Quantitative easing day – again

So will the Bank of England want to print another £25 billion or not? That is today’s question.

When they started the programme the Bank said it should be judged by whether it eased lending through the banks. It has not done that so far. Money remains quite tight if you are a small business or someone seeking a mortgage.

Subsequently they said it should be judged by whether the money supply increased or not. Judged by that criterion it has made a modest impact, but there is still little growth.

Maybe they wanted it to keep government borrowing rates down, given the huge sums the government has to borrow. It has not even done that, as gilt yields, the price the government pays to borrow, have gone up.

So what has it done? It has helped fuel a substantial recovery in asset prices. Alongside the big US money printing programme, we are witnessing the early stages of a familiar asset bubble created by the action of the authorities. It is exactly what the US did several times in the last twenty years and what this government did in the period 2003-7.

That is helping sentiment, leading to a concerted spin effort to create a feel good factor. I’m all in favour of looking at the mint rather than hole wherever possible, and hope they succeed in pulling us out of the nosedive the economy was in.

We need to remember, however, several things. The first is unemployment is still rising and looks set to do so some more. This will dampen spending. Where companies are reporting better profits, it has happened thanks to cost cutting, not to growth in business. The huge and temporary stimulus from government has to end sometime, and then we are left with the massive public sector debt overhang. That needs repaying, which means less public spending or with this government higher taxes.

The truth is the UK lived well beyond its means for too long prior to the crash. This government’s actions in the short term can create a bit better mood, but at the cost of a worse problem in the longer term. This policy is just for an election. I suspect the government wants them to print some more, so I guess that’s what they will do.


  1. alan jutson
    August 6, 2009

    Your last paragraph sums it up.

    Short term gain, for long term debt.

    The difficult and neccessary decisions have yet to be taken.

  2. Stewart Knight
    August 6, 2009

    So will the Bank of England want to print another £25 billion or not? That is today’s question

    It’s either that or raise interest rates, and Gordon wouldn’t like ‘hard working families’ to be hit with an interest rate rise, though where they work hard as jobs have all gone I don’t know…so yes, the bank will shove another £25billion into the economy and further devalue the little I have stashed away.

  3. DBC Reed
    August 6, 2009

    In one respect,(housing , affecting
    most people) governments of all stripes are only too keen on recovery raising asset values,which you refer to in general terms above.House price inflation could be dealt with easily by waiting till house/land prices hit bottom and then taxing land value increases thereafter.The natural market response would be for people to claim, in any tax demand, that their homes had not gone up in value and for the developers sitting on land to build on it. But political parties feel they cannot get elected without a house price bubble to ,frankly,bribe homeowning voters.
    A lot of other assets are property based ,even shares, but the Stock market where people hold shares in companies to which they
    have not contributed any capital , is one of those much-respected institutions which could do with radical reform and/or heavy unearned income taxation.
    Unfortunately, public sector cuts are going to cause more unemployment and force the private sector to operate in conditions of reduced aggregate demand.People whose mortgage payments have been reduced by interest rate cuts need to get out in the shops and start spending,before public sector cuts are even considered-by which time they won’t seem so necessary.

  4. Mike Stallard
    August 6, 2009

    Apparently the private sector has cut back, made itself much leaner and meaner and is now poised for action.
    Meanwhile the public sector is still recruiting, it is getting fatter and fatter and the Trades Unions, at least in East Anglia, are showing their muscle with strikes.
    Am I right in thinking that most of the QE has gone into gilts?
    That would account for the fact that money is still pretty tight for small businesses and mortgages, although, according to the BBC, the house prices are now beginning to move upward.
    It must look, at No 10, as if the brooding genius has got it right again. And that is truly scary.

  5. D McGregor
    August 6, 2009

    Would it be . perhaps , the right thing to do? Especially as if it proves to be wrong , then the Monetary Policy Committee of the bank will be to blame , not Gordon (that is what is most important).

  6. Brian Tomkinson
    August 6, 2009

    If the Bank prints more money, this will be another example of wilful negligence by this government and those who follow its instructions.

  7. Acorn
    August 6, 2009

    A colleague has just regaled me with the following.

    Mr X has recently extended some credit to his thirteen year old son. Mr X is the governor of the Bank of X (family division). Mr X extended the credit to said son at zero interest. The collateral he required was an IOU. The principal was to be repaid from son’s other sources of income over the next six months. Mr X has discovered that the credit (cash) has been deposited in son’s building society account attracting some interest.

    The credit was originally advanced for the essential, immediate requirement for new tyres for son’s fancy mountain bike. Mr X subsequently noticed that the old tyres remain on said bike; and, do not appear to be in dire condition.

    Investigation by Family X’s version of the FSA (mother); has revealed that the original tyres have been marked to market and a swap contract has been entered into with a counter-party for tyres of differing quality but with a longer term to redemption, (that is, going in a skip). A small cash adjustment is required for the swap; but, considerably less than the credit advanced by Mr X at the start of the “tyre crunch”.

    Now Redwoodians, who was the Merv King and who was the Fred Goodwin in the above?

