Quantitative easing – where’s all the money gone?

We are now well into the Bank’s programme of quantitative easing. They have announced they will buy up to £125,000,000,000 of government bonds, with a few corporate bonds as part of the programme. The Bank’s own balance sheet, around £40,000,000,000 when the Rock crisis struck, was last seen at £215,000,000,000.

The Bank’s last report on inflation admitted it was still above target, but commented that given the large amounts of spare capacity in the economy and the downward pressure on wages and salaries, they expect it to go below target later this year. They did, however, go on to say:

“There is considerable economic stimulus stemming from the easing in monetary and fiscal policy, at home and abroad, the substantial depreciation in sterling, past falls in commodity prices and actions by authorities internationally”

There indeed is. The government hoped that the low interest rates and printing of money would push up government bond prices and make raising the borrowing easier. Instead, there has been an uneasy truce in the government bond market, with some worrying already about what will happen to prices once the stimulus is withdrawn. If the Bank started to sell the bonds it has bought in at the same time as the government is trying to sell more than £200,000,000,000 a year of debt, there could be a lot of indigestion in the market. In such conditions interest rates may be forced up.

It appears that a lot of the money being injected on both sides of the Atlantic is flowing more readily into shares and into commodities. That helps build a bit of confidence. It also helps raise the substantial sums some companies need to obtain from shareholders to repair their own damaged balance sheets. It is also inflationary, as oil moves from $35 to $60 a barrel.

UK inflation is still high owing to the large devaluation of the pound last year. We are still feeling the delayed affects of that, as businesses have to re-order from overseas at higher prices in sterling. It also gives UK businesses a bit mroe pricing power than they would otherwise enjoy in these weak markets. In the last few weeks the pound has performed better. Whilst there is no evidence that the UK authorities are trying to get the value of sterling up to dilute the inflationary effects, it probably reflects other major jurisdictions keen to see their own currencies lower for once. In this recession gripped world, many would like a cheaper currency to make exporting easier.

This is the easy part of quantitative easing. For a bit it creates a better mood without undue inflation. Then comes the difficult part. When do they have to stop it, before it does unleash uncontrollable inflation? How can they stop the easing without causing falls in asset prices and halting a recovery in activity? They need an exit strategy.

There are hints that they plan to hold the government bonds they buy for longer, not turning from buyer to seller, in an attempt to reduce the impact of their shift on the price of bonds. The government, however, still needs to sell bonds to cover the costs of repayment as they fall due. The impact may come down to how long a time gap there is between stopping buying up bonds, and when the big repayments arise. I expect the aim will be to delay the adjustment for at least another year. When QE stops on both sides of the Atlantic it will have an impact on markets generally. Asset prices today are higher than two months ago thanks to QE.


  1. Colin D.
    May 20, 2009

    Your well argued analysis make things sound not too much of a disaster – despite all the noughts in your figures. But the background is that the Government has done no belt tightening whatsoever nor prepared us, the general public, for the economic horrors ahead.
    Why, oh why, is George Osborne not appearing in the media every day spelling out how difficult it will be to repay the debts, making clear the effects on household finances and giving us a tentative list and timetable of necessary cut backs.
    After the shambles of the last few weeks, surely now is the time to resume honest politics … or is the truth too unpalatable if you want popularity and votes?

    Reply: Yes, we do need to spell out the need to control spending and debt.

    1. alan jutson
      May 20, 2009

      Notice that since you started putting the real figures down on paper in numbers (not words) the whole scale of this has taken a new turn.
      The average person does not understand the scale of millions, billions, and trillions.

      Please can you make sure that the Conservative leadership adopt this sort of presentation, as it underscores the real situation that this Government has got us in.

  2. Kevin Lohse
    May 20, 2009

    Dear John. A couple of points I don’t fully understand.

    Is not QE a smart term for trashing the currency?

    According to the Treasury, money supply has been increasing at an average rate of 14% pa for the past 5 years. Is this not effectively stealth quantative easing?

    Surely asset prices are rising against a devalued currency. If one takes an enterprise and cuts it into smaller pieces (QE) then one has a lot more pieces for the same enterprise. Is this merely a revaluation of value?

    What is the result if the revalued enterprise is calculated factoring in currency devaluation thanks to stealth and renamed devaluation? I’m thinking of the Economist “Big Mac” paradigm here.

