. They are all well aware of of the basic concepts as well as the depth of research that has gone into this.

    Edward C D Ingram[Personal details removed by Moderator]

  • Comment number 29.

    17. At 3:32pm on 02 Nov 2010, tawse57 wrote:

    "They don't put it in the water any more - they just stick it up on ITV."

    August viewing figures (probably based on BARB system sample). So much of what's seen is rehearsed and scripted, as with all slick TV, but then, the much smaller portion of the population which cares about the economy and long term future one way or another has been bought off with salaries above 48K, so aren't likely to rock the boat. That's how this system works.

    Why does Robinson and Crick get praise? Probably because they keep many people befuddled with highbrow gossip (it's like drugs and drinks).

    That's all it is though, it's just like what the NN threesome Panel used to offer. Garrulous distraction. But that's the media these days - that's entertainment folks, that's politics.

    Look at the PIGS demographic projections.

  • Comment number 30.

    18. At 4:29pm on 02 Nov 2010, DebtJuggler wrote:

    "Fathom pointed out that the country's £150bn of buy-to-let mortgages – 12pc of the market – could be the first "zombie households" to be targeted."

    In other words - Private Sector property developers/landlords. They too live in households.

    The scam is to make the reader believe that (an intensional idiom or verb of propositional attitude - aka the new psychobable?) the problem hits private homeowners/mortgagees. This is indeed a shell game, spun by the usual culprits peddling muddles + fear. But that's the entrepreneurial business-world, where caveat emptor rules (aka there's a schmuck born who can be indoctrinated via psychobabble every minute).

  • Comment number 31.

    World War. We have currency wars, then real wars. If other countries don't want to trade with us then we have either got to suck it up and decline in silence or we go to war and take what we want. Someone correct my ignorance.

  • Comment number 32.

    25. At 7:16pm on 02 Nov 2010, muggwhump wrote:

    "I notice the news that 37% of all mortgage holders would be judged as not being able to afford their repayments if interest rates were to rise by just 2% has gone more or less totally unreported today."

    But who are they?

    See DebtJuggler's link and post above, and think Property Developers with a portfolio of BTL mortgages. How much are we seeing a small number of patsie borrowers' plight being abused to hide landlords now fearing the pinch? Is this not what's behind Boris Johnson's outcry against ethnic cleansing (loss of rentals)?

  • Comment number 33.

    26. At 8:44pm on 02 Nov 2010, Jericoa wrote:

    "''History is a race between education and catastrophe'' (H.G. Wells)

    The trouble is those that need to be educated are the ones who currently think they have all the answers."

    Wells was a Fabian you know. What the USSR implemented post 1928 was a scientifically engineered command economy, effectively, Fabian Socialism. The PRC too. What we did was undermine this, most effectively, here in the UK, it just took time to exert its full effect.

    But perhaps you think I am one of those who thinks they have all the answers? On the other hand,,,,,, what if it's you?

  • Comment number 34.


    PIGS -Let's just take Italy as an illustration. You can do it for Spain, Ireland, Greece and Portugal as an exercise to bring the point home. Remember what has been said about gene pool and skills? The OECD has these data, so does ETS in the USA, and UK here (ONS).

    See why tinkering with macro-economics probably won't cut it? But that's all Liberal-Democracies have in their tool boxes, so, that's all that's ever discussed. The alternative is deemed politically incorrect. Reality is deemed politically incorrect!

  • Comment number 35.


    Hey Tabble, what if we are both right? A bit like a single photon of light being in two different places at the same time, or would you deny that observation as being beyond pure rationality and therefore flawed as well?

    Did I detect a sense of humour in your post Tabble.. I think you may be learning something, I will keep plugging away at you anyway:)

    As for me I am off to look up what a 'fabian' is.

  • Comment number 36.


    All very noble I am sure, just in case you have not come across them, may I point you in the direction of NEF (New Economics Foundation) whom I am sure may be able to offer support for such a venture. lets put it this way if they dont support such things I want my monthly donation to them back..

