Quantitative easing – what next?

Some times predicting is easy. You look at what happened when somewhere else tried something, and reckon the same will happen when your country does. With QE that may not be so easy. Japan has been trying QE for a long time. In their case inflation stays very low, output does not expand as quickly as they would like, so they just do some more. Japan has become the most heavily indebted of the advanced countries, as successive fiscal and monetary stimuli fail to inject inflation or supercharged growth into the economy. The government has racked up record levels of debt.

The high debt levels are less worrying than they seem for two reasons. The first is a lot of the debt the state owes to itself. Once issued, the Bank of Japan buy the debts back for the state with created money.  The second mitigation is the interest rates on the debt remain tiny, thanks to QE purchases of bonds designed to keep rates ultra low.
I suspect the US and UK are different from Japan. Both the US and UK economies are now growing more rapidly. There are signs of monetary growth without QE. Both economies have a past history of being prone to more inflation. The USA keeps talking about getting interest rates back to a more normal level.The UK has deferred any such plan, thanks to the collapse of commodity prices and the greater strength in sterling, limiting inflation for the time being.
The Fed and the Bank of England are rightly wary of moving too fast to raise rates and choking off recovery. They are also conscious that for the time being they are more likely to undershoot their inflation target and have to explain why, than to face an inflationary issue. The US recovery is more advanced and has been proceeding for longer than the UK one. The US commercial banks are now generating extra credit, and US money supply is now growing at 8% per annum. That should be pushing the Fed to earlier action on rates. It begins to feel as if the economy and the banks in the USA are more normal. 0.25% as a base rate is anything but normal. The UK will have the luxury of watching what happens when the USA does start to make her move to normalise. If, however, the UK had a change of government policy to increase spending and borrowing, the UK might find markets intervened and started to drive sterling lower which in turn would start to increase prices.

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88 Comments

  1. Lifelogic
    Posted April 28, 2015 at 5:56 am | Permalink

    Indeed in the UK a change of government policy to yet further increased spending, wasting and borrowing would probably would find markets intervened and started to drive sterling lower, which in turn would start to increase inflation.

    Miliband with his landlord thieving, tax increasing, market interventions and attacks on non-doms would be a complete disaster economically – even worse that wet, lefty, EUphile, greencrap, election loser & serial ratter Cameron has been.

    • fedupsoutherner
      Posted April 28, 2015 at 3:30 pm | Permalink

      Seen the latest madcap idea for renewable energy??

      http://www.dailymail.co.uk/debate/article-3041005/CHRISTOPHER-BOOKER-1-billion-lagoon-Britain-s-pottiest-green-scheme.html#comments

      When are we going to get responsible governing over our energy needs? I hope to God Davey gets the sack and we get someone with some degree of sanity in charge after the election. If we want to see more jobs going in energy intensive industries then this is the way to go.

      • Lifelogic
        Posted April 28, 2015 at 7:18 pm | Permalink

        Indeed for government inspired energy absurdities this “lagoon” insanity pushed new boundaries for pissing taxpayers money down the lagoon.

        • Ken Moore
          Posted April 30, 2015 at 4:53 pm | Permalink

          Nearly as potty as paying wealthy farmers generous feed in tariffs to cut down trees with petrol chainsaws, haul them to the farm, chop into logs, chip them with massive power sapping chippers , dry the chips using powerful electric fans then burn them.

          Then call this ‘sustainable energy’.

          This is what happens when you put a bunch of college kids in charge of important things.

          • Ken Moore
            Posted April 30, 2015 at 11:26 pm | Permalink

            Or shipping wood chips from Canada at huge expense, to fuel Drax power station when our domestic coal mines are being shut down..

            All because it has been discovered the climate is ‘changing’…just as it has been doing for millions of years.

  2. alan jutson
    Posted April 28, 2015 at 6:14 am | Permalink

    I take your point about Japan, but do remember that their populations is getting older (many pensioners, so less demand for goods) and as I understand it fewer are in work, so no surprise that productivity has slowed.

    Here we have imported huge numbers of extra people, many of working age so we have more growth, but not per person which has remained static, thus when they retire we may well be in the same situation as Japan, in the meantime we now find ourselves behind on the increased population cost of :
    Schools, housing, healthcare, hospitals, social benefits, pensions, roads, sewerage/water provision, power generation, which are all behind with investment and cost, once you factor in all of these costs, are we actually any better off.

    Time will tell, but you cannot import vast numbers of people forever to cover up a shortfall in productivity.

    Anyone who has been to the States will recognise that they are far more patriotic with regards to purchasing their own manufactured goods, rather than imports, could this be the reason why they are moving forward.

    • Narrow Shoulders
      Posted April 28, 2015 at 7:05 am | Permalink

      @Alan

      Quite so. Much is made of Japan’s lack of growth but due to its declining population output per capita is growing and it tops global per capita growth and productivity leagues (with France oddly enough, there is a lesson there about time management).

      Our government’s strategy of mass importing of capita to grow the economy harms our quality of life. I would not advocate the Japanese work/life balance nor its housing situation but their approach to maintaining Japanese standards of living is to be commended.

      • Narrow Shoulders
        Posted April 28, 2015 at 6:10 pm | Permalink

        Very insightful piece on Japan’s productivity and recovery in tonight’s Standard

        Standard.co.uk/hilton

        Reply How did property values fall by more than 100%?

        • Narrow Shoulders
          Posted April 28, 2015 at 9:43 pm | Permalink

          They obviously didn’t. They have fallen by a great margin and that does not mean Japan has not improved it’s productivity. Non existent immigration no growth but improved standard of living.

          The point is that you can use indicators and statistics to tell which ever story you wish.

    • Denis Cooper
      Posted April 28, 2015 at 9:18 am | Permalink

      “thus when they retire we may well be in the same situation as Japan”

      That is not the intention of the parties which support mass immigration, their idea is that we will still be importing millions of fresh young workers when the present lot have retired.

