Anyone for more Quantitative easing?


             The talk is once again of another round of quantitative easing. It is not being introduced immediately for two good reasons. The first is UK inflation is still high. The second is there are more sceptics second time around about how effective another dose of it might be.

                The US experience is argued by both sides. The bulls of QE say at least two big doses of it in the US avoided deflation and helped the  modest recovery which the economy experienced in 2009-11.  The bears say it put prices up, squeezing consumers and cutting real incomes, added to world inflation which forced China and India to hike interest rates and try to slow their economies, and failed to lift the damaged US housing market.

               The first round of UK QE was a strange device. The Uk government had to issue a large number of UK gilts to pay its bills. Meanwhile the Bank of England created new money to buy second hand gilts in the market place. The idea was the Bank would buy the gilts from individual and collective savers, who would then use the money from the sale of their bonds to buy a riskier investment or to spend on more consumption. The money would circulate through the banking system , which in turn would multiply the money deposited, helping the recovery.

               In practice there were at least two problems with this. Firstly, many of the sellers of gilts simply bought the new gilts sold by the government instead of doing something more positive with their money. Secondly, the banks were placed under strict regulatory controls, making it difficult or impossible for them to increase the amount of lending  and private sector money out there. They had to keep the newly deposited cash from the bond sales as cash or buy gilts themselves. Inbstead of expanding the money supply, the government created a closed loop. It printed money. It bought up its own debt with the money. It then sold more new debt to the people who had sold their gilts to the Bank of England. The net result was cheaper government borrowing by a very roundabout route. The £200 billion of money created was just over a year’s borrowing, at the high level of deficit the government was running.

              It would have been cheaper and easier simply to print the money to pay the government’s wages, which was what underneath all the sophistication was happening.

              Today there are people arguing for QEII in the UK with a variation. They say that instead of buying up government bonds, the newly printed money of QEII should be spent by the Bank of England on buying corporate bonds, or mortgage packages. The aim should be to buy riskier assets. This, they say would have a more direct effect on triggering recovery.

                     The Fed did do some of this in its QE programmes. It is true that if the Central Bank would relieve the corporate and banking sector of some of its riskier positions, that might free these organisations to undertake new loans and investments to promote growth. The problem with it is it represents in effect yet another subsidy to a banking system that has been awash with subsidies in the case of RBS and Lloyds/HBOS  for many months. It would be bad politics, and I suspect also not very good economics. Why do we think RBS and LLoyds/HBOS  would suddenly be transformed into dynamic generators of new businesses and wealth, because yet another way has been found of relieving them of past mistakes?

              Tomorow I will set out an alternative to QEII which I think could address the problems of past bank errors, insufficiency of bank competition, and sluggishness of cash and credit for worthwhile new projects.


  1. Public Servant
    September 10, 2011

    Mr Redwood thank you. I have a clearer understanding of QE now that I have read your blogpost.

    1. Single Acts
      September 10, 2011

      Fundamentally the question is “Can we make ourselves richer by printing money?”

      The answer seems obvious to me.

      1. Ralph Musgrave
        September 10, 2011

        The answer is “yes”, at least in some circumstances. If the private sector has what it thinks is an inadequate amount of money, it will attempt to save money rather than spend it. That gives rise to what Keynes called “paradox of thrift” unemployment. In this circumstance, having government print and distribute or spend new money will raise real GDP.

        This excess or larger than normal saving of money is actually taking place at the moment in the US. See:

        1. APL
          September 10, 2011

          Ralph Musgrave: “That gives rise to what Keynes called “paradox of thrift” unemployment.”

          Seems to me that there is proof that Keynes didn’t know what he was talking about. It seems, Keynes saw unemployment and he saw people being thrifty – and said, thrift caused the unemployment, because of course people are not spending what they are saving*. In fact he suffered from what all statists suffer from, an refusal to see the market at work and a impatience 1. that the market doesn’t deliver what he deems appropriate, 2. the market doesn’t deliver what he deems it should when he deems it appropriate.

          Keynes would probably characterize these two phenomena as ‘market failure’.

          *If people have their money in the mattress, then he may have a point, if the money is being saved in interest bearing bank accounts, then it is avaliable to be loaned out to employment creating profit making businesses.

          Ralph Musgrave: ” In this circumstance, having government print and distribute or spend new money will raise real GDP.”

          We may be in a position to ‘QE’ without inflation because credit in the economy is being destroyed faster than QE can replace it.

          However in these circumstances the BoE gives the new money to the banks, who because they are bankrupt, keep the money to cover their dire condition, that money does not get out into the wider economy and thus the inflationary effects of QE are muted.

          1. APL
            September 11, 2011

            “If people have their money in the mattress, ”

            Current policies of our government include low interest rates at the same time as inflation rates above the artificially low interest rate in the economy.

            This mitigates against saving, reduces the future pool of capital avaliable to the country and increases in the short and medium term the level of unemployment.

            In fact, government policy results in all those things it says it doesn’t want, poverty, unemployment and the accompanying social unrest.

            All to save the banks and their cronies at the top of the banks.

            Not one prosecution since the banks started to fail.

          2. Ralph Musgrave
            September 12, 2011

            “The market at work” has produced some truly wonderful results: like the 1929 crash and the consequent mass unemployment. As to how “the market worked” to cure this problem in the 1930s, please enlighten me.

            Re matresses etc, there is no need for everyone to put money under matresses in order for the paradox of thrift to cause unemployment. The velocity of circulation of money in New York in 1931 was a third that of 1929. I.e. the fact that money is in bank accounts does not necessarily mean that much is being done with that money. The current massive excess reserves that banks currently have is another example of this.

            Re QE, you have assumed that when I used the phrase “having government print and distribute or spend new money” I was referring to QE. The idea that QE equals money printing is a popular piece of nonsense. QE simply consists of having the government / central bank swap Gilts for cash. Given the current near zero yield on Gilts, cash and Gilts are very near the same thing. Certainly QE causes no significant increase in the private sector’s paper assets. It’s almost as futile as having government give everyone two £10 notes for each £20 note in their wallets.

            I.e. when I used the phrase “print money” I meant just that. Forget about Gilts. In other words I mean “increasing the private sector’s” paper assets. I should have made that clear.

      2. lifelogic
        September 10, 2011

        Indeed also – can you lift yourself up by pulling on your shoe laces?

        Can you make a country richer by paying people to work for the state doing pointless things?

        Or make people better off by generating electricity using a method that costs about 4 times the sensible option?

        It is obvious to all but not to the coalition.

        1. Electro-Kevin
          September 11, 2011

          All heat and no thrust as we say on the railway.

