Well, Quantitative Easing is back, the terrifying new euphemism for ‘printing money’, which is itself a euphemism for stealing.
“Quantitative Easing” suggests that it’s ‘easing’ the pressure on the ‘quantity’ of money. This is not what is actually happening. Things wot Quantitative Easing doesn’t do:
1) It doesn’t pump money into the economy
2) It doesn’t create wealth from thin air
“But wait,” you cry. “The BBC says it’s pumping money into the economy! Why the hell would I trust you over the BBC?”
It’s a very sensible question to ask, but I contend that the BBC is dead wrong on this.
When money is printed it doesn’t create new money. It devalues all the rest of the money in the economy. In other words, the difference between the Government raising £200,000,000,000 by knocking on our doors and taking, on average, £6,666 from each adult of working age on one hand, and printing £200,000,000,000 on the other is that you don’t realise you’ve been robbed with the latter.
You’ve have been robbed. We all have. You just haven’t noticed yet.
By ‘pump money into the economy’ they really mean they’re pumping even more of our money into the banks. This money of ours, taken out of our hands by a simple key-press on a computer, is being used to convert bank’s investments into cash, leaving us, the taxpayer, holding the nightmare ‘assets’ that caused the credit crunch in the first place.
It’s hard to imagine any situation in which the taxpayer could possibly have been more screwed than they have been.
Yet all this Quantitative Easing doesn’t grow the economy at all. Not one bit. All that’s happened is that wealth has been redistributed from everyone to the banks. The total amount of wealth is exactly the same as it was before, but the value of a pound has gone down. We’re all, relative to the rest of the world, a third poorer than we were at the start of the credit crunch.
The theory is that by dumping massive volumes of cash on the banks they will start lending to us again, and thus get the economy going – specifically the hope is that banks with money can generate wealth simply by lending money. That’s the gamble.
So far it doesn’t appear to have had any effect. They have no clue, in fact, what it’s doing or what it’s likely to do. It may – just may – be keeping us in inflation as opposed to deflation. Yet despite this uncertainty they’re still confiscating another £25,000,000,000 in wealth from the economy to redistribute to the banks.
Good thing it’s bonfire night. I need to blow stuff up.
Constantly Furious said...
5 Nov 09 at 6:29 pm
What we need, is for everyone whose house is worth more than, say, one million pounds to pay an extra tax. We’d have those missing billions back in … no, wait … oh.
Jennie said...
5 Nov 09 at 6:56 pm
Come round to ours, we’re blowing stuff up.
Gregory Carlin said...
5 Nov 09 at 7:34 pm
I was vaguely consulted on printing money – Northern Ireland bank notes, I remaked upon the prettiest.
I was quite in favor. We’d just had a meeting with Gordon
£200,000,000,000
That’s a lot. One could buy a real navy with big battleships and flat tops and everything.
My parish, not even close, and set against stuff being burnt (or stolen by the IRA).
Printing money is a loan to the bank – I think, until distributed or something and Gordon wanted to change 70 millions for the right to print.
Gregory
DavidNcl said...
5 Nov 09 at 7:41 pm
Rothbard’s What Has Government Done to Our Money is, as ever, illuminating.
Jim said...
5 Nov 09 at 8:28 pm
As I see it, QE is actually reducing the amount of money available for banks to lend. If I understand correctly, QE works as follows:
Bank A buys (with its own money) a gilt issued by the govt. Govt now has cash to spend on race relations advisors and other such useful additions to our society.
Bank A now has a gilt worth pretty much the same as the cash it had previously.
Then the BoE steps in and has a tender for gilts in the market. Bank A decides to sell its gilts and offers them at a price that will make it a small profit. BoE then credits Bank A with electronic money in its account at the BoE (thats the ‘printing’ part, except its done with a few clicks of a mouse). Now bank A is back where it started, except that it now has a credit at the BoE (plus a small profit on the gilt trade).
Bank A is not much better off than it was in the beginning, and its cash is now deposited with the BoE. Where it seems most of the QE cash created has stayed – so far. Banks deposits at the BoE have risen by almost exactly the same amount as QE. So the amount of cash in the economy is unchanged.
What is dangerous is if the banks decide that rather than have their money sitting idle in the BoE, they would prefer to lend it out to people to buy houses, or new cars, or flat screen TVs. Then you get the inflation bit, as the ‘printed’ money hits the real economy (many times over due to the fractional reserve bank system). Of course when this happens the BoE is SUPPOSED to reverse QE and sell the gilts back into the market, take the cash from the banks and delete it, ending up with the same amount of cash in the economy as they started with. It remains to be seen if this will ever happen.
As far as I can see QE allows the govt to spend money it would probably struggle to borrow on the open market, especially at todays low rates. It puts off the day of reckoning when the budget must be balanced to beyond the next election when the current govt know they will not be in charge. The longer QE continues, the bigger the crisis when it stops, and the bigger the potential for much higher inflation.
Devil\'s Kitchen said...