    Good luck with it.

  • Comment number 37.

    #28 Edward C D Ingram

    I respectfully suggest that you appreciate the role of endemic fraud in the system as a contributing factor!

    The Fraud Started At the Very Top: With Government Leaders

  • Comment number 38.


    A guide to QE(x)

    we don't know

    we don't know

    no, it was the only tool left in the box

    no, not really

    they were going to but in the end we all did the same thing

    nothing, it all worked fine

    based on our analysis of the evidence we have no idea

    we're not sure what causes inflation anymore and anyway, we see disinflation the bogeyman now

    we don't know what we are doing

    oh yes, that or something else

    a huge dose of laxatives

    well if we don't then there is always QE(3)

  • Comment number 39.

    It is an immense mess. QE will not work as we are in a liquidity trap and the appetite within the private sector as an aggregate for more debt is small. In fact the private sector is deleveraging.

    What the economists at the Fed and the BoE cannot understand is that the money multiplier will not work when the creation of wider money has ALREADY occurred as it had in the years to 2007.

    Instead the cheap cash has 1) driven down interest rates to negative levels, which has supported asset prices (e.g. houses) and potentially staved off the horrendous problems that a property price collapse will cause. 2) fuelled speculation in financial assets, particularly emerging market property and other assets, and commodity prices - but also in equities generally.

    You could argue that these are the problems that got us here in the first place.

    Of course 2) feeds in to food and energy prices and so into inflation.

    Instead of QE we should be looking to use these resources to use public spending to increase private sector orders. This will switch money to productive use.

  • Comment number 40.

    A most thought provoking piece, Paul and some valuable responses. Shame that the Newsnight slot was very brief. Here are the two key take-outs:

    1) QE essentially converts privately created (bank) debt into publicly accountable (sovereign) debt (see #18 DebtJuggler)

    2) The big elephant in the room is the securitised assets for which most of this QE is actually trying to prop up. As #9 The NewPonzi points out, the presumed "profits" have already been cashed-in, and therefore we can only assume have made it in to shareholder dividends and bankers' bonuses!

    Most of the private banking debt was created under at best dubious assumptions of genuine economic growth, or at worst pernicious conditions of fraudulent lending practices (Google "liars loans" or "Foreclosure Gate"). This is just an elaborate pass-the-parcel to avoid anyone (bar the taxpayer of the future) taking a massive hit!

    You may have touched on the first point, Paul, but the second is woefully under-reported by all mainstream media. Forget trying to weave song titles in to your next piece on NN, how about sneaking in some of these fellows:

    - Privatised profits, socialised losses
    - Securitisation fraud
    - Liars loans
    - Foreclosure Gate
    - Zombie debts

    I myself will be making a formal submission to the Independent Banking Commision, and would suggest that all others who feel strongly about the questionable practises of our beloved financial sector do so too. Deadline is 15th November 2010:
    (click on Issues Paper: Call for Evidence)

  • Comment number 41.

    A noble effort, Paul. The problem in explaining the ins and outs of QE is that it's essential understand why we're in this situation in the first place - a debt saturation caused by the massive expansion of credit over the last 10 years.

    The contraction in the money supply (through defaults and deleveraging) that has just started to occur over the last three years is a direct result of the bursting of this enormous credit bubble, which policymakers are essentially trying to re-inflate.

    The reason it won't work is that it can't work without reigniting the bubble mentality, which has long gone across the developed world and won't be showing up again for a couple of generations at least. The deflation that is (trying to) occur now would be painful but is necessary to cleanse the system - that's how capitalism works. Short-termist politicians just refuse to recognise this.

    Credit busts are an inevitable feature of our credit-based monetary system of FRACTIONAL RESERVE BANKING, something which perhaps someone with your communication skills might one day have a stab at explaining to viewers. Because without understanding the entire structure upon which our economies are based it's impossible to grasp fully the situation we're in.