  2. Mike Stallard
    September 10, 2011

    Thank you for a really clear exposition of QE.

    I tell you what I would love to be able to see and that is a completely honest bank statement from all our major banks. I strongly suspect that all is not as well as they make out.
    Through private sources, I hear that money is pouring out of the country into off shore accounts. Why?

    1. APL
      September 10, 2011

      Mkie Stallard: “Why?”

      Once the Euro goes, which is the next regional currency where the government has spent the last year posturing, yapping yet doing nothing to improve the economic situation?

      That would be ….. us!

  3. Javelin
    September 10, 2011

    The investment banks I know of simply bought bonds, bond derivatives or equity and assets in emerging markets. QE1 achieved nothing other than propping up poor Government and increasing imported inflation.

    QE2 – spending on mortgages would simply raise house prices and put more people who cant afford mortgages into them. When interest rates rise the disaster will be far greater.

    If you want to inject money it needs to be done at the level of investments in the UK. Or it needs to be done in the same way that targeted tax breaks would have done. So it needs to reduce the cost of services and labour in the UK. Perhaps target areas where the Labour party has tried to turn society into a benefit culture. Somehow you need to link tax with money printing.

  4. Antisthenes
    September 10, 2011

    Politicians have still not woken up to the fact that the root causes of the current economic problems are over regulation, high taxes, bloated public sectors and the welfare state that makes poorer people to rich to work. Trying to maintain the status quo with bailouts and stimulus packages is in the end only exacerbating the problem. Eventually when there can be no more printing or borrowing money then slashing taxes, public services, welfare state and regulations will be an automatic consequence anyway. Done at the time of the banking crisis would have been painful but competitiveness and growth would have been restored, now when it happens the pain maybe so great that the end result will be catastrophic.

  5. mitch
    September 10, 2011

    Why not just give it to UK taxpayers ? You know , us poor sods whose lives you are ruining.

    1. Viv Evans
      September 10, 2011

      Rather, why not take less from us hard-pressed tax payers, without the detour through bureaucratic hands?
      More money in our pockets would help the economy much more than another round of QE.

      After all, weren’t savers admonished some months ago to spend their savings for the good of the economy rather than selfishly cling to their few £££?

      1. Dr Bernard Juby
        September 10, 2011

        Simple mathematics would state that if you have one pound and the bank prints another, without first obtaining the wealth to cover it, you effectively have two pounds BOTH worth exactly half of what each was worth before. To a simple-minded soul like me that is simply inflation – with all of its attendant horrors.
        One of the prices we paid for entry into the European Union was the inane system of VAT when we had a perfectly good Sales Tax before.
        VAT not only locks up vast sums of money (incidentally to the benefit of the bigger beasts who have more of it) while money sloshes back and forth between registered traders – AT NO NET YIELD TO THE TREASURY (in fact a bureaucratic loss in administration) until the final point of sale. A Sales Tax in all but name.

        1. Tedgo
          September 10, 2011

          I call it VAT thrashing, that is all the needless payments to and from the Revenue and Customs.

          I previously wrote,

          The problem manifests itself most when a customer pays you late. Currently you have to pay the VAT to the Revenue even if your customer has not paid you. Of course you also end up having to pay your suppliers and their VAT before you have been paid. This can seriously affect cash flow and is often the reason businesses take on overdrafts and loans.

          The only businesses that need to charge VAT are those that sell directly to the public, every other business need not get involved.

          It would work like this, if your customer was VAT registered you would invoice them with no VAT and likewise your suppliers would do the same. If you were in doubt about your customers VAT status you would charge VAT on the invoice. This would be simple to operate, in computer terms, requiring a flag on the customers details data base.

          VAT was invented before the majority of businesses had computers, now of course most business have automated accounts. The modification to the accounts package would be simple. Updating your customers data base with the new flag would be at your own pace.

          Yes I know small businesses can elect to not pay VAT until they have been paid, but they still have to pay VAT to their suppliers and it is a nightmare to operate, I have tried.

        2. A.Sedgwick
          September 10, 2011

          Absolutely and as regards VAT, I have this surreal scene of a group of astrophysicists being tasked with the creation of the most absurdly complicated sales tax and after being locked away for awhile they came up with VAT.

        3. lifelogic
          September 10, 2011

          Indeed VAT is an insane and inefficient tax – only the EU could come up with such absurd system. The idea I assume to make it cover the whole of the EU and create many pointless jobs for people everywhere administering it and countering the fraud to which it is so vulnerable.

      2. Ralph Corderoy
        September 10, 2011

        That’s one of the ironies of the current situation. Savers are the ones that do have funds to spend now that cheap credit has dried up and the consumers are cutting back. Despite having the saving habit it doesn’t mean they don’t splash out and they may feel now is the time to get a bargain on that new car or conservatory. But because of Mervyn Hughes plan, with implicit approval from George Osborne, to erode Government and individuals’ debt through low interest rates and high inflation, savers are being circumspect and tightening their belts because of an uncertain future, just when you want them to spend!

    2. Fiona Maddock
      September 11, 2011

      QE11? I’m absolutely dreading it. I’m just hanging on by my fingernails on my current income. If it loses any more value, I don’t know where to go next.
      If this gov wants to know what inflation does to a society, look at the history books. It’s not rocket science.

  6. Mick Anderson
    September 10, 2011

    To quote Einstein

    Insanity: doing the same thing over and over again and expecting different results.

    So, I expect that the notional value of my hard-earned savings is about to take another step down.

    1. Dr Bernard Juby
      September 10, 2011

      There may still hang in the hallway of the Institute of Economic Affairs a frightening chart of inflation in the UK – both before and after Keynes.
      For decades before it meanders gently along at a very low rate and then, suddenly starts to take off into the stratosphere.
      I suspect that it has been taken down as recent events have pushed it up out of sight altogether.

      1. zorro
        September 10, 2011

        There are some good links to the B of E. Look at this one – not quite as simple as you state…From about 1860 until 1914 things were pretty stable but we’ve had our ups and downs over the last 200 years….


  7. Gary
    September 10, 2011

    Print money to buy debt. Money as debt. Solving a debt bubble by issuing debt. You would need a heart of stone not to laugh.

    Truth is, they can’t just print the money and hand it out, because that would invalidate the fractional reserve system, and you can’t have that. So down the pan we go.

    The prosecutions have begun. There will be more.

  8. Gary
    September 10, 2011

    When the central bank buys bonds to issue money, they send out signal to traders that bonds are a risk free trade. So, instead of the money going into the economy it comes straight back into buying bonds and then some. These are the unintended consequences of govt stumbling around in the market. You would think they would learn.

