What is Quantitative easing doing?


           The Governor of the Bank has recently defended quantitative easing.  He has also made clear that as far as he is concerned, all the bonds bought up by the Bank will one day be sold back. It will not, of course, happen on his watch. The  longer we wait for the sales, the more bonds the Bank holds will be paid back by the state, paying  itself.  Effectively they are cancelled.

             The Governor wisely did not overclaim favourable outcomes for quantitative easing. He was fairly gloomy about the state of the Uk economy, despite the likely news that the economy came out of recession again last quarter.  He asserted that QE had limited the damage caused by the squeeze.  He also hinted that we are fast approaching the limits of what monetary policy can achieve.

              There is no doubt that there was a shortage of cash in the UK economy in recent years. That could have been dealt with by more radical and rapid moves to sort the commercial banks out. Instead, the previous government took large share stakes in them to leave them unreformed.  They  allowed  a policy of  extend and pretend on difficult loans delaying this process of sorting the banks out and recapitalising them. The Bank and government felt it had to create some more money and inject it by buying bonds off the private sector to offset the shortage of money. Money was not being  generated in the more normal way through a growing economy financed by credit creating commercial banks.

           We also need, however, to consider the other consequences of the unusual monetary policy that has been  a  striking feature of the last few years.

            Firstly, it has hit savers hard. Low interest rates have slashed  savings income. This in turn has reduced demand from the prudent and the retired who rely on savings income to supplement their budgets.

            Secondly, it has led to large increases in the pension fund deficits of many companies. The liabilities of pension funds Рthe future pension payments Рare valued based on current bond interest rates. If bond interest rates are low, the fund needs to buy many more bonds to generate the bond income to pay the pensions. At the ultra low rates available on bonds today, pension funds have serious problems. Under the new tougher rules, a company has to value the pension deficit, and then make payments into the fund to correct it. The company also has to put the pension deficit as a liability on its own balance sheeet, making it more difficult for the company to borrow to grow its business.

¬†¬†¬†¬†¬†¬†¬†¬†¬† When people look at the better recent ¬†cash generation of big business, they ask why don’t they rush to invest this money in new plant and equipment? Their worries about the deficits in their pension funds, and the impact of them on their balance sheets, deters companies in that position from making new business investment.

           Thirdly,  the period of  crisis followed by ultra low rates and QE has also seen a substantial devaluation of the pound. This has helped fuel a higher rate of inflation in the UK than in most other major advanced economies. This in turn has cut real incomes and reduced spending power in the economy.

            Fourthly, people retiring have had to buy annuities at very poor rates, meaning they have much lower pensions than they expected. This has also reduced demand.

           When this latest round of QE expires, would you do any more?


  1. Brian Taylor
    October 25, 2012

    I suppose it’s to late to put the banks in to administration now,which is what should have been done at the start!

    1. Disaffected
      October 25, 2012

      Osborne claimed in opposition there should be no more funny money…. And in office he has gone along with Blair/Brown plan of borrow, spend and waste. Possibly too much time spent in No.10 rather than No. 11 doing his job and scratching below the surface to see what is happening and to bring about change at the Treasury. He is out of his depth, appears not interested and does not have the personality or leadership skills other than to present what he is told by the civil service who were brain washed by Brown over 13 years.

      I read IDS thinks it is good that ¬£500,000 of taxpayers’ money is spent on a yacht by the NHS, contrary to what Cameron previously told us. When will the goons wake up and understand we, the taxpayer, cannot afford their stupid ideas. I read Strasbourg thinks it should have a 6.8% increase- anyone going to challenge them or, more importantly, do something about it?

      Finally, I read Germany took their gold from the UK at about the same time Brown sold our gold when it was at an all time low. Could anyone give me a sensible reason why he did this?

      1. Nina Andreeva
        October 25, 2012

        To help out one of the bullion banks who was stuck with a inconvenient put option on the price of gold. Have a look through the DT archive for a more detailed explanation. Then have a think about where Blair was signed up to put his boundless talents to use after he ceased to be PM.

      2. frank salmon
        October 25, 2012

        Gold was not a good investment at the time and currencies like the Euro looked a better bet. He failed to understand that gold is the currency of last resort rather than being part of an investment portfolio. It is needed when there are cataclysmic market events and we need a currency that cannot be inflated against the real value of output. We are circa $20 billion down on his deal at the moment.
        Ironically, since he managed to destroy the UK economy with entirely different strategies, including the loss of circa 50% of our manufacture, the pound is down against the Euro and the Euros he bought are worth more than they were….

        1. Conrad Jones (Cheam)
          November 2, 2012

          What is interesting about Gordon’s claim that the EURO was a better “bet” was it didn’t even exist when he made the decision to sell the Gold.

          But, Gordon Brown (afterall) was a Financial Wizard and could see – through his Crystal Ball; that the new currency was going to be a huge success and that Gold was to become an obsolete trinket.

          And we believed him.

      3. sm
        October 25, 2012

        May i suggest doing a search for two below. Both from articles on zero hedge referencing telegraph as noted by others.

        Gordon Brown Sold Britain’s Gold at Artificially Low Prices to Bail Out a Large American Bank

        Why Did The Bundesbank Secretly Withdraw Two-Thirds Of Its London Gold?