  • Comment number 42.


    Have a look at this site, after studying the table, go to the bottom and click on the left red arrow to see the featured EU states, and then the list of countries at the beginning (sort this by TFR). These are old data, and there has been a lot of (planned) compensatory immigration since, but just remember that this immigration has largely been of the low skilled (lowish IQ), and that will be what most of their progeny will be like too as it's largely genetic. Look very closely at the projected numbers in the lower age groups as the declining population is hidden by the bulge in the elderly living longer through good healthcare etc.

    This is what matters when one is concerned about (behavioural) economics as the productive nature, and demands upon the economy is a function of its aggregate and distribution. There are those who don't want people to think and write like this because it risks exposing their predatory business interests, e.g. landlords and BTL portfolios in the inner city areas where those renting do so only because of tax payer supported housing and other benefits. This is where so called left wing socialists and right wing libertarians join hands. A message for Boris Johnson? Why might he not want to see a Kosovo style social cleansing, or less dramatically, a migration to cheaper property outside the city? Loss of an easy source of income from tax payers?

  • Comment number 43.

    Excellent article.

    The boom years should have been followed by a corresponding bust. For the property market in particular that did not happen - property prices are still way above the long term trend, when they should be well below as has happened in previous recessions.

    Cutting interest rates to near zero was a massive mistake - great for big companies that can issue their own bonds, but disastrous for small and medium companies. For them it is not the cost of credit that is the issue - it is the availability of credit. Cutting interest rates simply meant that the carry trade took money out of the economy to invest in higher interest rate countries.

    Trying to fix the availability of credit issue by printing more money (QE) with low interest rates is like trying to fill a bucket that has a massive hole in it.

    Raising interest rates will keep and attract money solving the availability of credit, and will also help deflate the property market. Unless and until those in power realise this we will continue to be stuck in rut.

  • Comment number 44.


    'Sir John Gieve, a former deputy Governor, said he was "very sceptical about whether QE2 would be anything like as effective as QE1", while DeAnne Julius, an ex-policymaker, said: "I would look around for a different form of QE than buying gilts." Rachel Lomax, another former deputy Governor, said she would keep interest rates and QE on hold.
    Speaking at Fathom Consulting's Monetary Policy Forum, they argued that the Bank may be influenced by the US Federal Reserve if it presses ahead with more QE today – as expected. Sir John said: "The winner in the currency wars so far has been sterling. The strongest argument for QE2 would be to hold that position in the face of others doing it." '


    DeAnne Julius (ex policy maker)...Would this be the same DeAnne Julius who is special advisor to Fathom Financial Consulting?

    'Dr. DeAnne Julius CBE is Chairman of Chatham House and a non-executive director of BP and Roche. She also serves on the advisory boards of UK and US hedge funds, is Vice President of the Society of Business Economists and is currently leading a Review of the Public Services Industry for the UK Department of Business, Enterprise and Regulatory Reform.'

    I gets better...

    On her Wiki page it goes on to state that she has worked for the the World Bank and the CIA!

    You really have to look into the backgrounds of some of these people - very closely indeed.

    These libertarian anarchists/arsonists are setting off fires everywhere you look!...but only in the houses where the plebs live.

  • Comment number 45.

    More on Dr. DeAnne Julius...

    Ex-CIA analyst brings mountain of experience to UK's top companies
    'DeAnne signed up to study architecture, but switched to economics. “I realised that I had no talent at all in that direction,” she laughs. “I liked the drawing side, but could never pick up the engineering dimensions of architecture. I’d always found economics interesting, but, more importantly at that stage, I also found it extremely easy. It didn’t require writing long papers.” '

    That's funny...that’s exactly what I thought the study of economics mostly involved and why I never went into it!

    It also states that she worked at Shell. Now I just wonder if it overlapped with Vince Cable's tenure there? (don't mention fluids tabble)

  • Comment number 46.