      Which in fact is what has been happening already; immigrants brought in during the 1950’s and 1960’s are now elderly and need to be looked after, so making their own contribution to the perceived need to import more young workers.

  3. Gary
    Posted April 28, 2015 at 6:21 am | Permalink

    Good luck with raising rates. It will crash the fragile zirp economy, crowded into an almost zero rate corner. Trapped. The capital of the economy destroyed by 30 years of falling rates.

    QE is a debt for equity swap, and Japan had a lot of equity 25 years ago. Now it has , along with the UK, the highest TOTAL debt to GDP in the world.

    Its like selling off the silverware to maintain appearances. Eventually you live as a squatter in your own house.

    there is no free lunch.

    • mickc
      Posted April 28, 2015 at 7:20 am | Permalink

      Quite so!

      Osborne has been a poor Chancellor. Instead of cutting capital expenditure and raising taxes, he should have slashed current expenditure AND slashed taxes. And I mean slashed, not just lowered.

      No doubt the Libs will be blamed for him not doing so, but Cameron should have had the courage to form a minority government. However Cameron and courage are not exactly on speaking terms!

    • Leslie Singleton
      Posted April 28, 2015 at 8:27 am | Permalink

      Gary–Shows how much I know but I should have thought that it is more like buying back the family silver (to get cash in to the Economy for people to spend) rather than selling it. I may be wrong given that John has not commented.

      • Mondeo Man
        Posted April 28, 2015 at 7:26 pm | Permalink

        Gary puts it well and is being literal.

        Brits becoming tenants in foreign owned London property is common.

        We are selling our housing stock. Students are selling their bodies to pay their fees.

        This is not selling the family silver (we’ve done that already.) This is selling the marrow from our bones.

        • Leslie Singleton
          Posted April 28, 2015 at 7:55 pm | Permalink

          Mondeo–Gary was describing QE

        • Edward2
          Posted April 28, 2015 at 8:06 pm | Permalink

          Have you ever considered Mr Mondeo, that foreigners living in many other countries are working for UK owned businesses and renting buildings owned by UK citizens.
          Its globalisation
          But its not just a one way street.

    • Denis Cooper
      Posted April 28, 2015 at 11:03 am | Permalink

      A debt for cash swap, insofar as (a wholly owned subsidiary of) the Bank of England ends up owning debt, gilts, issued by the Treasury, at present to a total value of £375 billion, and in exchange the Treasury gets cash created by the Bank of England (and lent to its subsidiary), which was £375 billion minus minor transmission losses, all of which it has spent, that is to say used it to help fund the government’s annual budget deficits.

  4. Andyvan
    Posted April 28, 2015 at 6:37 am | Permalink

    Quantative easing (money printing to be more accurate) is an attempt by government to remove money from the present and future productive sectors of the economy, filter it through the most inefficient and corrupt mechanism in history (government and banks), spend it on dubious and counterproductive schemes then expect that to produce real economic growth. An exercise in foolishness.

    • Lifelogic
      Posted April 28, 2015 at 8:29 am | Permalink

      Yes, that is pretty much spot on.

    • Leslie Singleton
      Posted April 28, 2015 at 8:35 am | Permalink

      Andy–As I say above by my understanding what is happening is the opposite of “removing money”. It is very easy to make QE look terribly complex but I reckon it is simple, viz non government cannot spend bonds so government creates cash and buys such bonds thus injecting cash which can of course then be spent.

      • Denis Cooper
        Posted April 28, 2015 at 11:20 am | Permalink

        People who are due payments from the government usually expect them to be made in money, the normal familiar money which is current in this country. For example, imagine how state pensioners would react if they were told that the government was running out of money and so for the time being only a part of their pensions would be paid in the usual money issued by the Bank of England, which the shops and others will always accept in payment for goods and services, and the rest of their pensions would be paid in some other completely unfamiliar form of IOU, one issued by the Treasury rather than by the Bank of England, which at least initially would not be widely accepted in payment for goods and services. What is this gilt thing they’ve sent me, what am I supposed to do with this, how am I going to pay for our food with this if the supermarkets are saying that they won’t accept them, what the hell is going on?

    • Lifelogic
      Posted April 28, 2015 at 9:27 am | Permalink

      Yes that is about right.

    • Gary
      Posted April 28, 2015 at 10:26 am | Permalink

      @andyvan, a more succinct defn of QE , I have yet to see.

  5. Antisthenes
    Posted April 28, 2015 at 6:50 am | Permalink

    If you asked Labour and SNP voters what do they think of communism and no doubt most of them would answer that they dislike it. As both these parties are basically socialist and communism is the end result of socialism why on earth do they vote for them.

    RedEd is offering socialist policies that require higher taxes, spending and state controls on many markets which is bad enough but with the SNP propping them up they will have to move even further left and bring in state ownership of a lot of production and services.

    Another step toward a communist state with all it’s attendant horrors of shortages, impoverishment and authoritarianism. As wealth and talent either flee the country or is suppressed will they turn to QE as they quickly run out of other peoples money to pay for their inept ideology dreams. They may do so but it will be of little use as they will have destroyed much of the wealth creation base of the nation.

    • outsider
      Posted April 28, 2015 at 1:16 pm | Permalink

      Dear Antisthenes, One of the horror stories about Soviet Communism that used to be peddled was how children were removed from their parents each day from a young age to be ecucated and indoctrinated in state nurseries while both their parents worked long hours in factories or fields. Ring any bells?

      • Antisthenes
        Posted April 28, 2015 at 3:26 pm | Permalink

        I have not heard any stories like that so that is not what I am alluding to when I talk about the horror stories of communism. What I am pointing out is that the vast catalogue of evidence we have that tells us that socialism in the long run leads to economic and social deprivation.

      • Max Dunbar
        Posted April 28, 2015 at 5:45 pm | Permalink

        The SNP have a similar idea where every child in Scotland will be allocated a state guardian. This may become law quite soon.