        1. peter davies
          October 27, 2012

          Interesting about the comment implicating JP Morgan in this who pay Blair a lot of money, the ties they had with the labour party and Blair and Browns souring relations becoming known not long after…

          Is this not something that a commons committee should be looking into deeper Mr Redwood?

          Reply Mr Blair is no longer an MP so he can work for whom he likes as long as it is legal.

    2. Gary
      October 25, 2012

      Hear, hear.

      According to King banks have “insufficient capital”.


      Forcing our big banks to
      recognise all the big losses
      they are likely to face and
      raise enough capital to
      absorb those losses is the
      sine qua non”

      In other words, in my opinion. after this deluge of ongoing bailouts the banks are still insolvent and the economy is more moribund than when the bailouts started. Did we actually achieve anything?

      Time to let the insolvent banks go.

      1. Leslie Singleton
        October 25, 2012

        Gary–Does that include your bank? You might not be so sure then.

  2. ian wragg
    October 25, 2012

    When the B of E stops buying government debt, the interest rates will rise and there will have to be some real cut back. The markets won’t finance the government unless there is a real return on the money.
    maybe then we pensioners can start to get a better rate on our savings after the total destruction caused by Weimar economics of the government.

    1. Mark
      October 25, 2012

      The markets aren’t financing the government currently. The BoE is. I hope MPs understand that. Perhaps the election of Brooks Newmark to the Treasury Select Committee is a sign that a few more of them do.

  3. Sidney Falco
    October 25, 2012

    Thanks for pointing out one reason why companies are withholding spending their cash due to their potential pension liabilities. I had never heard that issue raised before. Very educational this blog!

    1. Leslie Singleton
      October 25, 2012

      Sidney–What I wonder is does anybody have any idea why employers should be forced to do or offer anything at all as regards pensions–when of course ipso facto the pensioners no longer have anything to do with the companies concerned. Pensions should be run and honestly financed by the government and if the government wants to force employers to take on the enormous responsibility of pensions, and of course much else, it should pay (Yes, out of taxes) the employers to do so. Instead we have employers’ NI–a charge on instead of a payment to employers and as I say not just for pensions by any means–think maternity leave etc which used to be the responsibility of something called the family or a husband even. Just think of the bound in the dreaded growth if these burdens, these punishments almost, were lifted from employers.

      1. uanime5
        October 25, 2012

        When it comes to pensions there’s two choices as to who pays them: the taxpayer or the employer. The Government has decided to make the employer pay for the pensions in order to reduce the amount it costs the taxpayer.

        So by all means campaign for employers to be “freed” from having to provide the employed who made money for them with a pension but don’t be surprised when taxes rise to pay for the care of these pensioners.

      2. Tedgo
        October 25, 2012

        Pension funds are essentially independent from the Company which sets them up. The funds are controlled by trustees. A properly run pension fund should be able to survive the collapse of the Company and continue to provide pensions to both past and present employees.

        The trustees have a duty to INVEST the money wisely. I think this is where the problem lies, particularly with regard to gambling the funds on equities. Many years ago funds avoided the stock market and invested in government bonds and the like.

        Its galling to see a fund ask for a bailout from the Company, because it got it wrong on the stock market, only to then gamble the new money again in stocks and shares. Talk about falling off a cliff twice.

        Before handing over the bail out money the Company should insist on a new set of trustees who undertake to handle the money better, it would be nice if the trustees were personably liable for losses.

        Up till now no one has forced a Company to have pension schemes.

        Reply Why would anyone be a Trustee if they were personally liable for losses? Pension funds have to take some investment risks.

        1. Tedgo
          October 26, 2012

          To reply, I take your point but once up on a time local government councillors could be surcharged for losses.

          I do think pension fund money could be lent to government directly to finance infrastructure projects like schools, roads and hospitals, rather than the government using PFI.

          Saving for a pension is no different to putting money in a building society account, when did a bog standard BSociety account return you less than you put in.

    2. lifelogic
      October 26, 2012

      Indeed it is a huge problem and made worse by QE and the low annuity rates.

  4. Pete the Bike
    October 25, 2012

    “What is Quantitative easing doing?”
    Destroying the value of sterling, allowing criminal waste on a gigantic scale, impoverishing savers, distorting markets, mis allocating capital, allowing unrestrained growth of bureaucracy, stealing from future generations, paving the way for hyperinflation and delaying the day of reckoning for criminal elites.

    1. David Jarman
      October 25, 2012

      Well said!

    2. zorro
      October 25, 2012

      But most of all protecting the banks and elites……


  5. Steve Cox
    October 25, 2012

    More QE? Definitely not, it’s done far more damage than good, but the Chancellor needs it as the only means to fund his deficit for as long as he fails to make significant inroads into public spending. That’s where the problem lies. John, you make a very interesting comment when you say that:

    “The longer we wait for the sales, the more bonds the Bank holds will be paid back by the state, paying itself. Effectively they are cancelled.”

    Is that correct? I realise that it’s just circular money, but unless the Bank of England does some very creative bookkeeping then at the end of the day it will end up insolvent, as its balance sheet will contain all of the liabilities created by QE but none of the assets. That can only be avoided if the government actually pays back the capital of the bonds rather than simply cancelling them, but that would presumably depend on turning the deficit into a surplus, something that won’t happen during this Parliament. Of course, some wild-eyed people might say that it doesn’t matter if your central bank is technically insolvent as it can still issue as much money as it likes, but at that stage I suspect that the Bank will have lost all of its credibility, with immense consequent damage to the country.

