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Will QE work?

Robert Peston | 09:13 UK time, Wednesday, 11 March 2009

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.

Bank of EnglandNote 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).


Page 1 of 4

  • Comment number 1.

    I don't understand, why would anyone buy gilts then?

  • Comment number 2.

    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.

  • Comment number 3.

    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).

  • Comment number 4.

    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?

  • Comment number 5.

    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.

  • Comment number 6.

    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?

  • Comment number 7.

    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.

  • Comment number 8.

    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.

  • Comment number 9.

    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!

  • Comment number 10.

    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.

    and bin veyoooge.

  • Comment number 11.

    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.

  • Comment number 12.

    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.


  • Comment number 13.

    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.

  • Comment number 14.

    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.

  • Comment number 15.

    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.

  • Comment number 16.

    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 ??

  • Comment number 17.

    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

  • Comment number 18.

    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?

  • Comment number 19.

    #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

  • Comment number 20.

    I love you for making QE something I can understand.
    Thank you
    a heterosexual male

  • Comment number 21.

    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

  • Comment number 22.

    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.

  • Comment number 23.


    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

  • Comment number 24.

    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.

  • Comment number 25.

    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.

  • Comment number 26.

    NO! 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!

  • Comment number 27.

    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.

  • Comment number 28.

    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!

  • Comment number 29.

    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".

  • Comment number 30.

    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.

  • Comment number 31.

    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?

  • Comment number 32.


    "To recap, it is not a loss to the taxpayer, the consequence will be a permanent increase in the money supply.


    ie. a loss to anyone with a sterling position - savers and pensioners..

  • Comment number 33.


  • Comment number 34.

    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?

  • Comment number 35.

    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.

  • Comment number 36.

    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.

  • Comment number 37.

    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.

  • Comment number 38.

    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.,


  • Comment number 39.

    The mention of big red letters brought red noses to mind. Is someone doing something funny for money?

  • Comment number 40.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 41.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 42.

    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.

  • Comment number 43.

    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.

  • Comment number 44.

    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.

  • Comment number 45.

    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

  • Comment number 46.

    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...

  • Comment number 47.

    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...

  • Comment number 48.

    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!

  • Comment number 49.

    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.

  • Comment number 50.

    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?

  • Comment number 51.

    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!!

  • Comment number 52.

    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?

  • Comment number 53.

    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.

  • Comment number 54.

    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.

  • Comment number 55.

    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.

  • Comment number 56.

    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.

  • Comment number 57.

    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?

  • Comment number 58.


    Very depressing but let me tell you this, the euro IS in trouble 'mark my words'

  • Comment number 59.

    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.

  • Comment number 60.


    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.


  • Comment number 61.

    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?

  • Comment number 62.

    Note sure if anybody has seen this already... The effects of QE explained very nicely.

  • Comment number 63.

    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.


  • Comment number 64.


    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.

  • Comment number 65.


    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?


    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?"

  • Comment number 66.

    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.

  • Comment number 67.

    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!

  • Comment number 68.

    #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?

  • Comment number 69.

    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?

  • Comment number 70.

    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.

  • Comment number 71.

    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.

  • Comment number 72.

    When it fails and typical Labour will flog the dead horse and do it again, will it be called "QE2"?

  • Comment number 73.

    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!

  • Comment number 74.

    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.

  • Comment number 75.

    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.

  • Comment number 76.

    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. ' 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!

  • Comment number 77.

    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

  • Comment number 78.


    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.


  • Comment number 79.

    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?

  • Comment number 80.


    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.


  • Comment number 81.

    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....

  • Comment number 82.

    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.

  • Comment number 83.

    Could someone just give me one example, from all the centuries of economic history, of printing money having a beneficial for the economy?

  • Comment number 84.


    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.


  • Comment number 85.

    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!

  • Comment number 86.


    Consumer debt = mortgages/credit cards.

    That would generate huges losses for the treasury.


  • Comment number 87.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 88.

    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.

  • Comment number 89.

    Why bother with queesing , just put up interest rates and get us all saving again or is that to simple.

  • Comment number 90.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 91.

    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.

  • Comment number 92.

    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.

  • Comment number 93.

    ......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.

  • Comment number 94.

    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.

  • Comment number 95.

    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.

  • Comment number 96.

    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?

  • Comment number 97.

    @67 egrid

    Thats good analysis of the mechanics of the governments actions.

    Incompetant to the last

  • Comment number 98.

    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.

  • Comment number 99.

    `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.

  • Comment number 100.

    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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