    • Mitchel
      Posted April 28, 2015 at 3:48 pm | Permalink

      Where will the wealth and talent flee?Much of the West is pursuing broadly similar socialist (or a mixture of corporatist-socialist) policies.The lesson of the Soviet failure was learned – you have to introduce it a)gradually,so the people will not notice or at least not try to resist until too late and b)it needs to be done in concert,the socialism in one country,in isolation is doomed to failure,so you have the innocuously sounding International Community with its transnational organizations and NGOs.

      So where do you fancy fleeing…China or Russia ,the Islamic world,possibly parts of Latin America?these are the only countries actively resisting.

  6. Narrow Shoulders
    Posted April 28, 2015 at 7:10 am | Permalink

    I struggle to comprehend why, after the opportunities for reform offered by the events of the last few years, money creation is still in the hands of banks.

    Banks create money through debt upon which they demand interest for profit. Surely some mistake.

    Sovereign money is the way forward. Www positivemoney.org

  7. GTE
    Posted April 28, 2015 at 8:44 am | Permalink

    The question of debt owed to oneself is interesting.

    Pensions are debts the UK owes the UK. However, its not an irrelevance. You can’t pay yourself interest so get an income in retirement.

    So with 9,200 bn owed by the UK state for pensions, they aren’t going to be paid.

    The consequences of that is dire, which is why politicians deny the debt exists. They don’t want you to know so they can continue to milk you.

    It’s a fraud. Look at Mr Median.

    Mr Median’s NI contributions come to £2,225.28 + £2,559.07 = £4,784.35 a year

    Over 47 years that is £224,864.45 in value paid in

    He gets back £113.10 a week for an average of 18 years.

    That’s £105,861.6 in value back.

    He’s ripped off. Even on min wage you’re ripped off by the state.

    So we have to face up with what to do with 10 million people in dire destitution because MPs have defrauded them.

    Reply There are two levels of owing yourself. In the case of one branch of the state owning a bond and another branch of the state owing the money on that bond there is clearly no problem, as the state could simply cancel the bond – this is the position of all the government bonds the Bank of Japan or the Bank of England own.
    In the case of pension liabilities not backed by assets under a pay as you go scheme it’s fine as long as future generations of voters and MPs take the same view as past generations and keep collecting taxes to pay the pensions. It becomes more difficult if the ratio of taxpayers to pension recipients changes adversely, with an older population.

    • CdBrux
      Posted April 28, 2015 at 9:53 am | Permalink

      “In the case of one branch of the state owning a bond and another branch of the state owing the money on that bond there is clearly no problem, as the state could simply cancel the bond – this is the position of all the government bonds the Bank of Japan or the Bank of England own”

      Apologies for a niave question, if they can cancel their own debt, why don’t they?
      I can’t help feeling that governments printing money to pay off their own debt must come back to bite elsewhere at some point

      Reply Done to excess or in the wrong conditions it leads directly to inflation.

      • CdBrux
        Posted April 28, 2015 at 3:05 pm | Permalink

        Thankyou

      • Kenneth R Moore
        Posted April 29, 2015 at 9:45 pm | Permalink

        Reply Done to excess or in the wrong conditions it leads directly to inflation.

        The trouble is QE on this scale has never been tried before it’s an experiment – nobody knows the final outcome.

        We don’t know the timescale on when the inflation will occur or how high it could be – will QE have a tapering effect on inflation or come in dangerously at a threshold level of QE when confidence in the system collapses ?.

        – all we know is that QE helps the politicians engineer ‘growth’ which is good for staying in office. But is it good for the economy in the long term – the two things have been shown to be quite different.

    • Handbags
      Posted April 28, 2015 at 12:01 pm | Permalink

      ‘Over 47 years that is £224,864.45 in value paid in’ – no, that’s not right.

      It’s not a savings plan – you don’t pay in – the money you pay goes to today’s pensioners and when you reach pension age the workers at that time pay for you.

      There is no pot of money – your contributions are spent immediately.

      It’s how the Labour Party bought the election just after WWII – the first pensioners didn’t pay anything and effectively got a pension for nothing.

      As John says it’s ‘pay as you go’ – and as long as future generations continue to pay then you’ll get your pension.

      • Denis Cooper
        Posted April 28, 2015 at 12:41 pm | Permalink

        It was started in 1909 by Lloyd George with Beveridge advising him.

        • Handbags
          Posted April 30, 2015 at 1:30 pm | Permalink

          Thanks Denis.

          It’s amazing how, over a period of time, pensions, benefits and the NHS tend to be lumped together and thought of as one entity.

      • Gary
        Posted April 28, 2015 at 5:16 pm | Permalink

        that’s the definition of a ponzi scheme. New entrants pay for existing members. You need a constantly increasing stream of new entrants. Some say that’s exactly what the govt’s immigration policy is. They know it’s a ponzi scheme, they just cannot admit it.

    • Denis Cooper
      Posted April 28, 2015 at 12:38 pm | Permalink

      But in his first letter to authorise the creation of the APF Darling gave the APF and the Bank an indemnity against any losses which might arise, possibly at the request of the Governor who wanted to protect the position of the Bank.

      While that indemnity is still in place there is no point in asking the Bank to agree to the cancellation of the £375 billion of gilts owned by the APF, because then the Treasury would have stump up £375 billion to compensate for the losses.

      Of course in theory Parliament could pass an Act to remove that indemnity and allow the Bank to operate with massively negative net assets, or simply to decree that the Bank’s balance sheet shall be adjusted to arbitrarily wipe out the losses and show positive net assets.

      But is that really how we should proceed? And what would the rest of the world think about us adopting that kind of accounting practice?

      Reply The state has an asset of £375 bn and a liability of £375 bn so it can cancel it internally. What is likely to happen once interest rates have been raised a little is for the Bank to accept repayment of gilts maturing, and not reinvest the money.