5 Nov 09 at 9:28 pm
Yes, fine. But better to explain like this…
A company worth £100 issues 100 shares. Thus, each share is worth £1. If the company issues another 100 shares (for a total of 200 shares) but is still worth £100, then each share is now worth 50p, not £1.
Britain’s economy is worth roughly £1 billion. How mnay pounds are there? How many pounds have now been issued (roughly £100 billion) and so how much less is the pound in your pocket now worth?
DK
Secret admirer said...
5 Nov 09 at 10:32 pm
DK are you seriously suggesting that the money is now worth 100 times less?
Evidence?
Richard F said...
6 Nov 09 at 12:45 am
Um, a company “worth” – i.e. with assets of – £100 that issues 100 x £1 shares GETS the £100 – and so has assets of £200 and each £1 share is worth £2.
That’s sort of why share prices go up and down.
And the UK economy (GDP) is worth (at least) £1000 billion, not just £1billion
Not that the currency represents “shares” in the countries wealth, either
Malcolm Todd said...
6 Nov 09 at 1:24 am
Thank God, some sense creeping in on the comments now.
The thing you have to understand is, money isn’t real. It’s a conjuring trick, smoke’n'mirrors, whatever cliche you like. And it’s not that because government is playing funny buggers. It’s that way because that’s what money IS, and always has been.
To use another tired old metaphor, money is grease, or oil in the machine. It doesn’t make the motor (that’s the economy, do keep up!) bigger or more powerful, but it does enable it to go round without seizing up, and sometimes, if your motor is showing signs of grinding to a halt, pouring more oil in is exactly the right thing to do, if only to keep you limping along until you can get to a mechanic. (That’s not George Osborne, by the way. Don’t let the metaphor take you up a blind alley.)
And one more thing: “the economy” doesn’t equate to “the amount of money sloshing around”. It equates (in principle) to the amount of money sloshing around times the speed at which it is sloshing. If the speed of movement is slowing, throwing more of this essentially fictional stuff into the mix just might help to keep things going at the same sort of level as before. I think.
Gonna lie down now. Got some metaphors to untangle in the morning.
Malcolm Todd said...
6 Nov 09 at 1:27 am
Oh, the economy’s about £1,400 billion per annum, by the way. What the nominal asset value of everything in the UK is I’ve no idea, but an awful lot more than that.
Laurence Boyce said...
6 Nov 09 at 3:31 am
I shall look forward to the Devil’s next blog post in which he accuses himself of being a lying cheating scumbag or something much worse . . .
simplysi said...
6 Nov 09 at 10:29 am
Is it also true that printing money does devalue everyone’s cash but that is arguably a very effective progressive tax? If you have no cash it will not greatly be devalued by the process. (stealing is not really a fair term because bird tables aside, the government do not stand to gain directly from our loss).
I agree it’s a gamble but if the government can pull off avoiding a really nasty depression (unemployment remains below the early nineties, for example), then it could be worth it, non?
Gregory Carlin said...
6 Nov 09 at 10:44 am
“Oh, the economy’s about £1,400 billion per annum, by the way. What the nominal asset value of everything in the UK is I’ve no idea, but an awful lot more than that.”
It is only worth something if somebody wants to buy it.
The Eiffel Tower – Brooklyn bridge, they have been sold, floated on the market, albeit fraudulently, there were buyers, how come nobody has sold Basildon to a Russian oligarch?
Could it be that Britain isn’t worth anything?
Gregory
Roger Thornhill said...
6 Nov 09 at 11:00 am
I summed up QE originally back in Dec08 thusly:
“It is as if you are a beer-maker and the Government pitches up at your warehouse in the dead of night with a truck of water and a truck-load of barrels. It breaks in without permission, waters down your beer and takes away barrels of beer for its own use. Because it gets first dibs on the barrels, those least diluted will be taken away. You wake up and count your barrels and all seems ok. When you come to sell your beer you find there is more in the marketplace and what you have is weaker, so the price you get is lower. Your beer is now less valuable yet the State has beer – money – it never had.
“It is theft, pure and simple.”
It is not just the dilution, but the first dibs at selling the least diluted before you or the rest of us realise it. Twice as bad.
Kevin Boatang said...
6 Nov 09 at 11:08 am
This suffers from mis-reporting and propaganda to be fair.
What is actually be done is a huge buying up of gilts, i.e. bonds. The only reason the government is to reduce it’s debt, hence no money gets anywhere near the high street.
If this was really about getting cash into the market they would be buying up other asseits, such as mortgage backed derivatives.
Kevin Boatang said...
6 Nov 09 at 11:10 am
DK, the pound in your pocket is worth preceisely what the market says it’s worth.
Thomas Byrne said...
7 Nov 09 at 1:29 pm
Oh good, state sponsered theft.
Emma said...
7 Nov 09 at 5:28 pm
And I thought spectacular economic ignorance only occured in the socialist blogosphere!
