QE II?

My answer to those who ask should the UK enter another phase of money printing or quantitative easing is a simple “No”.

The £200 billion of the last government’s programme is still in the system. It has caused some inflation, by helping drive the pound down against other currencies. This has led to dearer imports and some dometic price rises. It will lead to more inflation, if the monetary transmission mechanism of the commercial banks is repaired sufficiently.

So far most of the created money has stayed in the public sector. It has not been used by commercial banks to gear up their balance sheets, lending more out to the private sector on the back of the newly created money. They have effectively been forced to buy government debt with it. They have £150 billion deposited with the Bank of England. If the authorities get round to allowing the commercial banks to expand their balance sheets again, the large amounts of narrow or high powered money released into the system would permit a rapid build up of lending and rekindle inflationary pressures domestically.

To date the government has decided to tax the size of a bank’s balance sheet, whilst the banking Regulator has been demanding higher levels of cash and capital.These interventions limit the ability of the banks to multiply the new money through the system. If the authorities want a stronger recovery they will have to allow the banks to lend more. If they do this they need to be careful about the amount of extra money they have created, and stand ready to withdraw some of it as soon as things start to heat up too quickly.

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56 Comments

  1. Lottery Balls
    Posted October 11, 2010 at 8:16 am | Permalink

    Spot on as usual but we do need the banks to lend businesses right now, rather than forcing them to buy government debt. I know of numerous building project on hold for lack of ending when perfectly good security is available but the banks have virtually a blanket ban. Just the ones I know of would get about 40 people back to work.

    • Lottery Balls
      Posted October 12, 2010 at 8:47 am | Permalink

      Just to add.

      Andrew Marr has been complaining and trying, somewhat childishly, to belittle bloggers as spotty males who still live with their mums. I can see why. Good bloggers show up his Guardian/BBC's stance (broadly big on Global Warming, "Sustainability" and "Renewable" , the vast equality industry/agenda, more EU everywhere, an ever larger state at all levels and ever more regulations).

      They show this to be absurd, job destroying, and totally at odds to what most sensible people believe and want, this despite a life time of endless drip feed propaganda from the BBC. Roll on special state sector / BBC pension tax.

      And please can we scrap the Equality and Human Rights Commission so we do not have to listen to any more or their silly reports on "fairness" and to save some money too.

  2. JimF
    Posted October 11, 2010 at 8:41 am | Permalink

    Agreed.
    Although it could be argued that the money has leaked into the private sector via more public sector wages than would have been the case in an honest currency situation.
    How far would you go against your own Government should they try this trick again?

  3. Robert
    Posted October 11, 2010 at 8:57 am | Permalink

    Please, please, use all your powers of persuasion with the Chancellor and the Governor of the Bank of England. Anyone who remembers the 1970s will know that inflation destroys prosperity, wrecking the savings of the prudent and undermining the income of all. When inflation does hit, interest rates will have to rise, fast, creating a massive shock on mortgage payments.

    • APL
      Posted October 11, 2010 at 2:28 pm | Permalink

      Robert: "Please, please, use all your powers of persuasion with the Chancellor and the Governor of the Bank of England."

      Redwood can't even effect change within the Tory party, so we have less than a cats chance in purgatory that he has any influence with the BOE or the Chancellor!

  4. waramess
    Posted October 11, 2010 at 10:07 am | Permalink

    Increased taxation and printing more money. What divine temptations to put before an economically illiterate chancellor, particularly one taking advice from Keynesian economists who might not have a clue themselves how to proceed.

    Let us hope this chancellor is economically literate, does know how to proceed and sticks both fingers in his ears upon first sight of a Keynesian economist .

    BTW I wonder why we still have a Keynesian economist as Governor of the Bank of England.

  5. forthurst
    Posted October 11, 2010 at 10:41 am | Permalink

    We already have uncontrolled inflation well above the BoE target. Do we need further to debauch our currency?.

    A major problem is that banks have forgotten how to do their proper job. They have become used to lending large sums to spivs and gangsters for which they had pay themselves massive commissions and bonuses. They are still purchasing derivatives which are not exchange traded. The function of banks is to lend in order to enable good businesses to add value, not to enable the pathologically greedy to acquire unearned wealth. Is it their function to promote asset bubbles which simply inflate and inevitably deflate? People need houses to live in not as a means of acquiring wealth: houses don't make anything.