      • Denis Cooper
        Posted April 28, 2015 at 6:07 pm | Permalink

        One arm of the state, the Bank, has an asset of £375 billion in the form of the gilts it owns but balanced by a liability in the form of the £375 billion of new money that it issued to buy the gilts. Another arm of the state, the government and in particular the Treasury, has a liability of £375 billion in the form of the gilts that it issued which are now owned by the Bank. It no longer has the £375 billion of money that it got in exchange for the gilts, because it spent every last penny paying the government’s bills and so that £375 billion of money is now in the possession of numerous individuals and organisations not just in this country but around the world. There is no feasible or ethical way that the Bank can cancel the money to free itself from that liability, and therefore it cannot agree to the Treasury cancelling the gilts that it owns; instead the Treasury will have to gather that money back in so that it can repay the Bank, as you say most likely as each of the gilts matures. In any case, if the Treasury did default on its debt to the Bank it would also have to default on the indemnity that it gave to the Bank, an indemnity against losses which was reaffirmed by Osborne in November 2012, as mentioned in a comment below.

    • Narrow Shoulders
      Posted April 28, 2015 at 1:01 pm | Permalink

      Ladies and gentlemen I give you the workplace pension scheme. An additional tax of up to 4% plus employers contributions where the individual does pay in.

      For later generations HM Govt will declare that the state pension is no longer needed.

    • A different Simon
      Posted April 28, 2015 at 1:49 pm | Permalink

      GTE ,

      The main insurance functions provided by the state are insurance against outliving your savings (state pension) , medical insurance (the NHS) .

      When talking about N.I. , why do you focus on the state pension and ignore the NHS ?

      N.I. has been sold to the public as an insurance policy and it is implicit that a universal state primary pension is part of the contract . I expect the Govt to welch on this .

      Far from being short changed , N.I. would be the deal of the century if it really did cover both the state pension and NHS but in aggregate it does not .

    • Mondeo Man
      Posted April 28, 2015 at 7:31 pm | Permalink

      GTE – They’ve already started calling the state pension a ‘benefit’.

      We can all see where this is going.

      ‘Hard working families’ are going to get fleeced.

    • a-tracy
      Posted April 29, 2015 at 12:06 pm | Permalink

      GTE Only one problem with this NI wasn’t just for the state pension, it was taken for healthcare, one more % for healthcare. There was also an element of unemployment benefit which I heard was only supposed to cover a period of six months out of work benefits.
      Politicians have been trying to say its just a universal tax so they can uncouple it at some point in the future so that they means test it, remove it altogether by making sure most people are dead before they can claim their state pension, however, it was supposed to be an insurance policy and we’ve been tricked because its a time bomb and monies going to run out just at a time when our children will be deciding the laws and repayments and they won’t be sympathetic as they already know they’re getting nothing.

  8. Denis Cooper
    Posted April 28, 2015 at 9:26 am | Permalink

    One thing we can predict from precedent: if the next UK government wants to do more QE then our elected MPs will have no say over that, and nor will they want to have any say over it, apparently all being content to allow the Chancellor to make the decision on each new tranche of QE without any debate let alone a vote. There will be no drafts of his letters of authorisation placed before Parliament for prior debate and decision by MPs, whoever is Chancellor will just send the letters to the Governor of the Bank of England and then tell MPs that he has done that, purely for their information.

    Reply May be,. may be not. The important thing is that Parliament can question, debate and vote on it if it wishes to do so.

    • Denis Cooper
      Posted April 28, 2015 at 12:25 pm | Permalink

      But the precedent that MPs will not do that has been set under two governments involving all three of the old parties, so I will stand by my prediction.

    • acorn
      Posted April 28, 2015 at 2:06 pm | Permalink

      The MPC does not need further permissions to enact more QE. “The MPC stands ready to undertake further asset purchases if it judges that additional monetary stimulus is warranted.” http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/q115.pdf

      Denis, note that the Bank has been reluctant to buy commercial paper or corporate bonds and requires the Treasury to finance those purchases. The Treasury would have to indemnify the Bank against loss if it does other than swap Treasury Gilts for the original “reserves” that the Treasury spent (issued) into existence; that were used by the private sector, to buy the Gilts in the first instance.

      Reply The Bank would not enter a new QE programme unless it knew it had the government’s support. Government in turn would need to be sure it had Parliament’s support.

  9. rick hamilton
    Posted April 28, 2015 at 9:28 am | Permalink

    I am no specialist in government finance but do feel uneasy when huge amounts of money are created from nothing with no corresponding increase in real assets. Surely it must eventually lead to massive inflation or debasement of the currency, which is no doubt the underlying purpose because the only way to get rid of the 1.5 trillion debt is to inflate it away.

    Abenomics has doubled the money supply in Japan and some of it has been used by government to buy equities in the Tokyo stock market, thereby pushing up share prices and creating the illusion among private investors that they are better off. It does sound like a massive piece of self-delusion.

    On the other hand Japan has an extraordinarily productive economy, manufacturing some of the most high-tech equipment in the world and exporting it globally. For example the Maglev train just demonstrated a record speed of 600kph and will be in service by 2027. By that time the UK (where the linear motor was invented) may have an already outdated HS2 running, or not.

    Form a commonsense point of view it seems highly likely that a country like Japan will be able to produce and grow itself out of debt over a long period based on the knowledge by all citizens that they have to make things to survive. Not only are there no serious natural resources, but the country has to pay for natural disasters in a way the UK never has.

    Do British citizens have any idea what we have to do to survive?
    Compare and contrast.

    Reply Countries get away with printing money for public spending only when the commercial banks are crippled or unable to lend money on to the private sector, thus keeping the money supply and inflation in check. In Japan money growth is only around 3% per annum despite the huge QE programme, as the commercial banks are becoming ever more cautious and prudent.

  10. Kenneth
    Posted April 28, 2015 at 10:03 am | Permalink

    A Labour victory will usher in the usual high spending, low productivity, high-unemployment economy

    QE is a new toy that Labour can play with as an alternative to an IMF bailout or even longer dole queues.

