I've expounded on quantitative easing at length, but what it boils down to is commercial banks and government departments shuffling numbers on bits of paper (or on computer screens) around between themselves with little or no impact on the wider economy*.
An article in the FT, which is not easily available online sums it up:
In the UK, for example, nearly £140 billion has been injected into the economy through central bank purchases of government bonds and corporate assets, mainly from the commercial banks.
However, since the QE project was launched on March 5, a lot of this money, which in theory should be used by the commercial banks for lending to businesses and individuals has ended up at the Bank of England in reserves. Commercial bank deposits have risen from £31 bn in early March to £152 bn** at the end of July - the latest figure."
So all the commercial banks do is to swap one bit of paper saying "Government bond" for a bit of paper saying "Deposit with the Bank of England" (exactly the same as you paying cash into an account with a commercial bank); the Bank of England ends up with a new asset (a Government bond) and a new liability (the deposit from the commercial banks - don't forget that the depositor has an asset and the deposit taker has a liability) which net off to £nil; and the Debt Management Office no longer has to repay the commercial banks when the Government bonds mature, but another department in the Treasury (i.e. the Bank of England) instead. You can treat the two departments as one, for these purposes, actually, which makes it even easier to understand.
* Why do the commercial banks do it? Partly because the Bank of England is overpaying slightly (they must be - otherwise commercial banks who preferred cash to Government bonds would just sell them in the open market); and partly because commercial banks are prepared to forego the slightly higher interest rates on Government bonds compared to deposits with the Bank of England (the differential is about three per cent per annum, let's say) because they fear that the massive increases in Government borrowing that that have been promised (which is an entirely separate issue and nothing to do with quantitative easing as such) is going to depress the value of existing Government bonds by more than three per cent per annum.
This has little or no impact on the amount that commercial banks are prepared to businesses and individuals (net mortgage lending was a bare £1.6 billion last month), because the real-life commercial risks of doing so have not been reduced one iota.
** So £140 billion has been 'spent' and £121 billion has been deposited straight back with the Bank of England. Presumably the other £19 billion belonged to foreign investors who have shifted the money abroad.
No wonder he's never around
2 hours ago
16 comments:
But what happens when the £140bn eventually gets taken out of the BoE and lent into the real economy? Given 10% reserve banking that £140bn could equate to a credit boost to the economy of 9 times as much, or £1260bn. Which is about the size of the UK GDP. I don't want to be holding pounds when that happens.
QE is as big a scam as perpetual motion machines. When I see debates on the BBC about "is QE working?" it makes me want to wretch at their obvious stupidity.
QE is an attempt to fight the laws of mathematics, economics and physics. It doesn't create anything, and as you point out, helps to destroy confidence in the currency as people know that their pounds may end up worth less later.
Where did the £140 billion come from? Tax revenue, or the gov't "printing" money. If the former, down the back of which sofa did they find it?
S, the £140 billion won't be "taken out and invested" as I explained.
And even if banks withdrew it and lent it, the Bank of England would then also have to sell off the government bonds it now holds (to raise the money to repay the banks) so for every £1 cash that the banks lend into the economy, the Bank of England has to suck out £1 cash by selling a government bond.
OC, exactly.
B, the £140 billion didn't suddenly 'come from' anywhere. If you read the post again, you will see I was explaining that under QE, nothing actually happens. The £140 billion is a gross figure - the net figure is zero.
It's like you giving Mrs B an IOU for £10,000 in exchange for her giving you and IOU for £10,000. Has the net wealth or Mr & Mrs B changed? Nope.
Are you not looking at it from the wrong angle?
Govt issues say £5bn of gilts. Banks pay £5bn in cash to govt. Banks then sell gilts to BoE for £5bn+ a bit. They are net up slightly. Govt now has £5bn it didn't have before and spends it. Thus all the printed money is getting into the real economy via govt spending.
S, the government is indeed borrowing and spending like topsy, that is quite a different issue (and one that I do worry about).
But taking QE in isolation, as you say, the banks are net up slightly (they buy Tuesday and sell back Thursday), but HM Treasury does not suddenly have an extra £5 billion purely as a result of QE, the net position on Thursday afternoon is no different to the position as it was on Tuesday morning.
The government does not end up with £5 billion cash, because the cash it gets on Tuesday it pays out again on Thursday! OK, it doesn't physically pay it out because the banks leave it on deposit with the BoE so it's not the government's money to spend.
"Govt issues say £5bn of gilts. Banks pay £5bn in cash to govt. Banks then sell gilts to BoE for £5bn+ a bit. They are net up slightly. Govt now has £5bn it didn't have before and spends it. Thus all the printed money is getting into the real economy via govt spending."
Issuing those £5bn of gilts are themselves a debt by the country. It either has to be paid back or else it devalues the currency.
However, since the QE project was launched on March 5, a lot of this money, which in theory should be used by the commercial banks for lending to businesses and individuals has ended up at the Bank of England in reserves.
Precisely and yet no one is taking any notice of the four point plan whcih solves the problem for once and for all. Second point - abolish the BofE and give it over to the Treasury.
OC, that's the point. They issue them Tues and buy back Thurs. As Sobers says, the commercial banks end up slightly, and so obviously the Treasury ends up down slightly, but overall not much changes.