    Compamies should not be entitled to banking licences unless they can clearly demonstrate that their activities are specifically to promote the public good rather than simply to enrich themselves and their friends as they have been wont. The idea that by creating even more money just so that some of it might trickle into benficial lending is defeatist and incompetetent. It would be far better to offer the banks the withdawal of their licences as an alternative to not mending their ways.

    • waramess
      Posted October 12, 2010 at 11:10 am | Permalink

      Banks are businesses with shareholders, not to promote public good; that's what we elect governments for.

      • forthurst
        Posted October 12, 2010 at 8:28 pm | Permalink

        what are banking licences for?

  6. ChrisS
    Posted October 11, 2010 at 10:52 am | Permalink

    I am no economist but surely printing money is just a temporary fix which will lead to greater problems in the future. Let us create real wealth and jobs by encouraging and supporting the growth of manufacturing and industry. This should be the main thrust of the government. The problem is that the present leadership has little or no experience in this area.

    • Lola
      Posted October 11, 2010 at 4:47 pm | Permalink

      Yes.
      Yes.
      Yes.
      Sadly true.

  7. Steve
    Posted October 11, 2010 at 11:09 am | Permalink

    John,

    Can we have a Gold Standard now please? Once the poor have inflation (the original meaning,expansion of the base money supply) explained to them,they would see the Left has lied to them.Otherwise,with the blame being placed on Banks rather than Government money 'printing',I can actually see revolution occuring as we head into the depression proper (which is coming very soon now).Conservatives believe in Freedom and part of that is telling the truth.

  8. AlteFritz
    Posted October 11, 2010 at 11:15 am | Permalink

    For what would banks lend at the moment? Unless there is sufficient additonal demand, then a higher working capital requirement will not require a higher overdraft. It would be a real risk to seek structured finance or asset finance to fund an acqusiition or, say, machine purchase. Property lending will be stagnant until there is some hope that the development will attract tenants or buyers.

    Lending has to be repaid at some point, so you need confidence to borrow. Some governemnt help for the manufacturing sector to encourage UK companies to manufacture in the UK preferably sourcing materials from UK suppliers would be a big step on the road to wealth creation. That is where political leadership is needed.

  9. Steve Tierney
    Posted October 11, 2010 at 12:55 pm | Permalink

    It must seem such an attractive idea to the chancellor – as it has to previous people in positions of power. Taking all this criticism and unpopularity for dealing with another government's debt legacy must be uncomfortable and dispiriting. Print a bit of money and you could make life so much easier for yourself – you could be Santa Claus instead of the taxman.

    Except, that song isn't a hapy melody. Its the sound of the siren – lulling you out to sea and a watery death. QE is no solution. It's part of the problem.

  10. Rob H
    Posted October 11, 2010 at 1:04 pm | Permalink

    JR,

    Don't you think the effects of the QE has also boosted equities (artificially)? This is not just a benign impact. Creating another bubble is not a good idea unless you are a trader.

    Lots of people are waiting for the confirmation or not of the continuation of Global QE – if they go for it again expect to see the FTSE rise.

    If they decide to stop or slow to a stop get out ASAP as the shares will be able to come back down to their actual value.

  11. Iain Gill
    Posted October 11, 2010 at 2:40 pm | Permalink

    looks like our friends in the USA are going to go for QE again in a big way, and we will have little choice but to follow

    what exactly is china going to do with us when we are finally mortgaged over a gazillion years to them with no chance of repaying as we have lost out first world status by handing our lead to india on a plate? how much do we owe china today? how much more than we did yesterday? do you think India will give us billions in "aid" when the positions are reversed? somehow I think not
    do let us know

  12. Demetrius
    Posted October 11, 2010 at 2:53 pm | Permalink

    This QEII will sink faster than the Titanic.

  13. michael read
    Posted October 11, 2010 at 5:13 pm | Permalink

    Interesting, Mr Redwood, just the question I thought of asking you over the weekend.