    They can perhaps destroy a few less lives by throwing less out of work if they have the alternative option of destroying people’s savings using QE.

    I usually give politicians the benefit of the doubt when things go wrong by assuming they meant well.

    However, if they win the election and once again destroy jobs and savings as they always do (every time they have been in power), and then I am inclined to accuse them of wilfully doing so whilst ignoring the lessons of history.

    Here is an example: the Labour party pledge to cap home rents to inflation: they must surely know that right now landlords will be watching the polls and, if Labour take the lead, they will inevitably raise rents by well above inflation order to mitigate the effects of this policy. Other landlords will take their homes off of the rental market, reducing supply.

    If Labour are aware that this must happen – and they surely must be – that is cruel and callous.

    • Max Dunbar
      Posted April 28, 2015 at 11:51 am | Permalink

      Landlords may raise rents in advance but this will not help them as tenants will be able to appeal against these rents and ‘fair rents’ will be imposed by Rent Control Officers as before. As housing is such a hot political issue and excites so much emotive discussion, landlords or those aspiring to become property owners in the domestic rental market need to be aware of the pitfalls.

      • Mondeo Man
        Posted April 28, 2015 at 7:36 pm | Permalink

        Why are there tax advantages to being a landlord and not a homeowner ?

        For that matter why is the cost of commuting not subject to tax rebates ?

  11. agricola
    Posted April 28, 2015 at 10:11 am | Permalink

    In the case of Japan their only asset is their native wit. QE does not solve the underlying challenge that she needs to produce goods that the rest of the World wishes to buy. She has been very good at this, but to stay ahead of the game she needs to constantly innovate with new desirable product. No amount of financial slight of hand will resolve the problem long term. I would submit that this is just as relevant in the UK, except that we are encumbered by EU membership in an EU determined to self destruct.

    Pension liabilities, as pointed out by GTE, exist in the UK because of a basic conceptual fault in the way they are run on a rob Peter to pay Paul basis. The Tax / NI collected should have gone into an investment fund which through good management and growth would meet the pension liabilities.

    Politicians do not do long term thinking, preferring the quick fix. Investment to a politician is a word they have bastardised to legitimize spending, HS2 being a classic example. Contrary to the wisdom shown in Norway, our political dinosaurs spent all the gain from North Sea Oil for short term effect. The quality of political management has been abysmal in the UK. If the Civil Service are there to inject wisdom into the process they have been equally ineffective. Sadly there is little prospect of improvement whoever gets back in May.

  12. Roy Grainger
    Posted April 28, 2015 at 10:33 am | Permalink

    I see Mr Cameron has said today we have 7 days left to save the union, as if any of us cared about that. Another example of him being hopelessly out of tune with English voters.

    • agricola
      Posted April 28, 2015 at 2:12 pm | Permalink

      He has already sold the sovereignty of the Union to the unelected of Brussels. If by chance he does get back he won’t be making any serious effort to get it back. I personally find the deceit over Europe appalling. it is the biggest question to face us and the electorate get the mushroom treatment.

  13. Iain Gill
    Posted April 28, 2015 at 12:12 pm | Permalink

    Whats next? A few years of an even more command and control economy with ever more sectors of society under state control, and the citizens served up “take it or leave it” fashion as so far popularised under healthcare, social housing, and so much more. Vast numbers of our brightest leave for other shores where they can actually afford houses. And we get ever more swamped with out of control immigration. Eventually the ability of the state to borrow money evaporates and then a few pigeons come home to roost.

  14. ian
    Posted April 28, 2015 at 12:16 pm | Permalink

    Only 0.3 per cent growth last three months more borrowing and QE on the way.
    blame it on the weather.

  15. Brian Tomkinson
    Posted April 28, 2015 at 12:37 pm | Permalink

    QE again, that makes twice in two days. Are you trying to tell us something – that we should expect more QE?

    Reply No,I am not expecting more UK QE, but the ECB / BoJ QE programmes are the most significant economic events going on at the moment. I aim quite often to talk about the important things the media are not discussing.

    • agricola
      Posted April 28, 2015 at 2:20 pm | Permalink

      Reply to Reply

      You are possibly one of a small number who fully understands QE. Must be like understanding all the tricks in the Magic Circle. I would contend that the deliberate deception over our sovereignty as a nation far outweighs the slight of hand at numbers 10 and 11. Who is prepared to expose this deceit before time runs out on us.

      • Denis Cooper
        Posted April 28, 2015 at 3:39 pm | Permalink

        Well, the two are closely linked, because although the UK has not joined the euro it is not exempt from Article 123 of the Treaty on the Functioning of the European Union, which came through from the Maastricht Treaty on European Union. That runs:

        “Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

        So as one of the “central banks of the Member States”, the Bank of England is not permitted to extend “overdraft facilities or any other type of credit facility” to the UK government, one of the “central governments”, and nor is it permitted to “purchase directly” any “debt instruments” from the UK government.

        Hence the need to proceed indirectly, setting up a “money-go-round” with the Bank creating new money and using to buy up previously issued gilts from investors, while in parallel the Treasury sells new gilts to much the same set of investors and often at much the same rate.

        • acorn
          Posted April 29, 2015 at 10:00 am | Permalink

          If the Treasury stopped issuing Gilts from the DMO and NS&I, that would solve your “money-go-round” dilemma Denis. Why should the Treasury give away free money to people and pension funds, just for buying one of its IOUs? The BoE could easily introduce its own IOUs to drain or replenish “reserves” from its own customers current accounts.

          Government (Treasury) spending has no direct relationship with the actions of the “money-go-round”, the debt management office; national loans fund; consolidated fund or the bank of England in general.

          The debt management office maintains the reserve balances in the Treasury accounts in a “no overdraft” condition, because of the self-imposed, old Gold Standard legacy politicians groupthink; now EU-wide.