    Jeremy Warner also discusses King’s speech in The Telegraph this morning in this excellent article:


    1. Mark
      October 25, 2012

      If the gilts are repaid upon redemption, then they add to the sums that have to be funded. See pages 8/9 here:


      The redemption schedule can be examined in more detail in this report for the gilts in issue:


      and here for the BoE’s QE holdings:


      That reveals that the key test date in March 3rd 2013, when £34,519m of 4.5% gilt is due to be redeemed Рincluding some £6,111m held by the Bank. If they seek to maintain a given stock of gilts in BEAPF then they would need to purchase further gilts from the market with the money they receive on redemption.

      In summary, the BoE’ s gilts holdings are due to be redeemed on the following schedule:

      2013 £7.7bn
      2014 £20.9bn
      2015 £23.9bn
      2016 £18.5bn
      2017 £17.2bn
      2018 £15.0bn
      2019 £27.4bn
      2020 £15.9bn
      2021 £17.2bn
      2022 £23.5bn

      with the remaining £134.3bn spread out over 2025-2060.

      These sums can be though of as additional borrowing from the market over an above any further deficit financing required, assuming that third party holdings will typically be rolled over into new issues when redeemed.

      Replt Thanks, that’s a very helpful schedule and timetable.

      1. Denis Cooper
        October 25, 2012

        Of course there would be the possibility of changing that redemption profile by selling some of the gilts in a certain maturity range and using the sales proceeds to replace them with gilts in another maturity range, and those sales and purchases could be in the market or they might be swaps agreed with the Treasury.

        There would also be the possibility of winding up the APF much earlier than 2060, say in 2020, when the economy had recovered sufficiently for the Treasury to pay one or more lump sums to buy back the APF’s remaining holdings of gilts and clear its books.

        What cannot happen is cancellation of the gilts without the Treasury paying enough to the APF to make sure that the APF can repay enough of the loans it has had from the Bank and so make sure that the Bank doesn’t go bust, and at present the Treasury doesn’t have a spare ¬£300+ billion lying around to pay to the APF.

        Reply: The balance sheet of the Asset PF (Feb 2012) shows ¬£379 bn of assets (gilts and cash held) financed by a Treasury indemnity and a Bank of England loan. So as gilts are repaid the loan and indemnity is paid back. The Bank makes clear it has no economic interest in the APF and does not consolidate it, even though it is technically a 100% owned subsidiary. It looks through it to the Treasury and is acting as the Treasury’s agent with the loan/asset system.

        1. Denis Cooper
          October 25, 2012

          Yes, there was ¬£287 billion down as the loan to the APF from the Bank, NOT from the Treasury, which new money created by the Bank was used to buy the gilts, and at that time the APF was showing a ¬£41 billion profit on the operations which was set down as being due to the Treasury as and when it was agreed to pay it to the Treasury, if it hadn’t evaporated in the meantime.

          1. zorro
            October 26, 2012

            I really do enjoy John and Denis dancing around pinheads but why not avoid the technicalities and call a spade a spade! The QE exercise has only one aim – enable government spending to continue without attracting adverse attention from the bond markets – all helpfully enabled by putting off the reckoning into the future assisted by the benign fiscal expansionary regime championed by the FED……


          2. Denis Cooper
            October 26, 2012

            Reply to zorro:

            That’s correct, despite Mervyn King’s protestations to the contrary. But it only helps government spending to continue if these two conditions are met:

            a) The assets are bought with new money created by the Bank, not with existing money lent by the Treasury; and

            b) The assets bought by the Bank are something that the government is producing and selling at the same time as the Bank is buying them, eg gilts.

            In the brief first phase of the APF’s existence the Treasury was lending money to the Bank to buy private sector assets such as corporate bonds, which satisfied neither of those two conditions and rather than helping the government to fund its budget deficit actually placed an additional burden on its resources.

            I’m surprised that JR seemed to understand this very well in 2009 but now seems to have a different understanding.

  6. lifelogic
    October 25, 2012

    It has achieved little if anything. The banks are still not lending to real businesses on sensible terms, it has robbed savers and buyers of annuities, companies with pension deficits and has increased inflation. What is needed is less government, but Cameron won’t cut state sector pensions or the state sector staff many of who do nothing useful and even do things that have clear negative impacts. Why should the state sector be paid (with pensions) some 50% more than the private sector that pays for them all?

  7. Ralph Musgrave
    October 25, 2012

    I listed ten or so reasons why QE is a farce here:


  8. Single Acts
    October 25, 2012

    “all the bonds bought up by the Bank will one day be sold back. It will not, of course, happen on his watch”

    When President Nixon closed the gold window, he claimed it would be a temporary* measure. My bet is the bonds will be sold back right around the time the US goes back on the gold standard.

    I don’t understand your “not enough cash” argument. Surely price should just adjust to reflect an accurate price level vis-a-vis the amount of cash chasing the product?