    Now, how about Hr Hughne and cuts, as in the coalition might take a less robust approach if the economy shows sign of weakening. What say you?

  14. ferdinand
    Posted October 11, 2010 at 5:25 pm | Permalink

    Whatever happened to MV=PT ?

    • Mark
      Posted October 12, 2010 at 12:32 pm | Permalink

      There's a lag of a couple of years before it takes full effect while the money washes through the system. It's still there. The biggest injections were in Q2 and Q3 of 2009 (£83.4bn and £55.4bn of QE gilts respectively).

  15. Acorn
    Posted October 11, 2010 at 6:25 pm | Permalink

    Thanks for answering my question. Getting Banks to lend and borrowers to borrow is not going to be easy; there is no confidence in the system at the moment.

    The problem that has fallen off the media map, is the trillions of dollars worth of toxic assets that are still stuck in the banking system. Very few of them have been wiped off the balance sheets of the Banks. Some have been bought by Central Banks like the FED and the BoE. Nobody wants to admit that they are worth cents on the dollar or pennies on the pound.

    A while back, I posted a link (about purchases ……) from a junk bond dealer. A couple of weeks back "Toxie" died; with over a 50% loss. Toxie's fate will be typical of the billions of similar mortgage backed bonds (RMBS), over the next few years. So, if you were a Bank, would you be lending money to anyone but the government?

    • Mark
      Posted October 14, 2010 at 11:24 am | Permalink

      If you were a borrower, would you choose to borrow from a bank if you had an alternative? Your point is quite right. Banks need to sort out their balance sheets, pronto.

  16. simon_555
    Posted October 11, 2010 at 8:03 pm | Permalink

    It plain to see that it's only a matter of time before we go down the reckless QE road again, especially as they've got the go ahead from number 11. It always starts with murmurings in the press then they do it soon after. I thought the Tories were supposed to have financial sense? I hoped all this nonsense would end when Labour went.

    Looks like ultra low rates, QE, inequality and insane house prices are here to stay.

  17. Andrew Johnson
    Posted October 11, 2010 at 8:18 pm | Permalink

    More madness from economists who haven't got a clue what to do and don't have the integrity to say so.
    Memo to the Governor of the Bank of England. Forget your failed computer models and ineffective specialist economists. Instead take a walk to the bus stop near your bank, and ask some waiting passengers whether they think it's a good idea to print another £200 billion of money we don't have, to add to the £200 billion we don't have that we've already printed and distributed under Labour. As for me, I'm following a hot tip from a German friend and putting what's left of my money into wheelbarrow shares! He reckons every UK home will need at least one soon!

  18. Lindsay McDougall
    Posted October 11, 2010 at 8:45 pm | Permalink

    Yes, indeed. While we are about it, why not raise base rate to about 3%, which is where it ought to be, and relax the constraints on banks. The only constraint that banks need is for central government to say – and mean – that there is no such thing as a bank that is too big to fail. Once that message gets through, RBS and Lloyds will sell off peripheral assets spontaneously, in order to get lean and mean. Come on, RBS, you don't need to own 9 insurance companies, many of which compete with each other.

    We need a new Govenor of the Bank of England. Mervyn King has come to believe that his mandate is inflation and growth, after the manner of the US Fed. It is not; it is inflation targetting only, and make him grovel if he misses it. Mervyn King has a history of being a neo-Keynsian, in the manner of the disasterous Obama administration.

    • Mark
      Posted October 12, 2010 at 12:19 pm | Permalink

      If you want banks to sort themselves out in a hurry, just make them pay no bonus if the bank is making any use of the SLS or CGS or other BoE subsidy schemes.

  19. Rose
    Posted October 11, 2010 at 8:46 pm | Permalink

    Mrs Thatcher made the case that inflation is a moral question, not just an economic one. Unfortunately the ruling class so often has an interest in creating inflation. On inflation-proof salaries and pensions themselves, they have no incentive to keep money honest. On the contrary, inflation reduces their debts, both private and public. This threat has been hanging over us for years now: the return of inflation and all its ills. How can the B of E expect people living on savings to go out and spend them? If they could get some interest on them, and the capital retained its value, they might. As it is they face being wiped out – as the prudent and responsible little people were in the 70s. Can't the ruling class understand that there comes a time in everyone's life when they can no longer earn a salary? They must live on what they have put by. What incentive are they giving young people to do that?