          If the Treasury decides to spend, then the cheque clears. Government cheques don’t bounce because there is nobody with the authority to bounce them. The Treasury spends “reserves” which is not money as you understand it. The commercial banks keep the reserves (an asset)and give its customers an identical value “deposit” (a liability for the bank) in their accounts. It could be a state pension payment for instance.

          • Denis Cooper
            Posted April 29, 2015 at 3:13 pm | Permalink

            If/when JR publishes my informative reply to your previous comment I may reply similarly to this comment.

    • Denis Cooper
      Posted April 28, 2015 at 3:21 pm | Permalink

      I wouldn’t be surprised if there was some more QE in the UK.

    • acorn
      Posted April 28, 2015 at 6:30 pm | Permalink

      Now that the BoE is paying interest on Reserves, it really doesn’t make a lot of difference.

      Those that actually understand what QE is meant to do and how it tries to do it, will know that the re-creation of the original reserves in Commercial Banks current accounts at the BoE, forces LIBOR rates to zero. The BoE can’t use its current large stock of Treasury Bonds to drain the excess reserves from the overnight market, to maintain its policy interest rate. That would defeat the object of QE. So, it pays interest on those reserves at 0.5%, the Bank Rate.

      Like JR, I can’t see a reason for more QE, it has proved to be a very ineffective way to increase aggregate spending in the economy; BUT, it disconnects politicians from the real problem and gives them a Quango to blame (the MPC in this case), if it goes wrong.

      Fiscal policy is a far more powerful tool than monetary policy but fiscal policy is directly attributable to politicians. Fiscal austerity, Conservative neo-liberal style, negates anyway monetary policy QE, lock stock and two smoking barrels. Which is what Japan is currently doing.

      The only problem Japan has is its households save far too much money. They average about 18 – 20% of disposable income (UK about 5%). They own most of the Japan governments’ Bonds. In the periods when the Bonds pay the coupon, their savings can hit 40%. Poor old Abe never gets his spending (227% Debt/GDP) back because the private sector keeps saving it, doesn’t spend it, so Abe can’t tax it and write it off his scoreboard of annual net spends (deficits).

      Currently, the budget deficit is about 7% and it has a trade surplus of about 1%. That’s 8% the private sector households and firms are squirreling away for their old age! And, it has foreign currency reserves ten times the size of the UKs.

      • petermartin2001
        Posted April 28, 2015 at 8:42 pm | Permalink

        “The only problem Japan has is its households save far too much money.”

        Yes, that exactly the problem. Except it may not really be a problem once we understand what’s happening.

        According to the conventional economic view, a view that JR seems to subscribes to, debt is the sole responsibility of the borrower. JR talks about:

        ” The government has racked up record levels of debt.”

        But, is that true? Anyone buying a gilt from the UK government or a t-bill from the US government, or a bund from the German government is forcing those governments to take on debt. Is that the same thing as ‘racking up’?

        If the UK government ‘racks up’ debt it is largely because the big exporters buy up UK gilts rather than spend that money on UK made goods and services. If they want to do that, why not let them?

        Is there really a problem? If there is it’s with conventional economic thinking!

      • rick hamilton
        Posted April 29, 2015 at 4:00 am | Permalink

        Japanese savers wouldn’t call it squirreling away, but being prudent. Without a cradle to grave welfare system and with an efficient but not entirely free national health service, people do save up for their old age and would be insane to spend all their savings to help Mr Abe. Also the very old can remember losing everything in WW2 and do not trust any government.

        • Mitchel
          Posted April 29, 2015 at 9:24 am | Permalink

          ….also the reason why privately owned gold holdings are still quite high in countries like Italy.

    • Brian Tomkinson
      Posted April 28, 2015 at 7:36 pm | Permalink

      Reply to reply,
      What is your view about this scary article in the Telegraph today by Jeremy Warner under the headline: “Negative interest rates put world on course for biggest mass default in history.”
      “More than £2 trillion-worth of eurozone government bonds trade on a negative interest rate. It’s a bubble that is bound to end badly.”

  16. outsider
    Posted April 28, 2015 at 12:48 pm | Permalink

    Dear Mr Redwood, Your analysis is absolutely right, except that it is a mistake for the UK to follow American economic policy. The Fed’s policies have been based on modern macroeconomic theories that really only apply to that great country, in particular the assumption that there is an underlying, natural, fairly constant long-term growth rate in incomes per head brought about by “technical progress” in its broadest sense. These theories may eventually come to apply in other very large sub-continential countries such as China and India and just possibly in an integrated eurozone.
    The UK is now more like a big company operating in competitive European and global markets. Growth in living standards cannot be taken for granted but has to be earned by constant common effort and focus. None of the UK parties seem much concerned.
    We have recovered relatively well from the cyclical recession, maybe in part thanks to emergency interest rates and QE, to having our own currency and to the success in financial markets of Mr Osborne’s austerity propaganda.
    But the country’s economic base, including the City, has suffered such a damaging decline in recent years that our long-term prospects look poor. Does anyone care?

    • Mitchel
      Posted April 29, 2015 at 9:30 am | Permalink

      I think lots of people care…they just don’t know what to do about it.A re-set may be coming in which a new order will rise based on physical resources and production rather than financialisation.This could see people in the west,who currently consider themselves comfortable by reference to the value of their financial assets ruined as these turn to dust.

      • Kenneth R Moore
        Posted April 30, 2015 at 9:20 am | Permalink

        Indeed

  17. Denis Cooper
    Posted April 28, 2015 at 12:50 pm | Permalink

    Off-topic, I’m not that keen on the son of Malcolm Rifkind but I have to admit that he produced a superb summary of what has been going on about Scotland:

    http://www.spectator.co.uk/columnists/hugo-rifkind/9472772/the-real-threat-to-britain-and-its-not-the-snp/

    “So this is where we are. We have Labour being called Tories in Scotland, and the SNP being called Labour in England. We have Tories abandoning unionism for their own self-interest (while pretending they haven’t) and Labour cleaving to it for theirs (while pretending they aren’t). We have the SNP casting coy, come-hither looks at a coalition with Labour, even though they wouldn’t enter one and wouldn’t even be asked to, and are secretly on the same page as the Conservatives anyway. Although not the Scottish Conservatives, who are on another page altogether.”