    The only people who fear falling prices are reckless debtors. Who is the biggest, most profligate over-spender? Oh yes, HMG.

    Thus, for all the rhetoric and nonsense, all the smoke and mirrors, the real reason for the large scale forgery we have seen.

    Lastly, please don’t call it QE, that’s Orwellian, call it what it is ~ counterfeiting.

    * It’s on youtube and hilarious if tragic.

  9. Nina Andreeva
    October 25, 2012

    QE will continue regardless because the people who are calling the shots are completely insensate to its malign effects. When was Osborne last down the supermarket? When did he last fill up his ministerial Jag? When did he last have to worry about the investment and annuity risk related to his pension? I presume he has worried about when non UK investors go on a gilt strike and say we are not financing your government anymore because we do not believe we are going to be paid back in a currency that has any meaning to it?

  10. Brian Tomkinson
    October 25, 2012

    It would help if we were told the real reason for QE. Firstly, the very term was one that few people had heard before and sounded like a highfaluting way of describing printing money. This created suspicion about the real motives. Secondly, we were told that this was necessary to prevent deflation. Well it did that all right; inflation has been well above the target level for years. Was that the real reason though? I don’t think so. It seems to have just been a way of financing government spending. Your comment : “The longer we wait for the sales, the more bonds the Bank holds will be paid back by the state, paying itself. Effectively they are cancelled” seems to confirm this. The economic harm inflicted on many who have been prudent seems to be of no concern to anyone at the BoE or government. I suppose they take the view that what is ours ought to be theirs to do with what they will. I have never supported QE and would not want to see any more of it nor would I want to see them written off as suggested by Lord Turner. King told us that the bonds would be sold back. Is it too much to expect that at least one element of this charade will be carried out?

  11. oldtimer
    October 25, 2012

    You have described perfectly the predicament faced by company pension funds. The effective destruction of the UK final salary pension scheme, starting with Brown`s pension tax, demomstates in microcosm the power of government decisions and regulations to screw up a key part of the national economy.

    It happens time and time again as politicians think they know best. The present lot running the three main political parties are no improvement on the past as is evident from the mess they have made of UK energy policy and of the tax code, which are just as damaging.

  12. Lord Blagger
    October 25, 2012

    There is no doubt that there was a shortage of cash in the UK economy in recent years.


    There is no shortage of cash

    You as government have a shortage of cash to fund your extravagent spending. 175 bn one year, 150 bn the next year.

    So lets see.

    QE 375 bn. What do they do with it? Lend it to you to spend. 345 bn on Gilts.

    So come on, whose going to pay that back?

  13. The PrangWizard
    October 25, 2012

    I’ve said before, it’s ‘funny money’. I admit to not understanding it. Do the City spivs rake off a fat percentage for laundering it? Why can’t I print money to pay off my mortgage? I’d then be able to spend more on goods. But then only the government can get away with things like that, not the likes of you and me – perish the thought, what would become of the country if the ordinary people could ‘print money’? This must be reserved for those who know best, you know the governments, mainly the last one, and their bureaucrats and hangers on who got us in the mess in the first place.
    Do I take it from the comment that ‘effectively they are cancelled’ means that the ‘money’ has disappeared like a puff of smoke?
    If State were to be half the size it is now, we’d all be immensely better off. I’m not attacking all MPs and certainly not Mr Redwood. I’m just having a ‘brick through a window’ day.

  14. Martin
    October 25, 2012

    You have set out the negatives of QE very well.

    The supporters of QE also forget that the inflation it causes forces the government to borrow more as pensions and benefits have to be uprated!

    1. Mark
      October 25, 2012

      Except they’re planning to move the goalposts:


      In this case “improving” means reducing RPI by anything up to 1.5% by fiddling with the methodology.

      This is theft of pension and indexed gilt returns by statistical sleight of hand. It does give rise to the potential for holders of the gilts to demand instant repayment, which would create an almost £300bn financing headache.

      MPs really should be standing up for those who have contractual RPI indexation and stopping this.

  15. Electro-Kevin
    October 25, 2012

    More QE ?

    At least we have the choice.

    We wouldn’t have had if we’d been in the Euro.

    1. zorro
      October 25, 2012

      This is apposite… The government would have been unable to push through the spending cuts within the Euro and we would have been eaten alive and gone into a Greek style deflationary spiral with the banks still unable to lend. This is why they will carry on QE….north of 500 billion by the next election…


  16. waramess
    October 25, 2012

    QE as a monetary policy tool is a display of ignorance. When the stock of money appeared to be disappearing from the market it was no more than a reduction in the velocity caused principally by the banks inability to lend. This was also one of the reasons why corporates built up such a large buffer.

    Increasing the amount of money available to the economy does nothing to assist this problem. The banks were still bust; unable to lend under any circumstances whilst they had such a large stock of underperforming and non-performing assets.

    QE however has probably been the cause of inflated commodity prices which have been detrimental to a recovery.

    It is still not too late to sort out the banks and the legislation currently proposed to give retail creditors a preferred position on liquidation is a good start.

    Our store of value supposedly held by the banks as debtors, has in large part been lost through bad investment, and the continued policy of turning a blind eye to undeclared losses is to allow the banks, through their privileged position of owning virtually all money in the economy, to avoid the fate that would have claimed any normal commercial undertaking when unable to pay their creditors.