  8. Steve Cox
    August 6, 2009

    What’s another £25 billion? A mere drop in the ocean compared with the £1 trillion or so that’s been squandered by NuLab since 1999. The worrying thing is that the QE money is now largely just sitting in banks’ accounts with the BoE. So no wonder there are no signs of inflationary pressures yet, but what happens if and when the day comes that the banks either decide that it’s safe to open the credit taps again, or are bullied into doing so by the Bank and Treasury? Bingo – hyperinflation! QE is the most stupid, uncontrollable and irresponsible measure that could have been adopted. The BoE MPC and all their friends in the newspapers egging them on to print more money are showing us what a bunch of foolish and dangerous amateurs they are. Liam Halligan at The Telegraph stands out as one of the very few credible financial commentators who has been against QE from the very start. No wonder it’s called the dismal science 🙁

  9. figurewizard
    August 6, 2009

    ‘….. at the cost of a worse problem in the longer term.’

    Whenever I hear or read the phrase ‘quantative easing’ I recall Harold Wilson’s assurances that ‘the pound in your pocket’ would not suffer. Our problem today is not devaluation because that has already happened but that once the US and others begin to come out of recession they will be reversing their financial stimuli. If, when that happens there is no perceivable sign that public expenditure is being scaled back to reduce the colossal debts we are presently racking up, the financial markets will surely punish Sterling.

    There is no alternative to addressing public expenditure. Unlike 1977 for example we do not have the prospect of massive new wealth as was then the case with North Sea oil waiting in the wings to bail us out.

  10. JS
    August 6, 2009

    They need to pump that bubble again. More scorched-earth policy from Labour.

  11. Alan Wheatley
    August 6, 2009


    John Redwood, Conservative MP for Workingham, yesterday (Wednesday) predicted that the Bank of England would embark upon another phase of quantitative easing. This was counter to the prevailing wisdom. Today on the BBC Radio 4 programme, “The World at One”, we learned that MR. Redwood’s prediction proved correct, and they further reported it was indeed a surprise to most pundits. In their analysis they quizzed the Treasury representative as to why the Chancellor had given his approval, where as if Mr Redwood had been asking the questions it seems likely he would have wanted to know why the Treasury had prompted the Bank’s action.

  12. Sally C.
    August 6, 2009

    We need someone to stand outside the Bank of England with a good sound system playing ‘I’m forever blowing bubbles’ as loudly as possible!

  13. Adrian Peirson
    August 6, 2009

    Nations dont have to be conqEUred by external forces nor just with Bombs and Bullets.

    There are other ways of Bringing a nation and its people to their Knees.


  14. Adam Collyer
    August 6, 2009

    The BoE made it an extra £50 billion! Taking the total to £175 billion. Now what was that government deficit expected by the Chancellor in the budget? Ah yes, £175 billion I think. What a coincidence.

    Why bother raising income tax (proceeds expected this year: £155 billion) when you can just print the stuff like this?

    I think we do need to begin to understand that this QE is designed to finance the government deficit and not to stimulate the economy. GB and his crew really, REALLY are Socialists and not “nice New Labourites”.

  15. APL
    August 6, 2009

    Rumor flying around is that the US government has had two failed bond auctions.

    If the US can’t raise enough cash for its short term needs what hope has the UK.

    How would the UK deal with a 40% funding gap – at the same time as plummeting tax revenues?

    Any thoughts Mr Redwood?

  16. Mark
    August 7, 2009

    The BoE matched your £25bn and raised you £25bn. They’re playing poker with a marked deck – but the problem is that it’s stacked against them, so they’ll inevitably lose in the end.

    One lesson I have learned from watching international bankers is that they are happy to carry on financing an idiot until all his assets are pledged as collateral and debts/losses have grown to match the pledge. When it is clear that they are dealing with an idiot, they will stop hedging trades with him and make some money trading against him, meanwhile selling off his debts to others. The collateral is then scooped up to cover the losses, and lending ceases. This technique is applied equally to hedge funds, industrial companies or nation states, all of whom can be idiots.

  17. Ralph Musgrave
    August 8, 2009

    John Redwood writes a short article on QE (above), then ends by making the bizarre claim that “The huge and temporary stimulus from government has to end sometime, and then we are left with the massive public sector debt overhang. That needs repaying, which means less public spending or with this government higher taxes.”

    QE does not increase public debt – it simply involves exchanging one form of debt (gilts) for another (cash). Indeed, the latter is a very theoretical debt: try going along to the Bank of England and demand £20 of gold or anything else for your £20 note – you wont get it. Thus QE, if anything, REDUCES public debt.

    In contrast, traditional Keynsian borrow and spend involves governments going into debt, but there ABSOLUTLY NO REASON why governments have to go for this (in my view) questionable way of boosting the economy.

    Far simpler would be to do some genuine money printing, i.e. have government spending exceed income from tax and borrowing. There are plenty of reputable economists who advocate this. E.g. see my site (http://printingmoneyisgood.blogspot.com/ ) and see list on left hand side entitled “Other articles which advocate money printing.” Another economist who goes along with the latter idea (if I understand him correctly) is Warren Mosler.

    Reply: Have you not seen the huge surge in public borrowing from the deficit and the bank strategy?

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