They are racking up huge additional debts as a completely separate exercise to QE.
JH, you used the s-word! Sure, the government would like the banks to get out of gilts and lend money to businesses instead. They'd also like a cure for AIDS and an end to child poverty, but just wishing for it won't make it happen.
I'm completely confused. Setting aside the missing £19 Billion (has it all gone abroad?), QE only results in nothing happening if the commercial banks put all the money in the BoE, which,it seems, they have no obligation to do. If they'd invested the £140 billion, then the Treasury would be down by £140 billion,because it wouldn't just have moved next door to the BoE, but be out there in the "real" economy. The Gov't said it wanted the commercial banks to lend he money to businesses,in which case where was it going to find the £140 billion from? Unless, of course, they knew it was all going to end up in the BoE and this is just another bit of spin and an opportunity for the Gov't to give their friends in the commercial banks more of our money (I suspect that the "slightly" by which the banks are "up" in the previous post is in the order of millions of pounds).
I'm sorry MW what you're saying makes no sense. The BoE is 'printing' money. It's actually just pressing a computer keyboard and entering figures on spreadsheets or such, but its the same as printing it. The govt is magicking cash out of thin air and spending it.
So are you saying the BoE can print money ad infinitum and it have no effect on the economy or the value of the existing currency? Why did Weimar Germany get hyperinflation then, and why did the govt of Zimbabwe have to keep lopping zeros off its notes?
As far as I can make out the BoE is printing £20 pound notes and the govt is spending them. They take a rather circular route to get from BoE to govt departments, but they get there in the end.
This is increasing the amount of money in the economy because if they didn't use QE, there's a good chance the bond market would strike, and the govt wouldn't be able to borrow so much money. It would have to raise taxes and cut spending, and raise interest rates to encourage foreign bond buyers, and keep the pound up too.
By using QE they are putting off this day for a little longer at the expense of making the crisis worse when it does come.
If you think QE is benign, I'm afraid you are in for a bad shock when it all goes tits up.
B, in the complete absence of QE, a commercial bank has a choice whether to lend money to the real economy; to invest it in gilts; or to deposit it with the BoE. So if commercial banks preferred deposits with BoE to holding gilts, they would sell their gilts and deposit proceeds with BoE.
Under QE, banks who prefer having deposits with BoE to holding gilts, sell their gilts and deposit proceeds with BoE.
So what's the big difference? There quite simply isn't one.
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S, there are two completely separate issues:
1. Printing lots of new money or borrowing excessive amounts of money, which governments have been doing for centuries. This has nothing to do with QE and it is something that we have to worry about.
2. QE, which is merely paper shuffling and has little or no effect either way. This we don't need to worry about. QE is neither printing nor borrowing money.
I'm still confused. The banks are exchanging an asset (gilts) for cash (deposited in the BoE). So far, nothing has happened financially. However the banks are free to withdraw that money on deposit and invest it (eg in dodgy mortgages) in which case the BoE (and hence the gov't) will have to find as many billion as the banks decide to withdraw, which it wouldn't have had to do if the banks had sold the gilts originally to a third party. For some reason the banks aren't withdrawing the cash (perhaps they've been asked not to),but if they did,the gov't would be in the shit, wouldn't it?
B, you aren't confused at all! You have understood it, but you just have to join up the dots:
"The banks are exchanging an asset (gilts) for cash (deposited in the BoE). So far, nothing has happened financially."
That's a good summary so far...
"However the banks are free to withdraw that money on deposit and invest it (eg in dodgy mortgages) in which case the BoE (and hence the gov't) will have to find as many billion as the banks decide to withdraw."
Also correct. The BoE would raise that money by re-selling all the gilts it holds, let us assume to third parties (i.e. not just straight back to HM Treasury who issued them in the first place).
But imagine what the position would have been without QE, and banks had wanted to lend to individuals and businesses. They would have raised the money by selling those gilts to third parties.
So with or without QE, the way for banks to free up money for proper lending is to sell their gilts (or withdraw money from BoE), and the ultimate purchaser thereof would be third parties.
"For some reason the banks aren't withdrawing the cash (perhaps they've been asked not to)..."
One of the rules the government has dreamt up is that banks have to stop invested in dodgy second hand mortgages and invest in "better quality" assets, i.e. government bonds.
"the gov't would be in the shit, wouldn't it?"
Correction, the gov't, i.e. the taxpayer, IS in the shit.
Great post MW! Quantitative Easing doesn't change much at all.
What worries me is if the government decide to go down the route of qualitative easing. i.e. taking on bad assets and giving out good cash in return. That would have a very detrimental effect.
A banking Professor in a UK university predicted he ineffectiveness of the scheme nearly a year ago. See the following link: (extract below)
http://www.indexuniverse.com/blog/4710-hedge-fund-woes.html
Hedge Fund Woes
Written by Paul Amery
Wednesday, 22 October 2008 14:07
Richard Werner, Professor of International Banking at Southampton University, gave a bleak assessment of the current government intervention programmes to bail out the banking sectors, arguing that similar fiscal stimulation packages didn't work in Japan during the 1990s, and they are unlikely to do so now. Essentially, in his view, governments are injecting money with one hand and taking it away with the other, via new bond issuance programmes.
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