    QE has by now been shown to be an ineffective and quite destructive tool and should be ditched before more unintended consequences damage the economy

  17. Derek Emery
    October 25, 2012

    Hoisington Investment Management analysed the effects of QE1 and QE2 in the US see http://www.businessinsider.com/hoisington-quarterly-review-and-outlook-2012-10
    They found each QE caused around 30% increase in the S&P index and in gasoline prices but had a negative effect of growth.
    I wonder if the effects can be much more positive in the case of the UK?

  18. Bernard Juby
    October 25, 2012

    NO MORE “watering the milk or beer, please.
    “Firstly, it has hit savers hard. Low interest rates have slashed savings income. This in turn has reduced demand from the prudent and the retired who rely on savings income to supplement their budgets”
    Too true. And Brown is in the Guinness Book of Records I believe for spending more of the tax-payer’s money by selling gold at a low price making a loss greater than Nick Gleeson;
    Our money is, now, literally, worth less than the paper it’s printed on!

  19. Denis Cooper
    October 25, 2012

    MPs should decide whether there is to be more QE; they should insist that the Chancellor must get approval through a Commons vote for every new tranche of QE, rather than allowing him to just send another letter of authorisation to the Governor of the Bank of England and then tell them about it after he’s done it.

    Reply: QE does require Parliamentary approval, but so far the opposition has not wanted to oppose it or demand a vote, so the government has a large majority for QE.

    1. Denis Cooper
      October 25, 2012

      As the opposition front bench is falling down on the job it’s supposed to do, and as this is an important and contentious matter which greatly concerns large sections of the public even if it doesn’t much concern the cossetted politicians on the opposition front bench, shouldn’t backbenchers be stepping into the breach by insisting on a debate and a vote?

      Here’s the application form for a debate in backbench time:


      in case you’d like to use it.

      Reply: Most MPs support QE so there would be little point in a vote and little support for a debate.

  20. Lindsay McDougall
    October 25, 2012

    Both QE and the 0.5% base rate have been useless, indeed counter productive, for a considereable number of years. Inflation doesn’t cause economic growth, although you can have economic growth while the inflationary pressures are building up. We have lots of examples of this truth in this country since WW2 and elsewhere absolutely no-one believes that hyperinflation does anything other than destroy an economy (Weimar, WW2 Germany, Zimbabwe etc.).

    Just because banks are short of cash doesn’t rule out other sources of investment funding:
    (1) In the private sector, equity funding.
    (2) In the public sector, cuts in current expenditure to make way for capital projects, the reverse of what has been happening in recent years under both governments.

    The quarterly GDP growth of 1% just announced is good news, although the construction industry continues to disappoint. Why do institutions of government not ALLOW supply side economics to apply to private sector housing for rent in London, where rents are through the roof? Just grant the necessary planning permissions.

    Finally, that wretched 0.5% base rate. The government is still protecting both itself and all sorts of people and institutions who paid too much for property in the boom years, whether directly or indirectly. To attract money for lending, banks have to pay interest that equals or exceeds the rate of inflation. It certainly can’t hurt to raise the base rate and move to lower or zero inflation.

    1. zorro
      October 26, 2012

      That is because the banks lent recklessly and deliberately stoked the boom…..You have to lean to read the markets to make money.


  21. Robert Eve
    October 25, 2012


  22. Barbara Stevens
    October 25, 2012

    Well we can assume QE has worked in the short term, but for long term I think its dangerous to continue. Its all above me really, but like many in this country we are forced to have faith and hope with the Bank of England. If banks fail they should be allowed to fall and not expect financial help from the state. Just has we are expecting people to show responsiblity and not have children while on benefits, banks to should have responsiblity for other people’s money they use and hold. Responsiblity goes both ways in society. Banks have even bigger responsiblities as they have peoples well being in their hands and the whole state has a whole. This as been sadly lacking in recent years and we all know the outcome.
    We have people who have used having children to fund their accounts, while the taxpayers foot the bill, and we have banks using our money while actually defrauding us wholesale. We cannot continue like this, we have to bring responsiblity back into normal living, and education that things have to change, has the world changes.
    IDS, has said this very day, benefits are not to support expanding families, its to support familes in difficult times, so the Bank of England is there to police banks and guide them too in difficult times. We are seeing responsiblities heaped back onto institutions and people that have been forgotten for far to long. Long may it continue. Banks have nearly broken this country, and coupled with political spending on a large scale, and people’s lack of self discipline, we see the results.

  23. Bert Young
    October 25, 2012

    Did the decision to “pump” money into the economy come from the Treasury or from the Bank of England ? Was it , perhaps , collusion between the two ? Why is it that most of the Footsie companies are awash with cash and small companies are finding things difficult to put their hands on it ? It seems to me that there is a blockage in the money-flow system ,but, not because there is a shortage of cash . The psychology behind all this is twofold : lack of positive direction , and , lack of confidence . Leadership is the key note and place to start . More QE will only lead to more uncertainty and must be halted . “Don’t delay , start today”.

    Reply: Mr Darling agreed it with the Governor when it first started.

    1. Bernard Juby
      October 26, 2012

      Shame on him then – he should be damned well ashamed of himself!