    Great stuff Paul - at long last an honest and full explanation of QE - where else in the media can anyone point to a decent explanation of QE?

    My take is this - "Money" as a concept has become blurred - who creates it? Where does it come from? Do you count the value of everything owned as part of our total "Wealth" - and can you then quantify "Wealth" in terms of "Money"?

    But can we really say where "Money" begins and ends anymore?

    All assets have a price - if they go up and down in value, does that also change the amount of "Money" and "Near-Money" we have?

    Equity and other trading is now online and instantaneous, whereas going down the supermarket for a loaf takes much, much longer - so aren't equities now more "Liquid" than cash is? Indeed financial and commodity futures trading is - by definition - capable of "monetary time travel" - buying and selling things before they exist...

    Commercial Banks can create " "Money" by lending more of it than they hold - Central Banks create "Money" by literally printing it, but they also create it by removing "Assets" from the economy and replacing them with "Money" that they have simply created out of thin air.

    This system relies on us all accepting "Money" and its attributes - we equate it to the world around us - a £10 note can be exchanged for so much petrol, food or entertainment - it is a symbol for value - a token for exchange - but quite an expensive thing to use to light a fire with, or for "personal hygiene" puposes...

    Byzantine fiscal instruments and astrophysical financial mathematics have kidnapped the meaning of "Money", which is now becoming increasingly confused in the real world.

    What we can say about the US situation is that IMHO the level of US debt and the growth in their money creation goes way beyond anything that a "normal" country and central bank would find acceptable, or those that use its currency. The UK is following closely behind - others are too.

    The post-war Marshall Plan combined with the use of the Dollar as both the Reserve Currency and main Trading Currency has allowed the comprehensive abuse of our trust in "Money" to happen since the rise of the New Right in western political thought, the deregulation
    and globalisation of markets, combined with massive national deficits.

    The US currency is now so debased and its economy so overstrained that we are now living on borrowed time - the buck is in truth a busted flush - it only continues to be acceptable to the world as "Money" because the world has so much (literally) invested in it, but in the end IMHO the US monetary system must meltdown as confidence in it ebbs away - QE2 is therefore a nailgun in the hand of the undertaker that will simply hasten the process of shutting the coffin.

    The work going on about replacing the $ with a basket of currencies and moving commodity trding away from dollar pricing are the opening shots in pulling the plug on the buck.

    I'd suggest a sort of "Domain Name Server" approach is the only possible future - limit who can create "Money" electronically by only allowing it to exist in cyberspace with its own unique digital identity and therefore prevent its debasement and abuse by governments, banks and speculators.

    "Money 2.0"

  • Comment number 47.

    Apropos QE2: if I were you I would go to Paul Krugman's blog and type quantitative easing into the blog search engine, which will explain better than I can why the UK and other liquidity trap countries (which currently produce 70% of the world's GDP) will not find QE2 especially helpful. I don't know why the BBC has a blanket ban on the (1937!) term liquidity trap, but it's really not helping folks: 'financial sector economists' have been listened to enough.

  • Comment number 48.

    I think something should be done to force Banks to lend at a reasonable rate, otherwise money will not be borrowed.

    If the BOE rate is 10%, Libor something abot 5.5% (unsure of current rate), why is a personal loan costing me 10% !!

    Banks say people/companies do not want to borrow, I think they have made the rates unaffordable.

    I assume this is because they have to hold back the QE money as part of the "new" idea that they must hold a substantial reserve as a buffer.

    Whatever happens Banks will never loose, only the public.

  • Comment number 49.


    Given that half of the £140B Income Tax is due from the 10% or so who earn over 48K a year, and that these are the ones who can engineer tax avoidance most easily because they complete SA tax forms as opposed to just PAYE, does anyone have the figures for how much of that £70B in tax is NOT collected?

  • Comment number 50.