  18. Jeffery
    Posted April 28, 2015 at 1:13 pm | Permalink

    It may be quite difficult to draw substantial conclusions from the ‘normalisation’ of monetary conditions in the US. The issues are different. The Fed holds pro rata much less government debt than the Bank of England. Normalisation there will presumably involve the eventual disposition of Freddie Mac and its (mortgage-backed) securities, $2trillion of which are owned by the Fed.

    It’s not clear, but the Fed (NY) does seem to be trying out selling their Treasury securities in a very big way, on a ‘revolving door’ basis (reverse repo). It has led to some hilarious internet conspiracy theories!

  19. Bill
    Posted April 28, 2015 at 1:43 pm | Permalink

    I for one care about the Union. If we lose Scotland and remain in the EU, we end up as one of the minor players – a sort of glorified Belgium. How far will the mighty have fallen!

    If we keep the Union, our bargaining position with the EU is better and our chances of being a super-Switzerland outside the EU increase.

    I agree that QE can be ‘weaponised’ to use Miliband’s term against the middle class. Savings drop in value.

    • Max Dunbar
      Posted April 28, 2015 at 2:14 pm | Permalink

      Couldn’t agree more Bill.
      That is the big picture which those who cannot see beyond the end of their noses either in Scotland or England can comprehend.
      We also need to be capable of defending ourselves. If England abandons Scotland and the Scots then not only is she disproportionately diminished on the international stage, she has a potentially dangerous enemy on her northern border at her back.

  20. Denis Cooper
    Posted April 28, 2015 at 3:19 pm | Permalink

    As an aside I see that Puerto Rico is being called the “US’s Greece”:

    http://www.marketwatch.com/story/puerto-rico-hurtles-toward-default-2015-04-27

    Same kind of problem, the government and other public bodies have accumulated too much debt, the government has cut its spending and raised taxes but it is still running out of money to pay its bills, and unfortunately unlike the UK government it cannot induce a central bank to magic up some more money to lend to it.

    • petermartin2001
      Posted April 29, 2015 at 5:55 am | Permalink

      Denis,

      Yep that’s the problem. Even if it raises taxes and cuts spending, money is still going to flow out of the Puerto Rican economy unless it net exports to the USA and other countries. That’s the key.

      If it can’t do that, Puerto Rico ought to assert its full independence and use its own floating currency, or should insist on becoming a State of the Union like all the other US states.

  21. ian
    Posted April 28, 2015 at 3:48 pm | Permalink

    Japans retail sale down 10% last month from a year ago, When they start QE it never go away because spend and bribe to keep their party in power, so who gets in they will use QE and spend to stay in power, immigration will all ways go up to pay for pension and expand GDP, as for house building, one they have no bricks, no sand, no cement and so on and nobody want to put the infrastructure back in that shut down in 2008 because it cost lot of money to run and nobody know now long it will last, so it case of ones we have now expanding a little bit each year, it might take another 4 year to get up to 200,000 houses.

    The lie are in full swing, a bribe a day keeps the doctor away, the biggest bribe ever in this election, you see with QE they think they can move mountains, they live in hope, once you are at zero you tend to stay at zero. Once your mortgage is at zero you budget for zero.

  22. turbo terrier
    Posted April 28, 2015 at 4:18 pm | Permalink

    Well if you really want confirmation about the windfarm scam being totally out of control and the real cost and waste just follow this link.

    http://www.pressreader.com/uk/scottish-daily-mail/20150427/281479274962194/TextView

    Who is going to pay for all the subsidies especially when Scotland go it alone?

    John if we get the people into Westminster this has got to be the easiest tax of the lot. Very hard to hide them when they are up. This has all been done on the premise that the Scottish parliament had full control of energy.

    God help us all when they start at Westminster after the election.

  23. ian
    Posted April 28, 2015 at 4:41 pm | Permalink

    If you look at the usa economy and are economy they almost the same in structure with debt and employment and other things, usa home ownership back to 1990 the same as hear and still going back each year.

  24. turbo terrier
    Posted April 28, 2015 at 4:50 pm | Permalink

    You ask what is next.

    Well you have heard of Stalinism, Thatcherism well you are about to be present at the birth of Sturgeonism.

    Cannot believe how the good old beeb are playing their Scottish card. Totally outrageous. Talk about hail the new emperor.

    • Mondeo Man
      Posted April 28, 2015 at 7:39 pm | Permalink

      A boon for the Tories, TT.

      As has been the treatment of Farage.

  25. ian
    Posted April 28, 2015 at 9:28 pm | Permalink

    What next 0% interest rates so you can borrow more for hole you have dig over the last 5 years so you can afford the interest payments, at 1.5 trillion and going up for the next 5 years with PFI. you are paying interest 34 billion pounds a year now, you were paying 50 billion pounds but as bond couponed price went down, say like 10 year bond 2.6% to 1.7% today but as you borrow more it could go back up to 2.6% and will owe more money and the interest bill could go to 65 billion in interest a year, nothing but spending going back to 650 billion a year will do, the worst thing you can do when making a budget is to put growth forecast into it, growth money should always be spend on one off trim so if growth go away the next year you do not need the money but you will never do it because you are politicians in parties buying votes with people own money. the best thing to do is to go bankrupt. It has to happen anyway because politician will make it happen.

  26. petermartin2001
    Posted April 28, 2015 at 10:33 pm | Permalink

    QE is no big deal. That’s not a common view, I’ll agree, but from a scientific perspective, there seems to be no reason why the issue of government , or the BoE if you prefer, IOUs in the form of cash should be any more or less inflationary to the economic system than the issue of IOUs in the form of gilts (treasury bonds). If it’s necessary to buy back gilts from the private sector to control longer term interest rates then that’s what needs to happen.