    Reply: Yes, of course – if they print too much the value falls. We are already worse off thanks to last year’s devaluation.

  3. alan jutson
    May 20, 2009

    I do hope that these financial people who are controlling all of this really do know what they are doing.
    The figures seem absolutely astronomical.
    If they get it wrong, we are in one hell of a mess.
    But then we knew we were in a mess already.
    What we still do not know, and I guess we will not for many years.
    Is how much it will all cost us and our children ?????.
    What is the eventual bottom line ?????.
    What will the Tax take be to pay for it all ?????.

  4. oldrightie
    May 20, 2009

    The whole scam is as pathetic as the way our politicians allowed us to get into this mess. It began wth 9/11. A draconian and disproportionate response the terrorists hoped for. They play a much better long game than our moronic governments. All this wasted money should have been injected into a Palestinian solution, helping Israel to be comfortable with a Palestinian homeland next door.

  5. Mark Wadsworth
    May 20, 2009

    The ‘money’ hasn’t gone anywhere.

    In practice, all that happened was that one branch of HM Treasury (the Bank of England) bought up bonds issued by another branch of HM Treasury (The Debt Management Office).

    If you hold UK gilts, they are highly liquid, so you can turn them into “cash” more or less any time day or night. Some gilt holders chose to swap them for a deposit balance at the Bank of England, i.e. “cash” instead.

    The only marginal impact it has is because the BoE is overpaying ever so slightly, i.e. ten year gilt prices are a couple of points higher than they otherwise would be.

    So out of £150 billion, the increase in “cash” is only about £5 billion, which isn’t even enough to stoke inflation – it’s about the same as one year’s worth of benefit overpayments.

    1. Adam Collyer
      May 20, 2009

      This does raise an interesting question, which is why the Treasury chose to issue the bonds into the market in the first place rather than just borrow the money direct from the Bank of England. Maybe they thought that would be too much like Zimbabwe or Weimar Germany for comfort and therefore chose to hide behind this fiasco instead. Or maybe they were trying to generate profit for their friends in the City. Either way, as usual with this government, there is a distinct lack of transparency around this and it needs cleaning up.

    2. Denis Cooper
      May 20, 2009

      I don’t think so, Mark.

      One answer to the question “Where’s all the money gone” would be this:

      Part of it has already passed through the Treasury’s account, and has been dispersed around the country when the government has used it to pay various bills.

      Another part is still in the hands of the international investors who’ve sold existing gilts to the Bank of England, but haven’t yet used all the money received to buy new gilts from the Treasury.

      It’s perfectly true that anyone who owned gilts could very readily sell them in the market for cash, but in that case their payment would involve a transfer of existing money from the private buyer.

      When the Bank is the buyer, their payment involves a transfer of money which did not previously exist.

      Then as (almost all of) that new money is later being transferred to the Treasury when it sells new gilts to the investors, the end result is that the government is paying its bills with the new money.

      It’s easier to understand this if you consider the simplified case where the Bank was literally printing new banknotes.

      Then it could pay each investor for existing gilts with a suitcase of new banknotes, which he could then pass on to the Treasury in exchange for new gilts – having first removed a few bundles from the top, as his profit – so the Treasury could then hand out small packages of new banknotes to meet its bills.

      When a public employee then got one of those newly printed banknotes in his wage packet, and used it as payment in a local shop, it would be clear that the new money printed by the Bank was getting into circulation.

      1. Mark Wadsworth
        May 22, 2009

        Denis, (and to some extent Acorn) I agree that in practice they could print banknotes instead.

        But remember that bank notes are nothing more than small denomination, non-interest bearing government securities.

        e.g. if I sell you my house, I am indifferent between £100,000 in notes or £100,000 worth of government bonds or indeed an electronic credit of £100,000 at my account with BoE (assuming I had one).

        The ‘security’ for any of those three forms of ‘money’ is future tax receipts.

        When my future tax bill falls due, HM Revenue & Customs are also indifferent whether I pay in bank notes; sell a gilt and pay with the proceeds or make an electronic transfer from my account with BoE – that is how the ‘money’ gets taken out of circulation again (at which stage they just print some more, of course).