  9. lifelogic
    September 10, 2011

    Anything which stops the banks (RBS/Natwest “Helpful Banking” my foot in particular) from demanding many of its good loans back for no sound reason would be welcome. It is no use having notional low interest rates if bank margins/fees are huge unrelated to risk or they are simply not lending.

    With all the Cameron inspired negative pressures dumped on business, it is not really the time to force the banks, through regulation, to reduce gearing drastically and reduce or call back lending to sensible productive businesses. Businesses caught up in the banking and government overspend disaster through no fault of their own.

    First get some good banks lending and get them the money to lend. Sort out the zombie banks as an other later issue.

    A few business friendly actions might inspire confidence too. So far nearly all is in the reverse direction. Confidence is half the battle and Cameron inspires none.

    Inflation can be kept down if the government stops tax and waste and just halves in size and manages the interest rates and money supply sensibly. The pound would recover with this confidence and this together with the reduction in government spending would reduce the inflation risk.

    Less regulation, less government, less EU, lending banks and cheaper energy and confidence is all that is needed.

    1. Public Servant
      September 10, 2011

      That is two days in a row that you have not pinned the parlous state of the economy on the BBC. Are you going soft on Aunty?

      Reply: I have never held the BBC to blame for the state of the economy, but sometimes have disagreed with the way they report or ignore things. The poor state of the economy is the result of very bad policy decisions taken in recent years by the Bank, the Treasury and the FSA.

      1. lifelogic
        September 10, 2011

        Perhaps he means me?

        I am sorry to miss the BBC off the list – I do indeed think that the nature of the BBC political reporting is absurdly biased, anti science, pro EU, pro green “sustainable expensive energy”, pro everyone’s “rights”, anti “discrimination”, non judgemental, pro equality (of outcome), pro high taxes and distribution to the feckless and pro an ever bigger state.

        Also they produce and broadcast a vast amount of dumbed down drivel to us and our children.

        This sets the mood of the nation on these issues and distorts the whole of politics. Perhaps without them Cameron could have had the courage to put a smaller state conservative agenda to the nation (well maybe not Cameron but someone).

        A typical BBC line on almost any issue being: “Do you know minister that it is still legal, for anyone, to go to the loo and brush their teeth several times a day, with out any licence, nor formal training, without government inspection of standards or their equipment and accommodation – without even compulsory liability insurance. That really cannot be right minister, in a developed nation in the 21st century, can it, surely not?

        Where do they find all these BBC “think” people do they farm them somewhere?

        1. Public Servant
          September 10, 2011

          Actually I was directing my question to lifelogic

          1. Bazman
            September 10, 2011

            Lifelogics arguments against the BBC do no apply to SKY News or any other Broadcaster despite them often saying the same thing. If SKY was like FOX News he would not have a problem.

        2. Damien
          September 10, 2011


          I would settle for a change in the law that did not require me to pay for the BBC. I also happen to believe the need for a state broadcaster ceased when the cold war ended.

        3. JimF
          September 10, 2011

          I have to say I was listening today to a Radio 4 programme hosted by Sandy Toksvig in which every panelist seemed to take a rise out of the ways the government has been trying to get the debt down, even though it is failing miserably. Somehow taking the Mick out of actually making people face up to their responsibilities in a small way, like losing benefits or Council housing for throwing bricks and pinching other peoples’ property, seemed to engender raucous laughter for its stupidity. Oh, and this only didn’t happen in Thatcher’s time because TV’s were too heavy then. Hilarious, eh?

          1. lifelogic
            September 11, 2011

            The “comedy” output of radio 4 is perhaps the most “BBC think” biased of all the output. Because they are doing “comedy” they do not even seem to feel the need to keep up the pretence of impartiality and cannot hide their true thoughts. Mind you neither can the direction of the questions on Newsnight or the Today program.

            The “Daily Mail”, “Daily Mail reader”, “Tebbitt” or “Thatcher” compose many of the punch lines I assume the “jokes” are just written afterwards.

        4. uanime5
          September 10, 2011

          How is the BBC anti-science when they support real science such as evolution and climate change?

          “pro everyone’s “rights”, anti “discrimination”, non judgemental, pro equality (of outcome)”

          What’s wrong with any of these? Promoting people’s rights, opposing discrimination, not being biased, and supporting equality are what make the BBC good.

          “Also they produce and broadcast a vast amount of dumbed down drivel to us and our children.”

          You’re thinking of Channel 4.

          1. APL
            September 10, 2011

            uanime5: “How is the BBC anti-science when they support real science such as evolution and climate change?”

            Haw, haw, haw!

          2. lifelogic
            September 11, 2011

            How is the BBC anti-science when they support real science such as evolution and climate change?

            Because they use mainly art graduates all the time who know as little of science as I do about Beowulf. Try Melvin Bragg, for example trying to talk to scientists, on his radio 4 program.

            On evolution they have good programs, sometimes, but they have a political block on it when considering genders differences and using wage differentials as evidence for “discrimination”. They seem unable to accept that there are clear evolutionary gender differences, social background, and motivation differences etc. Even if there is a considerable gender overlap.

            A constant failure to understand and separate cause and effect for political reasons pervades.

            They also push the green (gross exaggeration at the very least religion) and the quack “solutions” house “bling” wind farms, wave, tidal, low food miles, organic and PV that clearly do not work in basic engineering terms to reduce CO2 anyway – even if you accept the CO2 theory. No one from the BBC ever points out that they do not work and generate so very little in practice. There is an assumption that all should be in favour because they are “sustainable” but they are not sustainable or renewable whatever those words actually mean.

            They also often push quack medicine, and other religions without any intelligent Dawkins type questioning or analysis of them for political convenience.


            “Equality of out come” means taking everyone down to the level of the lowest drop out alcoholic or similar – it is simply evil. Equality of opportunity might not be quite so bad but is not possible in practice anyway. How can a fit clever person with rich clever parents have equality of opportunity with a very ill young person with two drug addict parents.

            It also encourages the destructive politics of envy. We cannot level all the hills for people who cannot walk or make the world so that people who cannot see can play do the same as those that can.

            “Also they produce and broadcast a vast amount of dumbed down drivel to us and our children.”

            Channel 4? – perhaps that too!

        5. Electro-Kevin
          September 11, 2011

          I’m a fan of Lifelogic too !!!

  10. Peter Campbell
    September 10, 2011

    We don’t need an alternative to QE, the policy of all failed, or soon to be failed, states throughout history. We need sound money. Anything but sound money will lead to ruin, it always has. Sadly for all the intellectual arrogance of the ruling and financial class there seem to be few that can grasp that.