  20. wokingham mums
    Posted October 11, 2010 at 10:07 pm | Permalink

    Wokingham Mum's

    Worried sick, Middle class, both working but not for long My & husbands job's going to india. Young teen kid's facing Uni fees £10,000 per child per year + somewhere to live food ect. Plus our pension we're been paying into for 20 years probably worth nothing. Just can't do it!!!!!. Had to already talk to eldest 16 about not going to uni simply can't afford it and the future dept scares them.
    We want job's (even in the public sector) and job production in the private + security for existing job's and a future for the our kids – then tackle the benefits problem can't push them off benefits and into job's when there are no job's. Voted C now regret it

    • waramess
      Posted October 12, 2010 at 11:24 am | Permalink

      Hope you place blame where it belongs. Not just Brown and Balls but the rest of them also

    • simon
      Posted October 12, 2010 at 11:40 am | Permalink

      Wokingham Mum's ,

      Neither the Conservative's nor the Coalition are perfect but they are better than the alternative of a Labour or Lib Dem govt .

      Ian Duncan Smith , Frank Field and John Hutton have their hearts in the right place . It's clear Hague has been a Europhile all along and Cameron and Osborne should come out and admit they are too .

      In December the EU-India free trade agreement goes ahead with mode-4 arrangements .

      This means that "skilled" Indians can come to the UK to work on contract basis without a visa so India will be coming here .

      (argues companies likely to bring in a lot of new labour).

      About this time last year the Irish were scared like we are now and bullied into voting for the Lisbon Treaty . That should be a bigger regret for all of us than voting C .

    • APL
      Posted October 13, 2010 at 12:26 am | Permalink

      Wokingham Mum's: "Voted C now regret it"

      Do also bear in mind, the economy is like a supertanker, it has a momentum of its own, you can slam the breaks on but it'll seem like nothing is happening for ages.

      Likewise, we have been zooming along under full steam (and under Labour) and the rocky beach and reefs are clearly visible in front of us.

      With only two months under their belt, the situation cannot be the fault of your voting conservative. There is much else to complain of but this economic situation is not their fault, although they sat back and took all the expenses during the fat years!!

      No, the blame lies rightfully with Blair, Brown, Balls (who talks nothing but) and Darling. But mostly Brown who was at the controls of the economy throughout the last thirteen years.

      I have two children too, we have hopes for them too, but don't see much to be hopeful after Labour has laid waste to the British economy.

      God knows, I feel let down by the Tory party, but this situation is not directly their fault.

  21. Paul B
    Posted October 11, 2010 at 11:21 pm | Permalink

    "The initial plan was to destabilise the British economy by dropping the notes from aircraft, on the assumption that most Britons would collect the money they found floating from the sky and spend it into their economy, thus triggering inflation."
    http://en.wikipedia.org/wiki/Operation_Bernhard

  22. Mark
    Posted October 12, 2010 at 12:47 am | Permalink

    QE is simply unfunded government spending. A decision to add more QE is therefore a decision not to raise more funding through gilt sales (or taxes). If we look at net issuance of gilts this year, we find that it was £48.2bn in Q1, and foreigners increased their holdings by £19.3bn, while QE totalled £11.2bn. In Q2, net issuance was £41.7bn, with foreigners absorbing £30.9bn of that. In Q3, issuance totalled £41.9bn. We await data on changes in holdings by foreigners for that period. It would appear that overseas investors have been funding UK government debt to a significant degree now they have a little more confidence in the government (in Q4 09 they invested just £7.3bn in gilts). Opening the QE taps will mean that gilts will not be sold to buyers, including those overseas lenders.

    Further QE will advertise the idea that QE will never be reversed, and will therefore remain inflationary. It reduces the credibility of QE as a policy instrument, and greatly increases the risks of price inflation and currency depreciation. The greater the amount of QE, the greater the danger of it tipping over quite quickly into currency collapse, as happened at the start of the Weimar inflation.

