The End of Quantitative Easing.

OK, time to write a proper epitaph and get this over with.

In popular mythology, the government or the Bank of England pumped £200 billion into the economy between March 2009 and January 2010, and lesser mortals are hotly debating whether it had any effect, or what would have happened if they hadn't done it, and so on.

As I've been saying all along, this was all smoke and mirrors, it's a paper shuffling exercise - QE is not in itself printing money and is not in itself additional government borrowing - it is merely converting traditional longer-term borrowing via the gilts market into very short term borrowing by accepting massive deposits from the commercial banks at the Bank of England (for the non-accountants among you, when a bank takes money from you as a 'deposit' that is in fact borrowing, from the point of view of the bank).

(Technically, £5 billion in gilts was issued to the commercial banks every Tuesday by the Debt Management Office and repurchased from those banks for slightly more than £5 billion every Thursday by the Bank of England, but it's easier to see it as one exercise. In theory you could have QE at a time when the public sector debt is flat or even decreasing, i.e. the Bank of England could buy back gilts prior to their normal redemption date, that's another topic.)

We know that the expected public sector deficit for the fiscal year 2009-10 (April 2009 to March 2010) will be £178 billion*, and that the commercial banks had 'reserve balances' of £144 billion as at 31 December 2009 (see Table 1.1.1, Excel), but the three figures £200 billion, £178 billion and £144 billion are pretty much the same in the grander scheme of things (once the figures are big enough, they are nigh meaningless, as Nick Leeson might have said).

Now, had the DMO merely issued an additional £5 billion of gilts every week, this would not have gone down well with ye olde bond and currency markets - sterling would have fallen in value and interest rates would have risen; so we'd have inflation and rising mortgage rates, which is poison to a Home-Owner-Ist electorate.

So in a moment of genius, instead of the government admitting that they were actually taking £200 billion out of the economy (i.e. the commercial banks gave them all this money - they must have done or else the commercial banks would not have these huge deposits with the Bank of England); by some sort of black-is-white logic, the government got everybody to fall for the line that they were putting £200 billion into the economy. As it happens, a government can't really do either, all it can do is slosh it about in ever decreasing circles**, but in cash terms, there is £144 billion parked in near cash at the Bank of England that only went back into the economy indirectly because the government borrowed it first and then spent it again*.

And, like the truly great conjuring tricks, this was done in full view of the public, the government were quite open about what they were going to do, and they did it; weekly statistics were published as ever and so on. They were in fact borrowing like maniacs but disguised it as QE, so interest rates stayed low, the house price bubble remained inflated, giving Labour an outside chance of winning the next election - a bit like John Major but without the house price crash - because in the Home-Owner-Ist world view, that is the one mantra that matters: house prices can only go up, and it is the government's sole and solemn duty to make sure that it bloody well happens.

(It gets even madder when you remember that half the commercial banks who are leaving money on deposit at a derisory 0.5% interest rate with the Bank of England are government owned or controlled, and the government is using the money it borrows to bail out the self-same banks. I suppose we could cancel them out of the equation as well, and try and work out who lent them the money. The chances are we'd go mad in the process, so guesswork will have to suffice. Either way, the taxpayer will end up footing the bill.)

* The more interesting question might be, what the f*** did they spend it on, if it wasn't bailing out the banks?
a) HM Treasury's Public Sector Finances Databank (Excel) shows that the Labour government ran an average 'structural deficit' of £39 billion a year from 2001-02 to 2007-08, before the credit crunch (i.e. public sector gross debt increased from £382.1 billion to £613.9 billion). 'Structural deficit' is just a polite term for 'endemic waste', of course, but hey.
b) Maybe one million more people are out of work, if we bung them £10,000 a year each, that makes another £10 billion.
c) The economy has shrunk by 6%, so we'd expect tax and other government receipts of £548.7 billion in 2007-08 to go down by 6%, that's another £33 billion.
Tot those three figures up, and we get a projected deficit of £82 billion, so where did the other £96 billion go? Anybody?

** Before DBC Reed comes along and tells me off, I should add that the best way that a government can get the economy going is by simply liberalising planning laws - that creates jobs during construction and expands our productive capacity and/or increases our living standards; and by investing in new transport etc infrastructure and funding it by taxes on the corresponding increase to land and property values. But those ideas go completely against the Home-Owner-Ist philosophy.