    1. Gary
      September 10, 2011

      Sound money will put the bankers and most politicians out of business.
      Fractional reserve banking will be priced out, and govt would shrink. So we can’t expect our dear leaders to vote for that.

  11. Richard
    September 10, 2011

    With thanks to Mr Carswell’s recent article which I have edited to its most relevant comments about recent attempts to stimulate growth via QE:-

    Our economy does not grow because people consume more. We consume more because the economy grows.

    Conventional thinking with the elite is that government should inject cash into the economy. That way they’ll go out and spend it. As they buy things, the economy will get moving again and all will be well.

    In a healthy economy, the amount of credit around is linked to the amount of saving.
    People deciding to defer consumption by saving, enables someone else to borrow more.

    Western economies are in trouble because we created a system that enabled credit to be conjured out of nothing. It no longer required someone to defer consumption in order for someone else to borrow.

    In the US, President Obama threw an $800 Billion stimulus package to try to hold back the tide – but produced almost zero growth.
    Even in Britain, too many commentators still presume that a bit more government spending might be the answer.

    It’s time to stop kicking the can down the road …..

    Posted on 7 September 2011 by Douglas Carswell

  12. A.Sedgwick
    September 10, 2011

    The only economically sane route for us to manage the NuLab £4 trillion debt and rising is to cut taxes and government expenditure bigtime. I am always dumbfounded when commentators talk of export led recovery as the only solution, how about import reduction recovery led by encouraging the manufacture of the endless things we buy regularly that are made abroad.

    No apologies for linking our troubles with EUSSR but it is for me a no brainer that we have to get out if we are to prosper as a nation.

  13. JimF
    September 10, 2011

    Until this government has its house in order in terms of its spending, this shouldn’t even be talked about. Debt is being addressed with more debt, and asset price inflation with more inflation.
    We need a correction not a delusion.

  14. Graham Swift
    September 10, 2011

    No unemployment benefits in Hong Kong. If you don’t work you don’t eat. Excellent idea. And another suggestion : scrap child benefits. The rabbit breeders should pay for their own kids. Give up all your unnecessary luxuries , and have kids you can afford. Why should tax payers subsidise them ? Also let’s have the same levels of tax as in Hong Kong , maximum 15%.

    1. Public Servant
      September 10, 2011

      Graham is right but he doesnt go far enough. We should scrap child benefit and the state pension. This is an enormous burden on the tax payer. Pension provision is a private matter for the individual. Housing benefit should also be completely scrapped. There are many countries that operate just fine without these benefits.

      1. A different Simon
        September 10, 2011

        I take it you are being sarcastic ?

        Pensions provision , or complete lack of it for well over half the population, is a ticking time bomb .

      2. sm
        September 10, 2011

        Would that apply to your state employer guaranteed defined benefit pension? Do you fancy private provision of your pension-no guarantee then you see?

        1. A different Simon
          September 11, 2011

          Thats why I thought PublicServant was being sarcastic .

          Guaranteeing the level of future payments of people’s pensions is completely immoral .

          The Govt should not be able to make promises and write I.O.U’s on behalf of people who have not even been born yet .

  15. Public Servant
    September 10, 2011

    Apologies for returning to a theme of previous posts. Many of the contributors to this blog and indeed Mr Redwood himself often refer to our ‘bloated’ public sector. However, unless my memory fails nobody has suggested how it should be slimmed down. In my submission simply top slicing departmental budgets, limiting the salaries of judges and ambassadors or dispensing with the services of all the equality advisors will not be sufficient. We need an honest and open debate about what the state should be involved in. If you really want to cut tax you really need to cut back what the state does. My starter for this debate is radical. The state should do nothing more than protect the realm, keep order on the streets and provide subsistence level welfare to those who cannot work for health reasons. How much tax would you need to pay for this much state? It is not obvious to me that the taxpayer should pay for anything else. What we must be honest about though is that as we add to the activities of the state we add to the tax required to pay for it. Health and education are expensive. You can shave a few bob off the pensions of teachers and nurses if you want to go down that road or you can do what I propose and simply withdraw from these areas. Those that want these services and can pay for them can have them from the private providers that will fill the vaccuum.

    Reply: I have in the past written many detailed proposals on how public sepnding can be controlled – starting with a cash freeze for a year – without damaging services, and still allowing growth in key areas like NHS and education. It is a series of detailed measures to promote smarter and betetr value working, and reduciton of areas that are less desirable or counter productive. If the government had taken the advice and imposed a cash freeze for just Year One, instead of the 5.3% increase they allowed in cash spending, the combined extra borrowing for the 5 year Plan would have been about £170 billion lower, which I think would be a lower risk option.

    1. lifelogic
      September 10, 2011

      A few suggestions to start.

      Get out of the pointless wars.

      Lets have class sizes of 44 as I had a primary school in the 60s it worked just fine. That could half the number of teachers for a start. One good one is far better than 3 bad ones.

      In fact just fire one in two in all the departments most users would not even notice.

      Get rid of the Human Rights and Equality Commission.

      Sell off the BBC in bits and make it stand on its own feet without the licence fee unfair subsidy.

      1. lifelogic
        September 10, 2011

        & get rid of HS2 and the green energy nonsense.

    2. norman
      September 10, 2011

      Yours is basically a libertarian view and one I hold a lot of sympathy with but it’s unlikely to get off the ground.

      But here’s a simple starting point (so even politicians should be able to understand it). Labour increased public spending by ~50% in real terms. Look at what we were spending money on, as a % of GDP or as new spend, now and look at what we are spending today. Some things, like pensions due to an aging population, will necessarily have to increase but others, due to increased efficiency (lol) and technology should have come down so it a little bit of analysis would be needed but it would make a decent launching off point.

    3. oldtimer
      September 10, 2011

      Lifelogic has mentioned a few specific spending programmes to which should be added the self indulgent Aid budget. A huge chunk is absorbed by transfer payments which would be radically reduced by your proposal. Eventually the IDS reforms of welfare benefits mat make a difference.The economy is also about to be sunk (go ex growth) by ill considered green measures and a failure to implement a sensible policy to meet future energy needs. A further element, in many areas of government spending, is the absence of competition in the supply of the services provided by government. The NHS is a prime example and, because it enjoys sacred cow status, will continue to be one of the most inefficient elements of the spend.

      The contrast between the relentless drive for better performance that is required of businesses that must compete internationally and the state sector is stark. Unfortunately the state currently accounts for c50% of GDP. If the private sector fails in its markets, it goes under. The state sector ploughs on wasting taxpayers money.