    There are two possible reasons why Osborne may have been feeling tempted to press the QE panic button (and Cameron to back that idea as he did at hs monthly press conference). The first we have discussed here recently: the prospect that over-ambitious tax rates have damaged tax yields, increasing the deficit to be funded. If that is the reason, then it is a bad choice when the better choice of lower taxes that produce higher yields is available.

    The second reason relates to bank balance sheets. It must have been a choke-on-cornflakes moment for bankers when the Halifax house price index showed a 3.6% seasonally adjusted month on month fall. Of course, such a rate of decline is not sustainable (35.6% p.a.) – but the fall will have dampened the ardour of potential house buyers. The September BoE Trends in Lending report revealed that finally the stock of property lending in the commercial sector may be reducing – albeit property accounts for 50% of new lending to business generally.

    Banks are having to re-finance some £800bn by 2012 in order to keep existing lending in place. Reportedly, they have managed to pay down some £57bn of lending under the Special Liquidity Scheme, but they need to fund plenty more there and elsewhere. By not competing so heavily with the banks for investor cash, perhaps Osborne and Mervyn King hope that banks will be able to attract more of the funding they need. Moreover, as the deficit spending hits the bank accounts of benefit claimants, government employees and suppliers, many of them will choose to apply it to reducing loan balances. The banks have a lot of delevering still to do.

    The real question is whether this wheeze will be enough to get the banks out of their funding hole, and replace the SLS and CGS and other BoE hidden lending on which they are currently relying. £800bn is a significant fraction of their £4 trillion in sterling assets, and even of their total assets of about £8.5 trillion (according to Table B1.4 of Bankstats). Selling off their £150bn of gilts lodged as reserves isn't going to cut the mustard. Whilst domestic capital reserves are now some 12.7% of domestic assets, the foreign portfolios of our banks remain 29 times geared. The next bailouts will be hard to keep off the National Debt figures.

    • Acorn
      Posted October 12, 2010 at 12:44 pm | Permalink

      Mark, did you look at table F1.1 ? The derivatives seem to be piling up. This chart says "market value"; yeah, I bet. http://www.bankofengland.co.uk/statistics/banksta

    • Simple Soul
      Posted October 12, 2010 at 1:25 pm | Permalink

      Yes. Once you come to rely on QE there is never a safe point at which you can turn the tap off. The Germans discovered this the hard way. The arguments against QE are sound, whether you are an optimist or a pessimist. In other words it is dangerous if you think it is effective; and still dangerous if you don't. Either way we don't really know where the money goes.

  23. Richard1
    Posted October 12, 2010 at 9:12 am | Permalink

    The key issue is to remove the huge subsidy which the taxpayer gives the banks through the implicit guarantee on all banks' liabilities + unlimited access to subsidised funding. Once debt investors & long term depositors in banks have to make a real commercial decision on the security of their investment we will have a proper market based control on banks & there will be no need for artificial restrictions and/or pressures on lending by the state. BTW that will also solve the problem with perceived excesses in remuneration.

    • Colin
      Posted October 12, 2010 at 12:29 pm | Permalink

      The Fractional Reserve Banking system is also an effective subsidy to the bank, as it allows them to create money for every deposit.

      For every £100 I put in my account, they can lend it many times, providing of course they have enough capital in reserve already. Of course at the moment they are being cautious, so they probably won't and are trying to build up their reserves.

      This is because many of their loans are risky, house prices are dropping or at risk of dropping, which means defaults on mortgages will not necessarily get their money back. Also people are at risk of losing jobs and may not be able to pay off loans.

      The only alternative is to slowly move to a Full Reserve Banking system. Then the power to create money becomes a function of government. Government borrowing is then ceased and the money supply is controlled more directly, by printing or withdrawing money. This means that government borrowing is paid for only in inflation rather than in inflation and in interest ( which lasts forever as governments never pay back the government debt ). Currently government interest payments are around £50 billion…

  24. Alan Jutson
    Posted October 12, 2010 at 9:33 am | Permalink

    Agreed

    Absolutely NO

    "Live within Our Means"