        1. Denis Cooper
          May 23, 2009

          But the money paid to HMRC is not taken out of circulation; most it gets re-circulated back into the economy when the government pays state employees and contractors, while some gets re-circulated back to investors to pay interest and redeem their loans, and of course some gets sent abroad to the EU and other international organisations, and to foreign governments, etc.

          If the tax was actually paid in banknotes, as might have been the case not so long ago, then worn notes received by HMRC might be sorted out and sent to the Bank for destruction, but they would be exchanged for new notes to the same value.

          The problem for the government is that those state employees and contractors expect to paid in what they immediately recognise as money, currency, if not actually paper banknotes and metal coins then the electronic equivalent, which they can freely exchange for the goods and services they require.

          In general the state’s creditors, its employees and its contractors – except, perhaps, some of the very largest contractors – won’t accept payment in the form of marketable government securities, or cabbages, or works of art, or even foreign currencies like the euro, because none of those are accepted at supermarket checkouts or any other retail outlet.

          And as the Treasury is not getting enough money in to meet its bills, and as the Maastricht Treaty forbids the Bank of England to buy bonds direct from the Treasury, the government has had to devise this scheme whereby private gilts investors are used as intermediaries – so far, very willing intermediaries, as they are making a profit from laundering the new money created by the Bank.

          Otherwise, in the plan really was to “inject liquidity” into the financial system, the Bank would not be buying any gilts, which are readily marketable, but would instead be offering to buy only private sector assets, such as corporate bonds or mortgage backed securities.

    3. Acorn
      May 20, 2009

      Mark, I am not taking the piss here but read JR’s first paragraph again. The BoE is creating money and JR’s numbers show how much. The banks are choosing to hold that cash at the BoE, it is “not in circulation”, They are risk averse and still have loads of “toxics” to write off down the road. The treasury needs cash to fund its operations, if the private sector won’t supply it, the BoE has to print it. The danger is if/when the fractional reserve banking system blasts that reserve into circulation at a factor of at least 10 to 1 and hopefully not 30 or 50 to 1, result hyper-inflation. You can see JR’s numbers at:-


      Look at cash in circulation and the reserve balances. See also the reverse repo number, this is the BoE buying in guilts etc., in exchange for new printed cash. At some point the BoE will have to pull all this cash back, if they fail, hyper-inflation.

  6. Thanks for the update. On inflation figures: one of the things that worries me is that when they show a drop there seem to be an awful lot of economists who claim “good news, because it means money is worth more.” Am I missing something or do they really not know that it simply means the decline in the value of money is less, not that it has increased in value? And do you think there might be implications from this attitude should inflation really kick off in the event of another oil shock (say a doubling of the price over the current $60 due to trouble in Iraq or Iran)?

  7. None
    May 20, 2009

    The price of oil is rising is not so much due to inflation as due to the price rightfully returning to something in the region of the cost of replacement. 150 was way to high, and sub-40 way too low – both figures driven by combinations of speculation/greed/fear rather than sound financial fundamentals.

  8. Acorn
    May 20, 2009

    Where has it gone? Mostly to Bank Bond holders here and oversees. Bankers look after their own first.

    Off subject. I recently posted about the California budget vote; it appears the little people told the California legislature where to stick it.


  9. Richard
    May 20, 2009

    It is an interesting question as to why sterling has not fallen even further than it has given the huge scale of government borrowing and the fact that the Government plainly has no plan for a return to a balanced budget. The explanation of an increasing number of market commentators is that sterling is holding up due to the strong expectation of the return of a Conservative government with a coherent plan to control spending and borrowing. Good news for Conservative supporters – but it will put a huge onus on an incoming Cameron government from Day One to show a clear route out of the terrible mess into which Gordon Brown has led the country.

  10. Neil Craig
    May 20, 2009

    If money being printed is “flowing into commodities” that is a very bad sign. It means (A) that commodity prices are being artificially pushed up which makes everything more expensive while acting as a depressent to real production & (B) that investors are finding a shortage of real productive investments to make. I believe that the cause is that western governments have produced so many regulations either preventing manufacture (nuclear plantsw, GM, golf courses) or enormously expensive compared to the free market parts of the world (steel making, housebuilding, construction & manufacturing generally).

    Technology is still progressing faster than at any time in human history & if we allowed its use we would be growing similarly.