      1. A different Simon
        September 10, 2011

        The NHS may be innefficient but private healthcare and health insurance is even less efficient .

        Just look at the per capita spend in the US and what they get for it .

        The NHS has it’s merits , how are you going to avoid throwing the baby out with the bathwater ?

        Politicians and political ideology have indeed ruined childrens education and turned schools into propaganda and brainwashing machines .
        I went to state schools and think the more independent schools are of politicians the better .

        Currently most independent schools runs as not for profit organisations with a charitable status.

        Is this key to their success and long-term thinking ?

        1. oldtimer
          September 10, 2011

          The USA is not the only way to do it.

          Much, much more could be achieved by industrialising the service, as Peter Drucker would have put it. In short by specialising and streamlining processes. A small example – I noticed the difference in method between SpecSavers going about my eye test compared with my local, traditional optician. SpecSavers had redefined the process and applied different skill levels, and people, to the different stages of the test. It meant a little more inconvenience to me but I am sure that it reduced the cost of doing so. Where, in the NHS, is there any pressure to improve production methods? Commercial businesses must devote as much attention to these. if they are to survive, as they do to their marketing. In the NHS there is little detectable competition, only the protection and complacency that can be afforded by a monopoly.

        2. Iain Gill
          September 10, 2011

          why compare the nhs with the usa? compare it instead with the best of the rest of the world not another failing health system. the nhs as the “national religion” is coming to an end as more people travel and see how good the health systems are in the rest of the western world compare to the rubbish we tolerate.

          turn the nhs into a state backed insurance scheme, where the state takes payement via taxation but makes payouts directly to patients to spend anywhere they want. get the state out of the ownership and running of health providers as it clearly cannot do it. allow the buying decisions the patients make to optimise the system.

          and stop providing free nhs to the quite so many foreigners without indefinite leave who have not contributed and who come from countries with no reciprocal arrangements for brits

          1. lifelogic
            September 10, 2011

            Just charge £20 for all visits the GP as a first start – that alone would make a huge difference and might actually make the GPs more keen to actually see patients and treat them better rather than put them off as they do now.

          2. uanime5
            September 10, 2011

            State backed insurance systems would cost even more than the current NHS as private health insurers would seek to make a profit. This is why health spending is much higher in most other EU countries.

          3. zorro
            September 10, 2011



    4. uanime5
      September 10, 2011

      The problem with only paying benefits to those who can’t work is that there aren’t enough jobs for those who can. The net result would be that 2 million adults would have to turn to crime to get enough money to survive.

      It’s far cheaper to give people benefits and council houses then keep them in prison.

      1. Electro-Kevin
        September 11, 2011

        “It’s far cheaper to give people benefits and council houses THEN keep them in prison.”

        Couldn’t have summed the situation up better my self.

        Well said, Uanime5, me old mucker.

        1. sjb
          September 11, 2011

          1. The prisons are full.
          2. A new prison place costs about £119k.
          3. Keeping someone in prison costs over £40k per year.


  16. lojolondon
    September 10, 2011

    John, I absolutely hate the idea of QU, or ‘printing money’ as it is correctly known.

    BUT, if we HAVE to, then at least print some money and create some good. Crash Gordon’s sophisticated merry-go-round did nothing for anyone. If we created some ’employment’ – for example, by cancelling the dole and paying people say, double the amount for a guaranteed job, that would ensure 100% employment, solve some of the obesity crisis, and ensure that lazy, bored people are not hanging about causing trouble.

    eg. Men working on widening the M1, building bridges, as we used to 150 years ago when Britian really was Great. Can you imagine the feeling of satisfaction every time you see a feature like the Tower of London or Waterloo bridge and say “I built that”, or “your dad built that”. One may only be a wheelbarrow pusher, but everyone counts!

    Sore leg / back etc.? You need to pick up papers, wash grafitti off trains and bridges, weed public gardens, etc. Everyone must work, and be paid.

    Instead of creating the environment for bankers to get bonuses, QE in this way will go to the poorest people. And, of course, 100% of their income is always spent. So that really will boost the economy. And the people of Britian will have one more road or bridge or dam or some other feature forever.

    I guess we need to speak to IDS about this…..

    1. Public Servant
      September 10, 2011

      That sounds remarkably like the former Soviet Union. Dont get me wrong I agree that people should work in return for benefits as for example in Belarus currently.

      1. Bazman
        September 10, 2011

        Belarus? An anti NATO dictatorship in the geographic centre of Europe. A scandle and shame on the EU and all it’s members. I saw a military display there. No namby pamby health and safety, or not much. The sight/noise/pressure waves of of AK47’s and flashbangs. Tried to look cool, but failed miserably. They are so poor that bartering is part of the economy. Everything is available, but even compared to here is pretty pricey. It’s like stepping back in time with expensive cars overtaking horse and carts. A real dictatorship where no one looks each other in the eye. Your head is in the clouds.

    2. A different Simon
      September 10, 2011

      Lojo , great idea .

      You would have to give the poor this money in cash if you wanted them to spend it .

      If you pay it into their bank account then it would just end up as bankers bonuses .

      As soon as the banks see any money in a poor persons account they will just confiscate it as charges for the wonderful service they provide and because we owe them a living .

      Frank Field is on record as saying he thinks people should not receive benefits for doing nothing . I would not be surprised if IDS holds a simmilar view .

      A couple of other make-work tasks :-

      – reservoir building program . Instead of this we are building desalination plants . This looks like yet more public money being shovelled to big business for no particular reason .

      – directing excessive rainwater run-off from roads into reservoirs . Currently it goes into the sewers which causes sewerage stations to flood and discharge raw sewerage into rivers . This results in almost total fish kill and beaches which are like a 16th century London street .

      – dual stream reticulation in houses ; potable and non-potable water supplies

    3. sm
      September 10, 2011

      QE can only be considered if we have severe money supply contraction and is used to restructure that system into a better balance. We should not use this to reward failure in banking models, but to mitigate the social costs associated with failed business models.

      It must bypass the financial system completely and be spent on infrastructure some new bridges/roads etc. (Funded as and when by % completed.)

      In a different money system (not fractional reserve banking) positive money scenario the money would be spent debt free into existance to regulate the money supply as banks would be prohibited from creating debt money.

    4. waramess
      September 10, 2011

      Lojo, why pay them double?

      1. lojolondon
        September 13, 2011

        Well, we need to reward people for working. Instead of giving the money to the banks to buy euro-bonds and all the other crooked things they did under Crash Gordon that left us with such a debt for no benefit. £160 a week is not too much for someone who does, say, 5 X 5 hours work, is it? Bearing in mind that the quantitive easing is a bad idea, the point is that people will be earning the money, not gifted it, and that it will not go into shareholders or directors or balance sheets, poor people will use it to buy shoes and burgers and travel tickets etc. so it will circulate!