  25. Sally C.
    Posted October 12, 2010 at 10:19 am | Permalink

    David Miles, friend of Gordon Brown and member of the MPC ( could there be a connection there?), is giving a speech this morning ( Tuesday) and is using the opportunity to absolve the Bank of England of any responsibility for the huge expansion of credit, and in particular mortgage credit, that took place here between 2003 – 2007. He is saying that interest rates are not the right tool to control asset bubbles. I wonder if Paul Volker would agree. In fact, given our propensity to borrow on a floating rate basis, with mortgage rates fixed off three month Libor or directly off Bank Base Rate, interest rates are exactly the right tool to influence the amount of borrowing going on the UK economy. The story is slightly different in America and Europe where most borrowing is on a fixed rate basis. This allowed Alan Greenspan to argue that the Fed could not affect long term interest rates and thereby try to absolve himself of any responsibility for the huge credit expansion that took place in America from 2001 – 2007. The Bank of England cannot hide behind the same figleaf.

    • waramess
      Posted October 12, 2010 at 11:38 am | Permalink

      Taking a lesson from both the Russians and Chinese: if you don't like what history tells you then change it

    • Mark
      Posted October 12, 2010 at 2:20 pm | Permalink

      I think he's right that interest rates aren't the best way of limiting lending in support of assets bubbles. However, he then goes on to suggest that limiting overall bank gearing can do the job instead. Whilst there is no doubt that banks became insanely geared in the bubble years, limiting the overall balance sheet does nothing to attack a particular asset bubble. You can only affect house prices by limiting lending on houses. Banks actually have an incentive to pump and dump individual assets, because it usually leaves them inheriting the collateral at a low point in the cycle – from which they can profit on resale later.

      • Sally C.
        Posted October 13, 2010 at 1:04 pm | Permalink

        Mark, it may be a rather blunt tool, but the quickest and surest way to limit lending to the housing market is to raise the cost – in other words raise interest rates, not in .25% increments, but 1% increments. It has to become painful to borrow before people will stop borrowing. Paul Volker knew that this was true and took what now seems like incredibly brave action back in the early 80s to take the air out of the economy.

        • Mark
          Posted October 13, 2010 at 9:39 pm | Permalink

          If you look at the statistics for the total amount of mortgages outstanding you will find that overall lending has remained fairly stable since the credit crunch hit in 2008 – up less than 2% (BoE data series LPMVTXH ). Many people are insulated in the short term by fixed interest rate deals that currently account for half of new lending or highly favourable low differential tracker rates. The last data I saw suggested that about a third of mortgages had now reverted to SVR. New lending to first time buyers has already slowed to a trickle. That is mainly because they fear house price falls, but also because banks are insisting on much lower LTVs (because they too know that price falls are almost inevitable) and bigger deposits.

          Jacking rates would hit the budgets of those with over large mortgages on SVR, perhaps forcing some fire sales and repossessions that would add to supply – something that will need to happen in the end before the market can return to normal. In an already moribund market it will make little difference to new deals.

          If we look back to 2001/2 when house prices were leaping ahead by 20%+ p.a. we had low interest rates set in the aftermath of 9/11 and the dot com crash. We needed a separate mechanism to tackle the housing market. It was not helped by the relaxing of LTV standards at the time, particularly in the BTL sector. Perhaps a separate interest rate for mortgages could work, but modern financial engineering makes this more difficult – witness the big difference between fixed and tracker nominal rates for new deals currently. LTV and LTI ratios are probably even more effective at damping new lending. They aren't the same as the banks' capital ratios though.

  26. Johnny
    Posted October 12, 2010 at 3:43 pm | Permalink

    The Pound is falling today on the New York Exchange, against an already weak dollar, simply because the signs of inflation are back in the UK Economy and the Property Sector is looking weak and falling still. We need to be very very, very careful about QE at this delicate stage. I would suggest no more money printing at all until we grow out of these dense woods.

    • M.A.N.
      Posted October 12, 2010 at 10:26 pm | Permalink

      How will the government pay its bills though?. Just a question. Im wondering if they cant actually borrow enough to fund the deficit, so will QE to effectively pay its way.

  27. APL
    Posted October 12, 2010 at 9:25 pm | Permalink

    JR: "My answer to those who ask should the UK enter another phase of money printing or quantitative easing is a simple “No”."