  24. Denis Cooper
    October 25, 2012

    “The longer we wait for the sales, the more bonds the Bank holds will be paid back by the state, paying itself.”

    Not exactly; they will be paid back by the Treasury, which issued them; the Bank and the Treasury are two arms of the state, so one arm of the state has created new money and bought bonds issued by another arm of the state, but indirectly through the secondary market rather than directly; the overall effect is that the latter arm of the state, the Treasury, has borrowed from the former arm, the Bank, which is now by far its largest creditor; and having indirectly borrowed that money from the Bank the Treasury has then spent it to help pay the bills of a government which is still running a massive budget deficit.

    “Effectively they are cancelled.”

    No, they are not cancelled, they mature according to their terms irrespective of whether they are owned by a private gilts investor or by the Bank; the only difference is that the Bank is owned by the Treasury and so potentially the payments on the gilts are recycled to the Treasury as part of the Bank’s profits, while the payments to the private gilts investors can only be partially recycled to the Treasury through taxation.

    Reply : Splitting hairs! If the Bank accepts Treasury repayment for a bond it holds, and then has to repay part of the Treasury loan to buy the gilts, it is the same as cancelling the bond.

    1. Denis Cooper
      October 25, 2012

      There was no Treasury loan to buy any of the gilts.

      I thought we sorted out some time ago that it started with the Bank’s APF buying private sector assets using existing money lent by the Treasury, but within weeks that morphed into the Bank creating new money to lend to the APF to buy gilts.

      Which is why on the APF results summary:


      there’s ¬£369 billion of gilts, with the purchase of all of them funded by “Creation of central bank reserves”, and now as far as private sector assets are concerned it’s down to just ¬£22 million of corporate bonds, the purchase of which was funded by “Issue of Treasury bills and the DMO’s cash management operations”.

      reply: please look at the Bank’s balance sheet. The Bank did not want the risk of the gilts, so it has an arrangement with the Treasury.

      1. Denis Cooper
        October 25, 2012

        Oh, and another £58 million of corporate bonds bought with newly created money.

      2. Denis Cooper
        October 25, 2012

        The Treasury has indemnified the Bank, or more precisely the APF, against any losses which may arise in connection with the purchases it makes, but providing an indemnity against possible losses in the future is not the same as providing a loan for the purchases to be made.

        See page 9 here in the last report from the Bank of England Asset Purchase Facility Fund Limited, “the Company”:


        Note 10:

        “An Indemnity has been given by HM Treasury against any loss incurred by the Company and any profit made by the Company will be passed to HM Treasury.”

        While in Note 11:

        “Loan from Bank of England”

        which at that time stood at £287 billion.

        The indemnity is from the Treasury, the loan is from the Bank.

        There is at least a point in getting the Bank to create new money and lend it to the APF to buy up previously issued gilts so the Treasury can more easily borrow money by selling new gilts; it would be utterly pointless for a skint Treasury to sell gilts to borrow existing money to lend on to the Bank to buy gilts.

        Reply: The refusal to equity account the APF is based on the fact that it is effectively a Treasury operation.

        1. Denis Cooper
          October 26, 2012

          Even if the APF is regarded as effectively a Treasury operation that doesn’t alter the fact that its purchases of gilts have been financed by massive loans from the Bank, not from the Treasury; and if the APF couldn’t repay the Bank from its own resources, eg because the gilts which form almost of all its assets had simply been declared void, then the Treasury would have to provide the money to repay the Bank or it would go bust.

          In his speech Mervyn King gave a milder version of the Bank going bust:

          “Giving money either to the government or to households directly, or indeed cancelling our holding of gilts, means that the Bank of England has no assets to sell when the time comes to tighten monetary policy. And when Bank Rate eventually starts to return to a more normal level, as one day it will, the Bank would then have no income, in the form of coupon payments on gilts, to cover the payments of interest on reserves at the Bank of England that we had created. The Bank would become insolvent unless it created even more money to finance those interest payments, and that would lead ultimately to uncontrolled inflation. That is a road down which the Bank will not go, and does not need to go.”

          The “reserves at the Bank of England that we had created” meaning the new money the Bank created to buy the gilts.

          Reply: I am not sure we are disagreeing fundamentally.

    2. Mark
      October 27, 2012

      If the money paid by the Treasury on redemption is not used by the Bank to buy more gilts, then it can be used to repay the BoE’s loan used by the BEAPFF to buy the gilts, and in turn to cancel the reserves created by the BoE to fund the loan. However, redemptions have to be funded either from taxation or from fresh borrowing. The BoE’s payday loan to the government (the amount of QE outstanding) can be reduced if the government funds more borrowing in the market instead.

      If redemption money is used to buy more gilts it suggests that the BoE never intend QE will be unwound. That is debasing the currency by simply electronically printing money to pay for deficit spending.

  25. stan francis
    October 25, 2012

    Is this Tory lot fit for purpose of governing when everything is futuristic-the WE are now out of the recesssion on based on two quarters created I may add can only be by public money being spent on the OLYMPICS with private firms that then give these figures?

  26. Denis Cooper
    October 25, 2012

    Mervyn King’s speech is here, for those who’d like to read it:


    It’s very interesting, but he’s being disingenuous in some respects.

    He says:

    “We are not doing it at the behest of the Government to help finance its spending.”