    Rather than printing pieces of paper & working the economy by by moving them round we coyuld be running space X-Prizes & building a production line to manufacture nuclear power plants & massively cutting these destructive regulations.

    1. Stuart Fairney
      May 20, 2009

      Without wishing to be a cheerleader for you, this analysis is right on the money again ~ housebuilding (my profession and bete noir) is mad expensive because of the lunatic restrictions on land availability and planning consent pushing up land prices, as well as pointlessly strict building codes and the latest ‘zero carbon’ nonsense (don’t even get me started on the abuse of section 106 agreements).

      Neil, stand for election, I’m voting for you!

    2. Adrian Peirson
      May 20, 2009

      What a novel Idea, create wealth through industry and our labour rather than just printing it.
      I can only think that the Power Elite have no interest in advancing society nor humanity, they appear quite content with sinking us into a stagnant Cuban like society.

    3. Mike Stallard
      May 21, 2009

      Two little problems here, methinks: 1. The Green and Leftie mob who influence all governments in the West. 2. The EU and Socialist Government in this country.

      1. Adrian Peirson
        May 21, 2009

        Oh yes, I forgot about them for a moment. This Govt is holding this country and its Great People back.

      2. Neil Craig
        May 21, 2009

        Indeed. My main worry with Cameron is that he started off so enthusiastic about Ludditry. With Zac Goldsmith having testified in court that the Kingsnorth vandals should not be stopped I suspect a lot of traditional Conservatives will be hoping that Susan Kramer keeps Richmond Park, against the swing & the Conservatives don’t end up with that (prospective candidate-ed) in Parliament.

        Thanks Stuart – I am glad to have my opinions on housebuilding confirmed by somebody who knows.

  11. Waramess
    May 20, 2009

    What a conundrum, and nobody knows for sure what is happening out there.

    For certain, money has not disappeared but it certainly has gone into hiding and aint coming out any time soon.

    My own guess is that there has been a massive shift in wealth from the risk takers to the risk averse. All those losses on the stock exchanges and housing were sombody else’s gain, and whoever that somebody was did not stay invested until the bitter end.

    At some time the money will return into the system but I suspect not until the dark clouds clear. When that happens reversing the effects of QE will not be a political practicability and hyperinflation will ensue.

    Maybe losing the next election would be the right thing to do. From a political practicability viewpoint only, you understand.

  12. Rare Breed
    May 20, 2009

    Great. They have succeeded in re-flating the balloon.

    By delaying the day of reckoning they prolong the time that we have the current level of unemployment, they increase the national debt further which will hamstring any future recovery and worst of all they have held up inaccurate asset prices so that when the correction comes there will be a greater fall in asset prices.

    Eventually the easing will have to stop or we will be in Zimbabwe mode. At this point there is no way out. Debt will be too high and eventually the value of the pound will fall due to over supply – then we have real inflation.

    When will they let asset prices match their true market value??

    Only then can risk be properly measured – only then can confidence rebuilt.

    They are still digging to get out of this hole!

  13. Rare Breed
    May 20, 2009

    They still hide from the fact that the downturn is a CORRECTION!

    There is no escape from it, you can only delay it – and you can only delay it for so long!!!

    I think both main parties have chosen a long slow steady decline that wont look like anyones fault over a quick CORRECTION that can be rebuilt from swiftly.

    And the cost of this political (not economic) decision:

    Long-term unemployment (we know the cost of that financially and socially)


    Massive National Debt

    Longterm high taxes – even on the lowest earners.

    More Govt. intervention/nationalisation as they continue to prop up the imaginary “aggregate demand”.

    Poor investment decision by the state or state sposored corporations.

    What we really need to clear this mess up is the invisible hand of Adam Smith.

  14. Denis Cooper
    May 20, 2009

    A private investor who owns gilts will normally expect cash payments both for the interest every six months, and for redemption.

    However, it wouldn’t be impossible for the government and the investor to agree that those payments would be made not in cash, but in additional or replacement gilts.

    Obviously it would be much easier to reach such an agreement when the investor, the owner of the gilts, was not a private investor but instead the Bank of England, another branch of the state.

    So it may be that the Bank will agree to accept new gilts in lieu of interest and redemption payments, allowing the Treasury to roll over its debts indefinitely.

