More complete and utter bollocks on QE

From The Telegraph:

Economics truly is a dismal science.(1) Take the apparently ludicrous scheme under-pinning the economy: one branch of the state (the Treasury) is borrowing money from another branch of the state (the Bank of England) and everybody in the City is cheering madly, despite the dangerous circularity of the exercise.(2)

To the uninitiated, this will sound like blatant accounting fraud (3) but I’ve just described quantitative easing (QE), the perfectly legitimate wonder drug that was meant to cure the economy (4) but to which George Osborne is now hopelessly addicted...(5)

Feel free to read the rest if you like if it's the sort of stuff which will reinforce your own prejudices, but I find that it always helps to know what you are talking about before your start speculating as to what the consequences of something are.

1) No it's not, it's fascinating. And because we have so much history from so many countries to compare and contrast, we can pretty much say with certainty was the consequences of any particular economic policy will be, because the chances are, somebody somewhere has already tried it.

2) The government cannot borrow money from itself. It can pretend to do so, but it can't. Those cash flows (or lack thereof) and accounting entries between two departments of the government can be completely ignored, and all we need to look at is cash flows and accounting entries between the government and everybody else.

3) It's only fraud if you are gullible enough to believe in it, which he clearly is and does, therefore he is guilty of perpetuating the "fraud" rather than debunking it.

4) It's the public sector deficits which are supposed to "cure the economy" with all this chit-chat about 'the multiplier effect' and so on. This is also complete and utter bollocks, but a different topic to QE. Those deficits have to be 'financed' somehow, the government finances them by simply spending more than it raises in taxes. The balancing figure has to be accounted for somewhere, whether as a) unpaid invoices or late collected tax payments, b) freshly printed bank notes, c) electronic balances with the Bank of England or d) longer term government bonds.

When QE started, what the government did was replace a large chunk of (d) with a large chunk of (c), it did not materially affect the total amount of government debt outstanding. What it did was to replace long term borrowing with short term borrowing, thus reducing the overall average interest rate it pays (but generating handsome fees for bankers involved in the paper shuffling).

If his first paragraph is correct and taken in isolation, then the government is issuing (d) to itself in exchange for (c) which it has also issued to itself, this is a complete nothing of a transaction.

5) Osborne is addicted to QE because he and his mates like deficit spending, which is easier when interest rates are low; he likes low interest rates because it helps prop up house prices (and the author of the article is so stupid that he once claimed that low interest rates "increase the wealth of homeowners" (or words to that effect); and of course because the bankers can cream off their handsome fees and commissions from keeping the plates spinning.