    You can believe that if you wish, and we may find out when they stop doing it.

    He also says that some seem to imagine he should:

    “stand on the steps of Threadneedle Street distributing ¬£50 notes”

    and adds:

    “a policy which you will appreciate is rather hard to reverse”.

    But the truth is that it would be hard to reverse if instead he filled a suitcase with newly printed £50 notes and took it along to the offices of the Reliable Insurance Company, and gave it to them in exchange for some of the gilts they owned.

    He could not reverse that either, except with their agreement that he could have his new money back if he sold them something of equal or preferably greater value.

    And the new money would be even more difficult to recall once the man at Reliable had taken a bundle of notes out of the suitcase and taken the rest along to the Treasury’s Debt Management Office to buy new gilts to replace those they sold to the Bank, and once those new ¬£50 notes had been used to help pay the goverment’s bills Mervyn King would have to go house to house across the country asking if people had any and if so he wanted them back because he was cancelling them, more or less as if he’d handed them out on the steps of the Bank.

    Whether it’s in printed form or electronic form, once the Bank has issued the new money and it’s been put into circulation there is no feasible or ethical way that any branch of the state can have it cancelled and it will remain as a liability on the Bank’s balance sheet, and therefore the counterbalancing assets, the gilts bought by the Bank using the new money, cannot simply be cancelled without bankrupting the Bank.

    The Treasury can gradually recover the extra money through taxation, and so pay back what is has indirectly borrowed from the Bank, but neither can arrange to have it cancalled while it is in circulation and out of the hands of the state.

  27. Robert Pay
    October 25, 2012

    I am not sure that policymakers care about savers. They have no skin in the game, normally enjoying largely unfunded pensions that are indexed against inflation. Gordon Brown disliked pension saving and that is why he slashed private sector returns by taxing dividends making retirement even less affordable for those not working in the Public Realm (of which he was monarch.) We were encouraged to spend, spend, spend, which the great British public was really good at, beaten only by the Balls/Brown gambling machine that ignored all the obvious warnings (as did Cameron and Osborne) that they had NOT abolished “boom and bust.”


  28. sm
    October 25, 2012

    When this latest round of QE expires, would you do any more?

    Not for the specific benefit of the banks directly but probably yes for the real private sector economy.

    1) QE to the public direct to paydown commercial debt, student loans, pensions or housing deposits.
    2) At same time signal and allow interest rates to rise.
    3) Remove NI and introduce £15kpa and bring in a flat tax at 30% or so (removing most other tax breaks).
    4)Cap public sector salaries and pensions, and remove indexation above £30k.
    5)QE loans for new entity competitor banks?

    Move to full reserve banking and removal of the rights of the banks to create state money.

  29. peter davies
    October 25, 2012

    I think more analysis and publicity should be given to the effects on QE. If we are storing up future problems by overdoing it, then it has to be curtailed.

    Listening to Ed Balls on the news today talking about the economy with his single focus on growth clearly shows he does not understand the full implications of overspending and QE. – May the Lord help us if they get back in, this lot are bad enough with their civil servants who have been educated in Brown’s wheimar economics

  30. Jon
    October 25, 2012

    The second point was part of the real reasons why final salary schemes in the private sector are history bar the sorting out. The press followed what the then government told them to print which was to blame the directors which was not true. It was government policies that made them unviable and a fictitious solvency risk to the company. Shame the media was on the side of the then government and not employees pensions.

  31. Julian
    October 25, 2012

    just an observation on inflation. It is likely that real inflation (i.e. what people actually experience) is around 8%.
    Recent price increases:
    Royal Mail 1st class post – 30% rise
    Gas – 9%
    Petrol – 3.76%
    Offset by some price falls:
    Council Tax in some areas
    Electronic goods
    Amazon downward pressure on retail prices. (Amazon = 35% of the 6% of retail which is online).

    1. Conrad Jones (Cheam)
      November 2, 2012


      I agree.

      Government’s have “modified” the way they calculate certain statistics. If they were to use the same method as they used in the 1970s, Inflation would be around 6% in the United States. When we consider that Savings Accounts pay around 3%, we are losing 3% of our savings each year – in real terms.

      Shadow American Statistics:

      As you say, some items are increasing in price where as, others are reducing in price.
      Unfortunately, the items which are increasing in price are the essential purchases, like; Travel Costs, Fuel, Food and Housing Costs. I believe Council Taxes have increased – certainly in my area.

  32. Antisthenes
    October 25, 2012

    “When this latest round of QE expires, would you do any more?”

    Unless you are left wing in your political persuasion, they are renown for continuing policies that patently do not work, the answer is of course no. The answer is to kick quasi-Keynes onto the the rubbish dump where it should never have been picked up from and go in for full blown Hayek. That would terrify the left, the control freaks and mostly everyone else but if it worked it would at a stroke solve nearly every economic and social problem under the sun.

    1. uanime5
      October 26, 2012

      Any evidence that Hayek’s policies of do nothing and hope the problem will fix itself has any chance of working? If not then there’s no point trying them.