    'Given that half of the £140B Income Tax is due from the 10% or so who earn over 48K a year, and that these are the ones who can engineer tax avoidance most easily because they complete SA tax forms as opposed to just PAYE, does anyone have the figures for how much of that £70B in tax is NOT collected?'



    Please note that not all people on over £48K pa partake in tax avoidance practices.

    For example, Paul Mason has previously (on record, on a previous blog) confirmed that he is PAYE and therefore pays higher rate tax... and in anycase, you need to earn greater than £70-80K pa to make the £6-7K annual accountants fee (for setting up your Ltd comapany and completing the annual accounts) worthwhile.

  • Comment number 51.

    48. At 2:37pm on 03 Nov 2010, PoorSoul wrote:

    "why is a personal loan costing me 10% !!

    Banks say people/companies do not want to borrow, I think they have made the rates unaffordable."

    Ah, that will be the chutzpah. It's because they can probably get a far better return elsewhere (on the money which they got from you via the Government). So long as they charge a high rate, they can say that you don't want to borrow 'their' money, meanwhile, they get a good return elsewhere, can say nobody else wanted it, and pay themselves big bonuses for their good returns too..

    Tip, never try to argue with bankers. They always get their own way in the end, and if ever they don't, they will turn very nasty to make sure they do. Hell hath no fury etc.

    See Islamic world ('terrorists') for treatment of bankers.

  • Comment number 52.

    Another great post Paul.

    If the government is correct in that growth next year will be 2.5% or so, and inflation is over target, then would QE2 be very bad for us? Would investment by our big companies go overseas - so the best we could hope for is a jobless recovery in a time of stagflation? As less jobs result in less pay for those lucky to have a job; we would then need debt to fill the gap? One gets the feeling we would be spiralling down the plughole.

    Capitalism is a failed project.

  • Comment number 53.

    Slight corrections are called for I think.

    If a sovereign government like the US does 'quantitative easing' with government bonds, then all it is doing is swapping an interest paying asset it issues for a non-interest paying asset it issues. That's it.

    There are no new financial assets made available to the private sector by this process. In fact you remove a stream of government spending from the private sector (the interest on $500 billion) - so technically it is deflationary. There will be less assets in the private sector than there would have been if they hadn't bothered with QE.

    So there may be some shuffling of the relative value of various casino chips, but QE provides no incentive to take the chips off the table and go and buy some real goods and services with the money. And without that nothing of any real value changes.

    Once again the world is trying to solve its problems with financial wizardry, when what we really need is for somebody somewhere to open their wallet and induldge in some good old fashioned trade in real goods and services.

  • Comment number 54.

    "The Bank was insistent that QE would boost the money supply - it currently has no public explanation as to when the 12% of GDP pumped in flows through into 12% extra demand."

    Modern Monetary Theory explains it perfectly. You removed 12% of GDP of other financial assets in the process. The net addition was nothing. Little or no financial assets were destocked into flows, so how can it affect demand?

    Currently private sector businesses are hoarding financial assets. It's as clear as day on the sector analysis in the National Accounts. And they're not spending and investing because the 'demand signal of last resort' - the government - has gone on an austerity drive.

  • Comment number 55.

    50. At 4:13pm on 03 Nov 2010, DebtJuggler wrote:


    Please note that not all people on over £48K pa partake in tax avoidance practices.

    For example, Paul Mason has previously (on record, on a previous blog) confirmed that he is PAYE and therefore pays higher rate tax... and in anycase, you need to earn greater than £70-80K pa to make the £6-7K annual accountants fee (for setting up your Ltd comapany and completing the annual accounts) worthwhile. "

    leaving aside the wry remark, I'm sure not ALL do (SOME=NOT(ALL)), but the point remains that once one goes into the higher bracket one will probably get a tax form, which surely gives one the opportunity to claim some of the tax back via tax avoidance surely? What I'm drawing attention to is that the ONS lists what tax is due with reference to the numbers in earnings brackets, but how much does it actually manage to collect, and is its collection uniformly distributed? How 'fair' is it?
    I guess unless one works for Revenue & Customs it's hard to say, but then, my bet is that it's hard to say anything these days.......