The Bank of England MPC has one task, to maintain inflation at its target rate, that is, to ensure the purchasing power of currency changes at its expected rate (small positive inflation, because that is easier). It has no interest in altering the purchasing power of money beyond this, because to do so with destroy its credibility. Given the economic situation, QE and other monetary policy instruments are entirely appropriate – given the relative ineffectiveness of the 2 week repo rate (the BoE ‘base rate’) in present circumstances – and is completely in line with standard macroeconomics.
It is not about transfering money to the banks, nor subsidising the governments debt – that is the point of BoE independence. Whether monetary policy is working or not, is another matter!
Charlotte Gore said...
8 Nov 09 at 2:09 am
Emma,
I do actually appreciate the reality that BoE has its inflation target to meet, and the underlying economy is probably deflationary.
It’s hard to know what else they could do – the problem is what happens when the money hits the actual economy?
Joe Otten said...
8 Nov 09 at 3:34 am
I agree with Emma. The “robbery” you speak of Charlotte happens when inflation kicks off, not when money is printed, or interest rates are cut, or taxes are cut, or anything else happens that might be expected to increase inflation.
And inflation is not a tax on everyone equally but on people with cash balances and sticky rates of pay.
Kevin Boatang said...
8 Nov 09 at 2:31 pm
Joe, quite so. Inflation would truly remove the value of the pound in your pocket in a way that QE simply won’t.
However Emma, although the BoE is meant to act in the way you say, it’s purchasing of gilts as opposed to any other forms is revealing. It is buying back the debt rather than pumping money into the real economy, although there are obviously other benefits in monetary terms to reducing the burden in such a way.
Jim said...
8 Nov 09 at 8:55 pm
@Emma: I think you are showing a touching faith in the ‘independence’ of the BoE!
Are you so sure that when inflation starts to move upwards (and it has already shown ‘unexpected’ reluctance to fall into deflation, on the CPI anyway, which is the BoE’s official target measure) that the BoE will reverse QE, and start selling these billions of gilts into the marketplace, whatever the conditions at the time?
On any measure the govt will require to borrow many billions for many years to come. If £200bn of additional gilts are fed back into the market the price will plummet and rates will rise. Thus cutting off any nascent economic recovery.
Do you REALLY think the govt of the day will allow an ‘independent’ BoE to send us back into recession? Not a chance. They will just adjust the level of the inflation target range from 2%, to 4% and then 6 or 8%. That gilts will never leave the BoE vaults.
Emma said...
8 Nov 09 at 10:53 pm
Thanks for the replies, to start with Jim, amazingly I do expect the BoE to reverse its monetary stance if inflation begins to rise. If inflation is rising it means we are likely to be out of recession, or that whatever problems remain are supply side, and there isn’t a lot the BoE can do about that whather its policy. I also expect the Government (whomever it is at the time) to retain BoE independence, and maintain a fairly low inflation target, because of the problems with inflation we have had in the past, although I admit I’m usually far more cynical about the motivations and incentives of Government!
To Kevin, please correct me if I’m wrong, these things often make my head hurt, but surely the fact that the QE programme is buying up gilts means that more money is flowing into the real economy, because the government debt was previously held in the private sector, and has now been repurchased with money created ex-nihilo, meaning that the new money can be invensted in non-government securities and/or increases in bank deposits and lending. The problem would be if the new money had no effect on bank behaviour. As far as I can tell this is what the BoE is uncertain about, hence is doesn’t know how effective its strategy is!
Other strategies as far as I understand involve either ‘Credit Easing’ where the BoE purchases non-government debt (but this leaves the Bank with a default risk), or some kind of negative interest rate (which has never been tried, there are probably not the correct channels for banks to implement, and would be met with howls of derision from many quarters).
Emma said...
8 Nov 09 at 10:55 pm
Also, Charlotte, any chance of a preview pane for comment posting so that we have a second chance to catch our typos?
Jim said...
9 Nov 09 at 1:32 am
@ Emma: it is quite possible, nay probable, that we will get both inflation and low growth. Inflation will start to rise from now on as the effects of high oil prices in 2008 fall out of the index. And oil has risen from its low of $30/barrel to $80 now so that will pump inflation more. If sterling starts to slide on the fear of higher inflation then you get the added problem of higher import prices feeding in too. It feeds on itself. Add in the reluctance of the govt to increase rates when the recession is hardly even ended, and you have the perfect storm for stagflation. Welcome back to the 70s!
Roger Thornhill said...
9 Nov 09 at 9:33 am
The dilution occurs (even if temporarily it might be desirable to the BoE). The issue is, as my analogy pit, the dilution puts the money not in the hands of the “shareholders”, ie those with existing pounds, but the state.
To argue it is spent into the wider economy is like saying theft is ok as long as the thief is a spendthrift and the money ends up back out there.
No, it is not OK. At some stage the QE will need to be reversed and I do not trust the Government selling bonds and then destroying the proceeds.
Letters From A Tory said...
9 Nov 09 at 10:43 am
I read a hilarious article recently in the papers which showed the despite the billions put into QE, the money supply in the economy has increased by just 0.2%.
Why?
Because the banks have used the money to rebuild their balance sheets rather than start lending to homes and businesses, which is what it was supposed to do.