  33. ikh
    October 25, 2012


    I agree with all that you have written but much of what you discuss are symptoms, not cause and effect. One thing I do agree is fundamental is low interest rates were completely the wrong decision. When the market collapsed in the Autumn of 2008 it created a dire shortage of money. This, should naturally have lead to high interest rates to attract lenders back into the market. The same is still true today. Interest rates are artificially low. Banks would rather pay down or write off loans and strengthen their balance sheets than lend. And savers have no incentive what so ever.

    Q.E. is simply attempting to deal with a symptom, not addressing the cause. The cause is very simple. Late in 2008, the Credit Derivatives market was worth over 66 Trillion US dollars. Most of this was ABS ( Asset Backed Securities ) This spigot / market has been completely turned off and no-one has turned it back on. This has turned off 100’s of billions in money supply growth per year. There is no doubt that the money supply growth for the 10 years from 1997 was responsible for the credit bubble. The U.K. money supply ( M4 ) quadrupled and the U.S. money supply tripled in the same period. The under regulation of the markets by governments was solely to blame for the credit bubble. We should have raised the reserve requirements for property. Instead, Governments cut the historic bank reserve requirements from around 15% to 4% under Basel II. This set the banks up for a domino failure. Currently we are probably looking at 30+ years to dig ourselves out of this mess using current policies.

    Given the very high quality mortgages that the banks are now issuing, it is a crying shame that they are not able to issue Mortgage Backed Securities to recycle money. Without going into the full technical detail, these securities need to be traded on an exchange with full reporting requirements that make their value totally transparent. One impediment is stamp duty. Currently Asset Backed Securities are set up as limited liability Companies. Trading their shares attracts stamp duty which is akin to a Tobin Tax on ABS / MBS.

    The current Conservative part of the Government correctly understands many of the problems and are not wedded to Keynesianism. Sadly, until you treat the causes of the problem and not the symptoms, you are not likely to make much progress.

    If you would like to discuss this further, then please contact me via my email address.



    1. Mark
      October 27, 2012

      The problem is not with new mortgages issued in relatively conservative fashion. It is with existing mortgages issued against bubble valuations. These have yet to be written down or paid down to safe levels of outstandings. Bubble valuations remain, constricting demand. MBS will only be a functioning market when the underlying house prices have fallen, and the quality of the mortgages is no longer in doubt. As you point out, there needs to be a far greater quality control on MBS. However, it is also the case that by cherry-picking the better mortgages to go into an ABS, the dross is left behind at the originating institution. That is exactly what happened to Northern Rock, whose best assets were supplied to the Granite entities.

  34. Conrad Jones (Cheam)
    November 1, 2012

    “Money was not being generated in the more normal way through a growing economy financed by credit creating commercial banks.”

    Isn’t it always like this in a recession?

    Our monetary system (where Bank Reserve Ratios have plumetted from 20.5% in 1968 down to 3.1% in 1998) . In actual fact, in 2012 – there is NO Reserve Ratio stipulated by the Bank of England as it is now voluntary.

    That’s right, the BoE doesn’t care what the Reserve Ratio of Private Banks are, and Private Banks don’t seem to care either as they can always get the BoE to create some new money specifically for their Reserve Accounts.

    So the statement saying that Mervyn King defends QE and at the same time, doesn’t hold out much hope of it improving matters is rather annoying as he knows that all it’s doing is preventing a total Collapse – all QE does it tie a rope around an Elephant that’s dangling over the edge of a Cliff. Untie the rope and the Elelephant goes over. QE is not going to pull the Economy out of recession – only total Reform of Banks, Money and Debt will do that.

    It’s about time Politicians and mainstream Economists woke up and did something, rather than putting bandaids on a gaping wound.

    Nearly every other week there’s a new scandal, another example of how Banks have shafted Small Businesses and suckered millions into paying well over the true value of a home. Complicated Derivative Products designed to baffle and had their true intent.

    When are we going to have a clear, straight forward economic system that benefits Tax Payers and not that City of London vipers nest of Scamsters.

    1. Conrad Jones (Cheam)
      November 1, 2012

      Labour bangs on about how the Conservative Government (and Liberals) aren’t solving the Economic Crisis, but tend to forget that in 1998, a few months after they came to power, the Reserve Ratios of Banks was dropped, theoretically allowing infinite growth of credit money creation.

      When the Credit Crisis hit, they acted so innocent as how could dropping the Reserve Raito Requirment have anything to do with a Credit Crisis ? They sold themselves out to the Banks and gave them what they wanted to get the support required to win the election of 1997.

      Their “Economic Miracle” was centred around Zero Reserve Requirements laying the ground for infinite growth of debt.


      Country 1968 1978 1988 1998
      United Kingdom 20.5 15.9 5.0 3.1 %

      1. Conrad Jones (Cheam)
        November 1, 2012

        Sorry, the Table of UK Bank Reserve Ratios should read as follows:

        1968: 20.5%

        1978: 15.9%

        1988: 5.0%

        1998: 3.1%

        The Reserve Ratio is inversely proportional to the percentage of Debt Based Money in the System.

        In the 1960s, it was about 20%

        Today: it is under 3% (roughly equal to the voluntary Reserve Ratio of Banks, which averages around 3.1%).

        When Government’s allow Banks to drop the Reserve Ratio, what they are really saying is:
        “We want more people to be in more debt, and we want them to save less”.

        That may not be the case but it certainly is the result.

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