    5. uanime5
      September 10, 2011

      I doubt that the right would approve of this because it would massively expand the number of people working in the public sector.

      Also people cannot magically develop the skills needed to perform construction.

    6. Electro-Kevin
      September 11, 2011

      Every bit of grafitti has someone saying with the greatest satisfaction, “I did that” or “Your Dad did that”

      Heck. We’ve just made a national icon out of a chap who spray paints the sides of buildings and flogs books about them. Banksy. Jeez !

      So your point is, Lojo ?

      Don’t you realise we have people who are actually proud of their Asbos and criminal convictions ?

      They are quite happy. That’s the problem really.

      My own MP tells me it is because they are insecure. And that I should be more worried about Tibet.

      Building bridges and widening roads is only satisfying in contrast to dying as a result of potato blight or pox.

      In any case. This work isn’t done by gangs of semi-skilled navies any more but by chuffing great machines that come from Germany.

      1. Electro-Kevin
        September 11, 2011

        Is it navies or is it navvies ? I would hate to offend our Snr Service, even if they can no longer afford launch an air attack on me from the sea.

      2. lojolondon
        September 13, 2011

        Well, Electro-Kevin, ASBOS are the only thing they have ever achieved. So they are proud of them. That is human nature.
        I don’t care, even if they have to clean the litter up in their own street to collect the dole, just make them DO something.

  17. lojolondon
    September 10, 2011

    PS Looking at my submission, the left-wing, Labour and LibDems, will absolutely hate the idea, but remember, they are always wrong about everything, that gives me hope that we can do this right!

  18. RDM
    September 10, 2011

    Is more Money (or Aggregate Demand) really the problem?

    Here is an interesting article:

    I would suggest paying off our debt, increasing earnings of SME’s, and getting banks to lend to Technology startups who don’t(can’t) have collateral!

    1. forthurst
      September 10, 2011

      I can’t help feeling that banks should be more generous in their lending policies to existing successful businesses. Technology startups require specialist expertise to evaluate which does not exist in banks.

      1. forthurst
        September 10, 2011

        Were you suggesting that banks should become equity investors of last resort, or simply prime new company’s balance sheets so that the entrepreneur(s) would retain the equity?

      2. RDM
        September 12, 2011

        I don’t disagree with you, especially if existing company’s are investing in new product development.

        The difficulty is getting Banks to aid the investment of technology developers. There are two benefits to this; The development of the idea, and the development of the developer, the source of many idea’s. Neither has enough backing(collateral) before a revenue can be generated.

        Today’s Entrepreneurs are not commercializing technology.

        Universities can’t!

    2. lifelogic
      September 11, 2011

      At the moment you cannot borrow easily with collateral – let alone without it.

  19. Public Servant
    September 10, 2011

    I have just noticed that the well known left winger Sir Stuart Rose has warned against cutting the top rate of tax and indeed would not object to paying more. There is clearly no consensus on this issue.

    1. lifelogic
      September 10, 2011

      Clearly he now likes to appear “nice” in public and has not got much imagination to think of better things to do with it. Why give it to Cameron to waste on HS2, Green House Bling, Pointless wars, a non functioning NHS, propaganda, PIGS, EU, or seeking votes ………

      What about giving it to a charity sorting out basic health care in the third world, malaria or genetic research in to cancer or more inoculations or basic nutrition and clean water or nuclear fusion research or genetic engineering or better/cheaper solar cells.

      Surely all better than giving to the government.

      1. lifelogic
        September 10, 2011

        Or thinking of his earlier role at M&S maybe design some ready meals that are actually pleasant to eat and some puddings that are not all too sickly sweet.

  20. norman
    September 10, 2011

    I have no idea how much is raised through NI each year but the government could do something simple like print £100bn and then give everyone an employers & employee NI holiday for a year.

    When people noticed how much their pay packet went down by in a years time people might wake up about the extent of the second income tax (the politicians favourite), so that’s out the window.

    Or they could make the first £18k (or whatever) of income tax free next year, reduce fuel duty, or a thousand other things.

    But no, it will be given to banks so they can buy government debts so that the leviathan can feast on peoples savings, which when you get down to it is what QE is, the government taking your savings / equity / pension pot by stealth and spending it for themselves.

  21. Acorn
    September 10, 2011

    If you want to know why further QE will not work. Why the last lot of QE ended up parked in the BoE and being used as collateral for derivatives trading – not lending – then read “It’s A Long Hard Road” at Contrary Investor.

  22. Samuel
    September 10, 2011

    Quantitative easing is possibly one of the worst ideas of modern economics. It doesn’t work because the money can be hoarded, and it raises the price of goods and services by driving up prices.

    The only thing that will help the Market grow right now is to liberate it. Liberate it from heavy government intervention, liberate it from heavy regulation, liberate it from the enormous tax burden that is sitting on it.

    Norman Lamont is the last very good Chancellor this country had. He once said “The truth about jobs is that they happen if allowed. Companies and business will create jobs if they are allowed to create wealth, create jobs and get on with running their businesses. That is how jobs happen. With less taxation and less regulation is the way to get jobs to happen.”

    I also believe we should address the issue of inflation for the long term. The gold standard should be brought back. When there is a titanium-tough Pound, long term savers, who keep this great nation going, are protected. They are the first ones who are hammered by inflation. I am not saying though we should back to gold standard in this difficult time. I believe Churchill did that in 1925 and it caused a further downturn.

    I particularly despise what Keynes said, “The Gold Standard is a relic fom a barbarous age”. Yet it served it’s purpose by giving us a solid currency base and long term monetary stability. It’s time for a return to something that is sensible and something we can depend upon for prosperity and stability. Its time to stop using fiat money.

    1. Dr Bernard Juby
      September 10, 2011

      Norman Lamont is the last very good Chancellor this country had. He once said “The truth about jobs is that they happen if allowed. Companies and business will create jobs if they are allowed to create wealth, create jobs and get on with running their businesses. That is how jobs happen. With less taxation and less regulation is the way to get jobs to happen.”

      Too true! People don’t start businesses to employ people but to be independant and to make money. When they get big enough and cannot do all the work themselves they take on an employee and so it goes on.

      Just release them from all the petty-fogging Red Tape & bureaucracy and they’ll do the job for you.

      1. lifelogic
        September 10, 2011

        Lamont and his/Majors ERM fiasco – chucking tax payers money in to a black hole for no reason. Just like Cameron and the PIGS. Did he ever appologise? Major still has not.