  • Comment number 56.

    Can I add my humble congratulations to Paul Mason on a thorough and adult analysis. Can I also suggest to other non professional readers that they read “Whoops” by John Lanchester which is another brilliant analysis of the economic mess we are in. The key point of which is that this mess stems from the cheap credit that was an inevitable response from the financial markets to top up suppressed real median wages, without this the economic system would have ground to a halt years ago.

    QE is the easiest to use of the available macro economic weapons, it can be done quickly without any changes to institutions or society. That is why it is used even though no one knows if it will work!

    We have several other options but they all require a radical revolution in the worlds financial system and so unless things get really really bad, by which I mean a collapse in living standards resulting in violence and social upheaval, they wont happen. The vested interests are too great.

    Capitalism has delivered on its promise - we have got what we wanted! The problem is that now we have it we realise we don’t much like it and it doesn’t make us happy but we don’t have an alternative! QE2 may or may not keep the system intact in the short term but it wont resolve the problem that economic growth is a poor goal for humanity. Communists, Fascists, Wahibists, hippies, punks, greens, liberal democrats have all failed to answer that question and

    Ignorance, cheap lager, SKY Sports and plenty of available sex will keep the revolution at bay while the elite make themselves miserable with their accumulated wealth.

  • Comment number 57.

    Points to note:

    1) QE does nothing to increase aggregate demand in the "real" economy - the money created simply sits as reserves. It can be reversed, and should be in short order.

    2) Lowering the bank rate was essential for helping the private sector to deleverage.

    3) Monetary policy has a very limited role in recessionary times - fiscal policy will always be superior.

    4) We need fiscal stimulus to stimulate demand in the real economy and complete the recovery process.

    5) We should stop living in our 'gold standard' fantasy world, and allow government to spend without unnecessary debt issuance (and merge BoE and Treasury balance sheets).

  • Comment number 58.

    #56 Giveemenoughrope

    Yes, economic growth is a poor goal - we are causing a mass extinction.
    Humanity has no collective control over its destiny because the drive for profit shapes everything.
    We have a system that enslaves us.

    Only by having direct democracy (controlling the means of production) can we chose a different way of living.
    Don't you agree?

  • Comment number 59.

    I don't like this article. Although the ostensible purpose is noble, the Author fails the challenge, with the simple tactic of excessive verbage (yak yak). Indication are that the Author simply repeats what others tell him, without a hint of fundamental understanding. For instance, if the Author would explain clearly the detailed mechanism by which the Fed "pumps" money into the "economy," we might learn something. Just who exactly gets the money, and what do those people do with it, all the way, showing possible paths to the street level. Similarly, if the "Government" pumps in money, what are the details. What's the difference between the Fed pumping in money and the Government pumping in money. Explain to us the details about how the Fed works. In other words, tell us something factual, instead of repeating a lot of hand waving theories. Typical clap trap from writers on the economy.

  • Comment number 60.

    "The world seems full of smoke ahead of a world currency war. The weapon of choice is quantitative easing, a.k.a. QE. If you print a trillion, I’ll print a trillion. Of course, he and she will too. No change in exchange rates after a trillion? Let’s do it again, QE2.

    If you listen to people like Geithner, the end of the world is quite near. Rich people everywhere are buying gold for a little peace of mind, not just the Chinese. They are literally trucking it by the ton or two home. When currency values vanish in a QE melee, at least the rich have the gold to stay rich......The same people who caused the last crisis are still in charge. They’ll get us into another. Iceland is taking its ex-prime minister to court for causing the banking crisis. Worse fates await the people who are causing the next crisis. China used to chop off the heads of its failing ministers at the capital’s vegetable market. Maybe we should bring back the practice and globalize it" by Andy Xie in MarketWatch

    Is this the real QE about?