  15. Adrian Peirson
    May 20, 2009

    I expect the Banks will hold on to the money until the economy really crashes then buy everything up at rock bottom prices.

    Instead of Printing £125B worth of Bonds, Gordon could have instructed the Treaasury to Print £125B worth of Money, that way we wouldn’t have to pay it, or the interest back.
    No Govt Debt to pay back, no need to Tax us.

    Sometimes I wonder who the executive is working for, us or the Global Banks.

    There are about ten children being born in the UK right now who have just been born owing £55,000 to the Bankers who bought the last round of Govt Bonds.

    It’s Immoral, it should be illegal, it’s hideous.

    We should coin our own money, not Borrow it.

  16. StevenL
    May 20, 2009

    “Where’s all the money gone?” (JR)

    Well I sold my corporate bond on the QE annoucement a couple of months ago and made £60 profit. I guess this means I got £60 of it. I’ve lost £40 playing roulette since then and a fiver down the bookies though.

    I would guess the bulk of the money has gone to the big time punters, and through them into the casino economy.

  17. […] The great interest rate rip off Quantitative easing – where’s all the money gone? | John Redwood MP […]

  18. Demetrius
    May 20, 2009

    Does anybody really “know”? It is rather like buying raffle tickets where there are a lot of “prizes”. The more you buy the more chance you get something. But what you get may not be what you want at all. It may be something that you certainly do not want. It may be something that is positively embarrassing. QE and its involvement with government bond issues, bust banks, the stock market, and capital movements, has all the risks of a raffle where the prize you hope for isn’t the one you get.

  19. TomTom
    May 20, 2009

    Mark Wadsworth seems to view the term structure and duration of bonds as homogenous. I thought the BoE was trying to implement a variant of Kennedy’s “Operation Twist” in 1961 which attempted to flatten the yield curve thereby creating the Eurodollar Market.

    If the BoE tries to manipulate the yield curve it may well deter pension funds and insurers from holding longer term bonds and simply create synthetic long bonds from riding the medium term bonds and churning portfolios. The BoE is surely simply boosting trading profits for arbitrageurs ?

    What might be beneficial is to create a retail corporate bond market and let companies sell bonds directly to investors and have municipal bonds since it seems as if Shares are now a dog investment having been disastrous since 1997 and with no real prospect of recovery for long term investors building personal pension plans.

  20. Mike Stallard
    May 20, 2009

    I heard today from a very high banker indeed that there is soon to be an upturn in the market with Stocks and Shares rising encouragingly.
    “Do not have anything to do with it,” that is what he said.

    I cannot get what is happening at the moment.
    I don’t really understand the sleight of hand with gilts and QE.
    I don’t understand why there isn’t a lot more inflation and why the pound is steadying against the Euro and the Dollar.
    I don’t know where the huge toxic debt has disappeared to.

    I do know that the government seems to be as spendthrift and indecisive as ever it was and that the taxation system is rising even as we speak.
    Thank you for going back to what you are brilliant at: the economy.

    1. Adrian Peirson
      May 21, 2009

      I think what he meant was that the Global Elites have decided on an upturn to sucker the last bit of wealth out of the Middle Classes then they will polunge the economy again.
      This is what is coming out of the Latest Bilderberg Meetings in Athens.


  21. Ian Jones
    May 20, 2009

    I still dont see why they buy Govt debt in order to increase the asset prices of non Govt debt and therefore lower its yield. Surely just buying the non Govt debt would be quicker and more effective!
    Obviously it wouldn’t then be digging the Govt out of its massive debt problem which is the real reason behind it……

    Trouble is the Bank will not know to stop printing until its already too late.

  22. Matthew Reynolds
    May 20, 2009

    One idea could be that as the economy recovers and as interest rates rise thus boosting the value of sterling QE could be persisted with. Only the Bank of England could print enough money to pay off some government debt ? A stronger economy and higher interest rates would ensure a stronger currency meaning that printing more money to pay off debt would not fuel inflation or debauch the £.

    Giving the Bank of England the power to impose curbs on bank lending when an asset price bubble threatens would help choke off inflation as would a 2% RPI-x statutory inflation target for the Bank of England. Axing the FSA and restoring the powers to the Bank of England would simplify the situation and put financial stability in the hands of those best qualified to do a good job. MPC members could be picked for fixed seven year non renewable terms to minimize the potential for political meddling in monetary policy. We need to remove the problem of politicians threatening not to reappoint an MPC member for not supporting lower interest rates at a politically appropriate juncture.