    In a democratic society I would argue that decisions regarding interest rates, both long and short term, should be made by the elected government. They used to be. However, for nearly 20 years, short term rates have been set by the BoE. Short term rates are important and they can be adjusted to stimulate a slowing economy or slow an overstimulated economy. But there are other adjustments that can be made too.

    Just as a pilot has all the control levers at his disposal when he’s flying a plane (if he does hand over to the co-pilot it would be all the controls not just one) then all the controls need to be either in the hands of government or the hands of the central bank.

    So why not give control of the fiscal deficit to the BoE too? The BoE could calculate the best combination of fiscal and monetary policy, including whatever level of QE is needed, and tell the government what it needs to do. Arguably the government could decide to raise income tax a bit or reduce VAT a bit , etc, but it wouldn’t have complete control as it now does.

    That’s not my favoured option BTW. But, if the pilot is going to hand over the (macroeconomic) controls to his or her co-pilot it should be all the controls and not just one.

    Reply You never understand the workings of the private sector and the commercial banks. The reason states do not normally finance themselves by issuing bank notes rather than bonds is that cash can be lent on many times over by credit creating commercial banks, which is usually inflationary when done to excess. QE has only be possible because the commercial banks and private sector loan demand have been weak.

    • petermartin2001
      Posted April 29, 2015 at 8:58 am | Permalink

      cash can be lent on many times over by credit creating commercial banks

      This is the multiplier theory, if I understand you correctly. Yet in a recent paper by Michael McLeay, Amar Radia and Ryland Thomas “Money creation in the modern
      economy” the Bank of England now say that banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.

      They simply create it out of nothing as asset/liability pairs, using the strength of their financial resources to guarantee that money and ensure that it is generally accepted. So I can’t see how it would make any difference if those resources were held as bonds or as BoE issued cash held in their reserve accounts.

      Reply The cash gets deposited with the commercial banks, the gilts are not deposited with them

      • petermartin2001
        Posted April 29, 2015 at 11:02 am | Permalink

        It would be good to have the opportunity to have a proper discussion about this sometime but, if not, another possibility would be Prof Steve Keen who lives closer to you. He’s also head of the School of Economics, History and Politics at Kingston University in London, so he’s somewhat better qualified than I am.

        His criticism of mainstream economics is on the basis that it is inconsistent, unscientific and empirically unsupported. So I’d agree with all that too.

        One of his pet projects is a computer simulation program (Minsky) which could be used by all politicians to test out their economic policies in advance. If the economists of the eurozone had such a program , or had one been available to UK and US politicians, then recent disasters could well have been avoided.

        But of course computer models have to be reliable and testable. They have to be able to predict the crashes we’ve had. It’s much better to have a crash in a simulator than in the real economy. It’s hard to believe that governments themselves aren’t working on this approach too. The cost of developing such a simulator would be tiny compared with the potential benefits.

  27. Gary
    Posted April 29, 2015 at 4:48 am | Permalink

    the default will be funded by reneging on service obligations to the taxpayers. It will be a default on these obligations by inflation.

    No matter that they tell us that outgoings are funded by incomings, the present value difference of the two is a funding gap representing insolvency. The immigration policy us an attempt to bridge that gap. It won’t work, instead it creates a whole new set of problems.

    Inflation will be the next option, but their QE is having the opposite effect. Now they are panicking with negative rates. Gold should be rising, inverse to the real rate, but its not. Its being simultaneously managed in the futures market.

    Too many spinning plates.

  28. Kenneth R Moore
    Posted April 29, 2015 at 9:31 pm | Permalink

    It seems that the politicians, in hoc to big corporate business have abandoned re-balancing the economy instead turning to ‘monetary activism’ to balance the books.

    QE is just a way of conjuring up ‘growth’ when it doesn’t really exist.

    Mr Osborne may think he is very clever, but a system which reduces the price of money (interest rates) close to zero may be doing exactly the same thing to the value of money.That will be part of his legacy…

    Money as a store of value is being undermined – it can only fill the tank of my car or buy groceries if it remains a credible store of value. This credibility is under threat in my view – we trust the government and the financial system… It is this trust that Mr Cameron is in danger of losing.

    The (manipulated) monetary system in the Uk may look quite healthy but it is becoming more detached from the real economy of real goods and services. This is very dangerous – sooner or later the investors in the uk might start asking awkward questions….
    Yet all we hear about from Conservatives and Labour are plans to spend more and more financed from ‘growth’ paid for with more unearned wealth…

  29. lojolondon
    Posted April 30, 2015 at 7:29 am | Permalink

    The USA, Iceland, let their banks fail, and they have the best recovery. In the UK, Ireland and most European countries the leadership of the day took the decision to use taxpayers funds to bail out a commercial enterprise, and that has strangled the recovery.

  30. Ken Moore
    Posted April 30, 2015 at 9:31 am | Permalink

    It seems that we have become so dependent on big corporate business that we have abandoned re-balancing the economy.. instead turning to ‘monetary activism’ to balance the books.

    QE is just a way of conjuring up ‘growth’ when it doesn’t really exist.

    Mr Osborne may think he is very clever, but a system which reduces the price of money (interest rates) close to zero may be doing exactly the same thing to the value of money.

    Money as a store of value is being undermined – it can only fill the tank of my car or buy groceries if it remains a credible store of value. This credibility is under threat in my view – we trust the government and the financial system… but can we really ?

    The monetary system in the Uk may look quite healthy but it is becoming more detached from the real economy of real goods and services in my view.
    This is very dangerous – sooner or later the investors in the uk might start asking awkward questions….
    Yet all we hear about from Conservatives and Labour are plans to spend more and more financed from ‘growth’ paid for with more unearned wealth…

  • 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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