    What do you say to Denninger who suggests that under certain circumstances, because QE removes interest or coupon bearing instruments from the economy replacing them with non revenue bearing cash, QE could actually be deflationary?

    Reply: The impact of course depends on whether the credit creating banks can create credit on the back of the extra cash or n ot.

    • APL
      Posted October 13, 2010 at 11:06 am | Permalink

      JR: "depends on "

      Yes, but over the last fifty years QE has been used in an underlying credit expansionary envionment. Now all sorts of credit instruments are being withdrawn and some are being defaulted. Greece, Portrugal, Ireland, Iceland, etc.

      It's generally thought the banks are not lending, there are some people that think there is not much appetitie* in the economy for credit – for two reasons; People who need credit are probably least credit worthy, People who are credit averse, don't need nor want it.

      So in a credit deflation can QE work in the same manner we have been accustomed to it working during a credit inflationary period?

      *maybe there is an appetite, but do you want to lend to a bad risk?

    • Sally C.
      Posted October 13, 2010 at 3:29 pm | Permalink

      JR is right. But let us be clear on the effect of QE even without extra credit being created. The immediate impact of QE is to lower yields in the Gilt market, as the Bank of England buys secondary market Gilts, and thereby gives Gilt traders a one way bet, and simultaneously cuts the costs of government financing. The follow on effects are manifold. While the government wants banks to lend to the real economy more freely, the more likely outcome is that money will instead continue to seep into the Gilt market, thereby lowering yields even further, some will seep into the stock market, and some will seep into the commodity markets. If you look at a chart of Gilt yields, the Stock market and Gold or Silver ( or any other commodity) since the original round of QE you will see that this is true.
      Devaluation is another effect of QE. As most governments around the world are pursuing a zero interest rate policy, we are now in a devaluation race. America is in the lead and given the state of their problems are likely to remain out in front. The question is – do we really want to follow them down the path of currency destruction?

      • Mark
        Posted October 13, 2010 at 11:18 pm | Permalink

        I prefer to think of QE slightly differently. Essentially the BoE and DMO combine to swap new gilts for old at high invoice numbers, and then the BoE gives money to the Treasury to cover its planned spending which will only be properly financed when and if the purchased gilts are sold to real third party buyers. The banks can show a profit on gilts swapped, and since they are not actually being asked to buy any additional gilts they have no interest in establishing a real market price for them – that would only happen when the BEAPF QE portfolio is sold.

        The difference between QE and no QE is simply that when there is no QE deficit spending must be financed by selling gilts. The money is spent by the Treasury in the same way regardless, and in turn by the recipients of government spending in much the same way regardless too. The question therefore is what do investors who were planning to invest in gilts on a pre-announced DMO timetable do with their money instead. In the case of foreigners, they probably seek to avoid sterling assets, seeing the inflationary impact of money printing as a risk. Some pension funds are almost statutorily required to purchase gilts from other holders (since there is no new net supply), who in turn may flee sterling. Of course, QE isn't the only mechanism through which investors flee sterling. The sharp depreciation between August 2008 and January 2009 was associated with foreign banks withdrawing funds from London that had been supporting mortgage lending in the UK (particularly via Lehman who became bankrupt in September), to be replaced by the expansion of the BoE balance sheet (did the BoE effectively bail out Lehman creditors at the expense of the devaluation?).

        At low yields, the risk of capital loss for holders of gilts can be substantial, especially for longer dated issues – I can recall 2 1/2% Consols trading at £25 per nominal £100. High inflation will lead to a bond strike. Real borrowing would suddenly become very expensive, a la Grecque. You are right that it is the route to destruction of the currency.

  28. Conrad Jones (Cheam)
    Posted October 13, 2010 at 12:18 am | Permalink

    It's about time people began to live within their means. Debt has become institutionalised. As a small child, I was taught that if I wanted to buy something, I had to save up my pocket money. I couldn't just borrow the money and pay it back later. With easy credit (but certainly not cheap) people who did not really understand how much they would eventually have to pay back, were lulled into buying things that they could simply do without. It is no mystery why China is in a far stronger economic postion than we are. Their culture is to create products (not Banking products) but real physical items that can be sold. Another aspect of their way of life is to save money – just in case. We have not done that – if the City of London is so wonderful, why are we now making all these cuts. Cutting Housing Benefit is a good thing to do, why should I pay for someone elses damned house when they sit around all day pretending to look for work. Cutting Education and Student Grants is bad, for someone who is of John Redwood's generation – it's extremely selfish as they – no doubt; benefitted from the University Grant system and FREE tuition fees. No wonder students are angry.