        Perhaps his heart is in the right place – unlike Major and Cameron but how could he not resign after the ERM collapse – he had no credibility what so ever and how could he not see it coming when every one else could group think I assume like the BBC.

      2. uanime5
        September 10, 2011

        So small businesses are willing to take on people to do everything except manage the Red Tape & bureaucracy?

        1. A different Simon
          September 11, 2011

          uanime5 ,

          It is very difficult to take some of the views you express seriously .

          Could you tell us what you do for a living please so that we can see where you are coming from ?

          I’ve worked for small companies all my life and the longest lived lasted 10 years .

          Why do you see them as the enemy ? Many of them struggle to pay the wages each month and could not absorb another overhead .

          Do you really think it would be preferable for these small companies to be replaced with big businesses which can afford to pay people to deal with the red tape handed down by Govt ?

          Onerous red-tape is lobbied for by big businesses because it makes to cost of entry prohibitive for new entrants in their business .

        2. lifelogic
          September 11, 2011

          Dealing with red tape bureaucracy does not bring any money it – to pay wages for the people dealing with it!

    2. uanime5
      September 10, 2011

      If Norman Lamont thought that he was obviously inept. Companies create wealth by reducing salaries or by reducing the number of people they need to employ. This is why so many jobs are outsourced or automated. If it was left to companies everyone except the employer would be paid a pittance, just like in Victorian times.

      Also less regulation doesn’t result in more people employed, it results in less employee rights.

      1. lifelogic
        September 11, 2011

        Fewer regulations gives lower costs (perhaps indeed with fewer worker rights which also gives lower costs) this means more customers for the business and more jobs as a result. So more demand for labour and higher wages and more choice of jobs for workers if they don’t like the deal.

  23. Viv Evans
    September 10, 2011

    ” It would have been cheaper and easier simply to print the money to pay the government’s wages, which was what underneath all the sophistication was happening.”

    Yep – but then, commissions on the sales wouldn’t have been earned, making some not-so-poor people perhaps a tiny bit ‘poorer’.

    1. zorro
      September 10, 2011

      Indeed, often politicians who realise that it makes more sense to print debt free money without any banks making any interest on it suffer short life spans (political and otherwise…..)


  24. Matt
    September 10, 2011

    The government borrows and prints money just to pay its wages.

    In my view the top brass aren’t levelling with the people – still giving the illusion that a deceleration in the rate of borrowing and economic growth will suffice.

    When, as things are, we cannot afford the lifestyle that we have. The fact that we live in comparative luxury here in the UK isn’t written in stone – it’s not a law of physics – it cannot be taken for granted.

    The only way we will get out of debt on this course, is by inflating our way out of it.

    As Mr R has pointed out reductions in the rate of borrowing should be contrasted against increased overseas aid costs plus EU funding increases.

    Only way is to cut borrowing – the deficits act as a great anchor restraining growth – look at Greece -and go for growth, with lower taxes top rate CGT, reduction of them would help decrease borrowing not add to it. Cut restrictive EU employment laws. The present legislation is a drag on industry and only helps those already in employ; a change would give the young unemployed a chance.

    1. uanime5
      September 10, 2011

      So your solution to encourage employers to hire more people is to give employees less rights? Won’t this just lead more employees with poor motivation and very few new jobs?

      1. Yudansha
        September 11, 2011

        Can’t you agree that some things have gone way over the top now, Uanime5 ?

        Race/sex/safety ?

        I’m not talking about a return to Dickensian times. I’m talking about correcting the abuses by no-win-no-fee lawyers and, as union H&S representative (Aslef), I spend more time on joint committees concerned about keeping our company out of the courts over fatuous claims than anything else.

        There has been nothing more unifying for management and unions than EU red tape and Human Rights claims.

        “BEEP-BEEP-BEEP Please use the handrail when using the stairs. BEEP-BEEP-BEEP Please use the handrail when using the stairs. BEEP-BEEP-BEEP Please use the handrails when using the stairs. BEEP-BEEP-BEEP Please use the handrail when using the stairs …”

        Literally all day long at Plymouth railway station. Go there if you don’t believe me.

  25. Sebastian Weetabix
    September 10, 2011

    Mr. Redwood, I see there is a campaign to change the debt money system (; the suggestion being that we need to take the power to create money away from the banks. I would be very interested to hear your views on this.

  26. waramess
    September 10, 2011

    The USA managed to avoid massive domestic inflation because it is a reserve currency and the inflation affected also commodities priced in dollars. The Bank of England are not to be so fortunate and any further debasement of the currency will be felt in domestic inflation.

    Maybe this will be the reason for Kings reluctance.

    On the other hand the debasement of sterling is a very easy way for the Government to raise taxes and they will think it is a good form of stealth tax that nobody will notice very much.

    The poor will notice even though they might not understand for it is a mechanism like inflation and devaluation that will shift wealth from the poor to the rich. Is this something the Conservative government really want to be responsible for?

    When people understand what is happening, and in this age of rapid diverse communication they surely will, they will never forgive.

    Leave such antics to the socialists.

  27. Paul Danon
    September 10, 2011

    QE is mad, stoking up debt and inflation. We need tax-cuts, beginning with the abolition of so-called national insurance.

  28. Bernard Otway
    September 10, 2011

    More quantitative easing will quantitatively just prolong the inevitable,as Leo Mckinstry says in an article this week ,there is a DISEASE called SUB MARXIST THINKING that infects
    our complete public service,the left have been infiltrating All public life for at least the last 50 years,as successfully as the BROEDERBOND did in South Africa from just after WW1 until the Afrikaners achieved their aim of installing APARTHEID [that hate word for the left Ironically] after winning power in 1948,let us not hope that it takes the 46 years it took for Apartheid to go when South Africa had the first truly democratic election in 1994,for this disease to be flushed from the life of this country,BUT if it does this sceptered group of islands will by then have sunk so low there will be a ban on emmigration except for the very wealthy plus all the enlightened by then will have left for AUS/CAN/NZ long before that [provided they allow us,they may just be scared of getting the same disease by importing it and thus refuse to take us]. As for the Bolshevik BC it is just [IMHO and I have called it this since the last 20 yrs ] a marriage of TASS AND PRAVDA my name has been TAVDA. In fact I recall a series on TV in the 70’s that depicted a left wing elected dictatorship,that because it made a complete mess of the UK,actually did stop emmigration
    the main role was of an agent who tracked down ILLEGAL EMMIGRANTS before they could leave,his part was taken by a very young Irish actor who recently played one of the main parts in Ballykissangel, does anyone remember it’s name or what it was called,I expect if it was a bbc production it has NOW been CENSORED or WORSE DESTROYED
    as being TOO PROPHETIC,it was made during the Liebour years from 1974 till 1979,as a response to so many wealth producers including many from showbiz leaving [ESCAPING]
    if I was to give it a title today it would be ESCAPE FROM THE COUNTRY rather than the property programme Escape TO the country.