    Finding the £100 billion in public spending savings as found by the Taxpayers Alliance via major state sector reforms and then using the money to slash government borrowing would stop rampant public debt & big government causing a Carter style Malaise.

    Boy do we need a Tory government with guts !

  23. Blank Xavier
    May 20, 2009

    I could well be utterly wrong, but I think we’re all stuffed. Any mass State intervention in an economy *only* reduces the ability of the economy to produce wealth. If there were interventions that could be done which would produce *additional* wealth, the market would already be doing them.

    These massive interventions are inducing massive distortions. It is massive, State induced distortions which produced this whole mess in the first place. We are lurching from one disaster to another.

    Recession and depression are not natural events in a free market. They exist *only* because of State intervention in the market – State actions to make the market unfree, to force non-voluntary contracts upon notionally free citizens.

  24. Blank Xavier
    May 20, 2009

    BTW, as an aside, QE is State mandated legalized theft. It is absolutely and profoundly unethical. All contracts must be voluntary and well-informed; unilaterally diluting the value of money to transfer wealth from the the economy to the State is non-voluntary and I suspect largely non-well-informed.

    I’d add that IME, non-voluntary, non-well-informed contracts seem always to lead to harmful outcomes for all involved.

  25. Adrian Peirson
    May 20, 2009

    I see the BBC are demonising The Bankers like Fred Goodwin, as the ones who caused this mess.
    Fred Goodwin earned Millions, it’s true, but how many of us would have said no.
    Gordon was there saying, yes it’s OK, I’ve approved these policies.
    It was Gordon’s policies that turned the city into an unregulated Casino.
    If Fred Goodwin had have said No, it’s immoral, there’s too much risk involved, someone would have stepped into his shoes and we would STILL be in this position.
    This situation has been deliberately created to usher in the ‘New World Order’

    In just the same way, the Govt failed to intervene when the Public were getting themselves furhter and further in debt.
    The thinking on the streets was, well it must be OK, if it weren’t or of things were not going to continue to be prosperous Govt is watching our backs and would warn us.

    What has happened is Deliberate.

    It is not the fault of the Bankers nor the people.

    As for the Public, they are not in debt, they owe the Banks nothing, all the Banks lent then was Fractionally Reserved thin air Credit.

    1. Adam Collyer
      May 21, 2009

      Maybe you’d like to tell us what “real” money would be then? All money (even money that is not “fractionally-reserved thin air credit”) is just representative of real value. It doesn’t have value itself. And note that the Banking system does NOT create money. It simply circulates the same money round and round. It takes money deposited and lends it on; the borrower deposits the borrowed money, which then gets loaned again and so on.

      I really don’t buy all this “Bilderburg”, “international-consipiracy”, “some-plotter-must-be-behind-all-this” stuff. I believe we are living through an almighty cock-up, not a conspiracy.

      1. Adrian Peirson
        May 23, 2009

        REAL Money would be Gold and Silver, imagine I had the power to Print money and ONLY I was allowed to do that, and the country could ONLY buy or Borrow it’s money from ME and ME alone.
        That is the situation we are in with regards to the PRIVATE Bank of England.

        and banks do not lend out peoples deposits, they do not circulate depositors money round and round, they lend out TEN TIMES what they hold on deposit, Faud by definition, they are lending out thin air. and forcing interest on it.
        The 90% they lend out that is not Backed they just Print….yet you have to pay it back in Real Wealth.

        1. Adam Collyer
          May 25, 2009

          The Bank of England was nationalised in 1946.

          Banks do not lend out more than is deposited. They lend out say 95% of what is deposited. Those loans are then deposited by the borrowers in that or another bank, in those new deposits can be lent out again. There’s quite a good explanation for it on Wikipedia http://en.wikipedia.org/wiki/Fractional_reserve.

          It is not fraud. And you don’t pay it back in something different called “real money”.

          If you only count gold and silver as “real money” that’s really rather silly because it gives gold and silver producers the chance to control the money supply.

  26. adam
    May 21, 2009

    what happens if there is another crash, i dread to think

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