  • Comment number 61.

    Imagine if everyone had been given $8,000, this would have been far more successful than QE, better still the money could have been used to employ the 20% odd un/der-employed in the public sector who could then spend that money at Wal mart etc and keep demand in equilibrium with production/supply so incomes keep growing and private debt can be paid off.

    Warren Mosler, the UKMC school are all well worth checking out on the real way to grow jobs and the economy so debt shrinks...debt is simple, stop borrowing, simply create the money and use it to keep demand and incomes on a higher growth trajectory. With supply gaps so large and 20% labour underuse, inflation is nothing compared to the huge national costs of mass unemployment.

  • Comment number 62.

    I cannot even claim to be an amateur when it comes to matters of economics and finance, but logically if 600bn dollars are thrust into the system, this will serve to reduce the value of each dollar that already exists, thereby causing inflation and further reducing the effective wealth of everyone in that system.

  • Comment number 63.

    Paul, you're over-hyping this. And getting a bit mixed up.

    First thing is: QE in its most basic form is simply a standard open market operation for longer maturity paper. Standard OMO (i.e. "conventional" monetary policy) takes some near equivalents for cash and replaces them with cash; alternatively, it takes some cash and replaces it with near equivalents for cash. In general, the CB will buy or sell short term government paper depending on the policy rate it desires and the level of reserves it is targeting. Under QE it buys high grade longer term paper. That is the difference between conventional and unconventional. The nuclear option it is not.

    QE will lower long term yields, which may increase spending through two channels. The first channel is via a lower cost of borrowing, leading to an expansion in the money supply (i.e. credit extended); the second is via a raise in asset prices, leading to an increase in net wealth among asset holders, leading to greater spending.

    But the important thing to remember is that these monetary operations are asset sales or purchases. The CBs are just swapping the mix of risk free assets held by the private sector, but not increasing or decreasing their amount.

  • Comment number 64.

    Just come across Paul Mason's blog for the first time - fantastic blog post! Although I knew that QE was directed at buying bonds, I am inspired by the clarity of his article to ask this:

    Why doesn't the Central Bank do QE by putting Capital directly into the banks? It seems pretty obvious to me that a Central Bank should be the primary source of capital for all banks, and by doing so, the Central Bank would be holding shares in its lending banks, which seems to give it additional right of jurisdiction over the regulation of those banks.

    That way, monetary policy may be executed by a Central Bank by at least 3 means:

    1) the familiar setting of interest rate
    2) the setting of Capital Adequacy ratios,
    3) the investment or withdrawal of the Central Bank's Capital injections.

    This would have been far more effective for example in the last financial crisis, when the Treasury made loans to RBS and Lloyds TSB
    and then the Bank of England had to use bond-buying QE to make a market for Treasury bonds.

  • Comment number 65.

    Good article long overdue. I've bored people with a pet theory now for a good few months that QE was nothing more than a convenient way for Governments to make sure their IOUs kept getting cashed, not least the previous government with gorden 'QE' brown at the helm. This evening the US kept going headlong down the QE path and I think it's going to be a key point in the forth coming historical work 'The rise & fall of the American empire'. On the plus side for the West we have the UK whose voting population may have sent us in a different direction as will be pointed out in the forth coming historical work 'The fall & rise of the Britsh empire' in which our decision on the 4th November not to follow the US down the QE road will be seen as a mile stone in our re-invention as a lean mean high end services economy serving the mighty eastern rising economic powers. We don't necessarily get this job because we are the best, but because we are the only ones left not incapacitated by debt in one form or another. Our European rivals for this choice position are stuck with the Euro millstone round their knecks and all the 'peripheral state' nightmares that entails and as mentioned the Americans are out if it to, so how about a 2nd commercial British Empire starting in 2010? read it here on the BBC first.

  • Comment number 66.

    #59. (For instance, if the Author would explain clearly the detailed mechanism by which the Fed "pumps" money into the "economy," we might learn something.)