    Reply: My generation did indeed benefit from full state payment of student fees. There were, however, two large negatives compared to today to factor in. The first was only 1 in 10 of us went to university. the second was if we then got good jobs we paid a marginal tax rate of 83% – the student loan repayment and current tax rates would have been a better deal.

    • Mark
      Posted October 13, 2010 at 1:48 pm | Permalink

      Quite right, JR. However, I don't think that having just 1 in 10 at university was really that much of a negative. It meant that a degree was a qualification worth having, and that so too were the other more vocational qualifications offered by Polytechnics, and such qualifications as SRN. That also meant that as a country we didn't waste much money on education with no payoff, which is what is happening now.

    • Conrad Jones (Cheam)
      Posted October 14, 2010 at 2:57 pm | Permalink

      Mr Redwood, Presumably you are saying that from about 1974, anyone earning over £20K (The Equivalent of £120K to £150K today) paid a banded Tax Rate of 83%. This – however – was not a Tax directed at Students – but on anyone earning over this amount. You are quite correct when you say that a much smaller percentage of the population went to University back then, therefore – is the Government going to look into which Courses are regarded as useful to the Overal economy – and those courses that are dubious in usefullness?
      Perhaps Grants and free Tuition could be re-established for Degree Courses accredited by a Professional Institution that lead directly for specific Jobs and those that do not should NOT receive Tax Payer Funding. Therefore the poorest and most talented people in society will still be able to aspire to a Professional Job without the shadow of Debt on their backs for many years into the future. I did my Degree under a Conservative Government and was Gglad I did – as when New Labour was elected the Grant System and Free Tuition Fees were abolished.

  29. Conrad Jones (Cheam)
    Posted October 13, 2010 at 12:44 am | Permalink

    Out of interest – is it the Bank of England pushing for QE or is it the Government; as we know – the Government has no control over Interest Rates any more, and the Bank of England now regulates the Banking Industry. The unelected Bank of England. They also charge Fees for setting up QE transcations. Since the BoE have taking over regulating the Banking Industry – there have been several stories relating to Bankers looking forward to higher salaries and bonuses; hopefully the stories are by the Bank of England to promote public support for stiffer penalties on the Banking Industry. After all – we're all in this together.

    • rose
      Posted October 14, 2010 at 2:24 pm | Permalink

      And we lived on a minimal grant – only two thirds in my case because my parents didn't add their allotted contribution – without being allowed to overdraw, right through the Barber inflation. That was a lesson and a half. We were not allowed to take jobs during term time either, because the degree was a serious undertaking.

      40 years later the "economy" here is sustained by students, as if they were rich tourists. They shop, dine, and drink etc. to a degree quite beyond the purses of the locals. It has transformed the scene. It feels like London, but nothing substantial is supporting it. There are said to be 60,000 of them. Quite a lot for a provincial city.

      • Conrad Jones (Cheam)
        Posted October 14, 2010 at 9:06 pm | Permalink

        I believe it is quite unfair to Burden students who undertake a serious professionally accredited Degree Course with a £20,000 to 30,000 burden of debt at the end of it. An 18 year old student – leaving school without possibly ever taking out a loan for bicycle; is encouraged to borrow £5000 per year. With access to (in their view) almost unlimited supplies of money – they will spend it – and not necessarily on Text Books and Study Guides. As a Graduate myself – I have continuously being paying Income Tax since graduation – without claiming state benifits. Univeristy Degrees are an investment – Unemployment Benefit and Housing Benefits are not.
        Labour only succeeded in devaluing the Degree Qualification.

  30. Conrad Jones (Cheam)
    Posted October 15, 2010 at 2:54 pm | Permalink

    "Labour only succeeded in devaluing the Degree Qualification. "
    In more ways than one.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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