    He DOES explain clearly the detailed mechanism:
    "QE involves the central bank creating money and using it to buy up pieces of paper known as bonds"

    (Just who exactly gets the money.)

    For example pension funds who already hold Government bonds and Corporate bonds will now get higher prices for them and make a small profit, and therefore sell them to the Central Bank. With their "cash" they have to do something, so they might put some into the stock market. From there on it is impossible to determine the path of the money. At best, if stock markets go up, new technology companies (eg. solar panel electricity generation) will have a chance of raising more capital. This new capital creates new jobs, new wealth, a new future (except that nothing ever stays new for long, of course!)

    (What's the difference between the Fed pumping in money and the Government pumping in money. )

    The Fed is the Central Bank in the USA. The Government of a nation is separated from its Central Bank. Even in Britain, the Government has its own accounts, and the Bank of England has its own accounts, and this has been going on for centuries, which is why we have so many miraculous things here, like the internet, and the BBC. :)

    It isn't all clap trap, definitely no more than is horse racing at the betting shop. Occasionally, Evan Davies and Stephanie Flanders make an effort to really simplify explanations, but those of us who have been hearing about GDP for years know what the letters stand for. Paul Mason has here actually done the best educational blog post I have ever seen on the BBC Economics or Business website. True, You can't teach people to run before they can walk, but there are plenty of people who can already walk.

  • Comment number 67.

    66. verano wrote: "For example pension funds who already hold Government bonds and Corporate bonds will now get higher prices for them and make a small profit, and therefore sell them to the Central Bank. With their "cash" they have to do something, so they might put some into the stock market. From there on it is impossible to determine the path of the money."

    In other word, printing money for speculation?

    I dont think so. More dangerous to US credibility, i`m afraid is these pension funds or investor funds or even hedge funds would use the printed money`s profit to buy companies and assets, more precisely, foreign assets. And the price is not a problem, you see, the mopney is created in thin air.

  • Comment number 68.

    1. Taking a micro view of solving a financial problem - most people would agree that, for example, throwing money at a corporation that is making substantial losses is not a lasting solution. If the losses are not stemmed borrowing more money is only a question of putting off the evil day.
    I submit that there is a parallel on the macro stage. Surely the fundamental issue to be addressed is that money supply for each currency zone should be brought to a percentage of the zone's G.D.P.
    2. Increasing the money supply will put further resource into the banking system allowing the non-economic contributing markets [derivatives etc.] to produce further paper profits. These profits by definition do not contribute to true wealth of nations.

  • Comment number 69.

    #66 verano

    Good clarification, however I would add two quick comments:

    The central bank forces the Gvt to create new money as interest bearing debt. If the Gvt just issued money (as in the Lincoln Greenback model) then there wouldn't be an explicit requirement for money supply expansion (to honour the increase in money required to pay back principal & interest). I recommend Ellen Brown on this topic.

    Secondly, you seem to imply that financialisation (Gvt accounts and BoE accounts) has driven economic growth. It would be fairer to state that financialisation "facilitates" or lubricates the economy, but it is not the FUEL of economic growth. It takes real work / energy to make things, and it is this this provides the underlying substance of economic productivity. Without the tangible efforts of people & the energy consumed by machines, there would be no fuel to drive growth. The absence of a reliable monetary system can surely hinder the exploitation of this work / energy, but this does not automatically mean that money itself can create work / energy from thin air.

  • Comment number 70.

    Couldn't bully their way through at G20 so is QE2 merely a very convenient "Plan B"?

    Why (and how) the U.S. Has Launched a New Financial World War

  • Comment number 71.

    It appears to me that a simple definition of QE is the printing of fiat money by a profligate government. I am a simple man,or simply a man,

  • Comment number 72.

    Give the money to the people, not to the banks. Not from a Robin-Hood, anti-capitalist or bank-averse viewpoint, simply from the fact that a countries economy IS it's people.


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