  29. waramess
    September 10, 2011

    There used to be a belief that the Central Bank had to print more money in response to public demand because if they did not the currency would become scarce, and its value would increase against the goods it purchased. Should that happen people would stop buying goods and wait for them to get cheaper and that would bring on a recession/depression.

    We are all now far too grown up to believe that, so why on earth should anyone believe that printing money is the answer to anything?

  30. Denis Cooper
    September 10, 2011

    JR gives a good explanation of the “money-go-round” set in motion during the last period of QE, but omits any discussion of:

    a) The EU treaty constraints on the Bank of England funding the government’s budget deficit directly – see Article 123 TFEU on page 99 here:

    b) The electoral consequences of the Labour government cynically resorting to that device during the year leading up to the general election.

    Imagine what would have happened if at some point the government had no longer been able to borrow the one pound in every four that it was spending, and had been forced into immediate and drastic cuts of public sector salaries, and sackings of staff, and cancellation of contracts etc; the Labour party would have been massacred, instead of just being defeated.

    As for what could or should be done with billions of newly created money next time: I suggest that it may be needed quite soon, to help prevent a meltdown of the UK banking system in the event of eurozone countries formally defaulting on their debts.

    Which still may not happen, but which is looking increasingly likely.

  31. Gary
    September 10, 2011

    There are ugly signs that the wheels could come off the europe financial system this weekend. I think they just kicked the can off the cliff. There is no good end to this. Thanks to the utterly incompetent, useless imbeciles in charge. Our futures look bleak.

  32. Bill
    September 10, 2011

    With rates as low as they are – this has been a contributor, low £, to inflation. QE will add to this.(Don’t need any more smoke & mirrors)

    Poor fixed income pensioners are being hit so hard – low annuities, closure of defined schemes, increase in VAT, low interest rates that erode their savings – then the final blow to them will be inflation.(they need help)

    Banks need to lend more to business – I know a lot of business plans are fantasy and are rightly knocked back by credit, but good solid businesses that have traded for years are starved of loans, or tied in with lots of covenants and pg’s – it’s the inconsistency in the banks attitude here.

    We need to get rid of this burden of debt – that’s the problem – it’s a difficult task for a government to succeed in – but it must be done. Government wastes a lot of cash.

    Then go for growth, (Lots to do here) starting with the 50% tax rate – make the UK a centre for business.

  33. MajorFrustration
    September 10, 2011

    John – I very seldom disagree with your commentary but it seems that your views have no influence on the Tory front bench whether in dealing with the economy, welfare, overseas aid, human rights, policing, crime, immigration, media etc etc. Am I wasting my time reading your Blog as it only makes me feel more frustrated? I think the term is “hissing in the wind”
    Some years ago there was a general comment in the media that we were “Rip off UK” – well, we still seem to be ripped off, particularly by our political class – not just by way of expenses but by both their failure to deal with issues mentioned above and a failure to adhere to manifesto promises – you can con the voters once but not twice.

    Reply: the aim is to influence opinion and change policy where needed. The method is to encourage debate and to build Parliamentary and Ministerial support for the improvements we require. Sometimes it works.

  34. Martin
    September 10, 2011

    On the subject of saving cash (for the NHS and other sickness costs public and private) why not make TransFats illegal and also save thousands of lives a year.

  35. MajorFrustration
    September 10, 2011

    QE is not the answer – as if another £50b would make a diffierence – come on. Our banks are insolvent on a mark to market basis. What is the argument for QE2/3 – supposedly QE would stimulate growth. Having dumped £200b into the banks where is the growth todate – 0.1% billiant – and subject to adjustment – more importantly where is the lending to SMEs and private individuals. More QE means more inflation – with input prices up some 16% and output prices up some 6% inflation is roling down the street towards us and we cant kick that can down the street..
    Take the hit – no reason to save the banks any further after all whats in it for the BP( as in Poor Bloody Infantry) tax payer/saver. QE only allows the banks to dump more shady bonds and does not change their capital ratios as they are exchanging one asset for another. They must be laughing all the way to the BoE.
    Would that we had some politicians with guts nouse and foresight. An understanding of the economy would help – dream on. Who was it said that a country gets the politicians it deserves – HG Wells or JBS. Well we certainly have an unbrilliant shower now but a peerge is bound to turn up and save them all – unlike the rest of us.

  36. Gary
    September 10, 2011

    I have been saying here for a long time that when the yield curve flattens, this cancer called fractional reserve banking dies. It is dying, and we are in a world of trouble. You may not be inclined to believe me, but you should be inclined to believe the manager of the largest bond fund in the world , Bill Gross at PIMCO :

    Helicopter Ben’ risks destroying credit
    By Bill Gross
    “Helicopter Ben” Bernanke is a
    second -generation pilot. As he himself
    acknowledged in his now well-known
    2002 speech , the term was an original
    of economist Milton Friedman.
    Whether father or child, the concept
    of showering money over national
    economies to combat deflation has
    been an accepted principle of
    monetarism for decades. A helicopter,
    however , is not your average
    aeroplane, and the usual laws of
    aerodynamics do not necessarily
    apply in all cases . Similarly monetary
    policy at the zero interest rate bound
    introduces a new dynamic that may
    conflict or even reverse standard logic
    that lower interest rates across the
    sovereign yield curve are everywhere
    and always stimulative to economic
    growth .
    This potential paradox arises not just
    from observation of the Japanese
    experience over nearly two decades,
    but from an analysis of our modern-
    day financial system and its potential
    inadequacies. Fractional reserve
    banking, where only a portion of bank
    deposits are backed by hard cash, as
    well as unreserved collateral – based
    lending on overnight repo have
    allowed for an expansion of credit
    beyond the bounds of a central
    banker ’s imagination.
    Borrowing short -term at a near risk –
    free rate and lending at a longer and
    riskier yield has been the basis of
    modern- day finance . Renowned
    economist Hyman Minsky explained
    that this was one of the inherent flaws
    of the Keynesian neo- classical
    synthesis . Borrowers wanted lengthy
    loans to match the practical lives of
    their plant and equipment , but
    lenders were disposed towards
    shorter maturities because of the
    resultant financial volatility. Over a
    secular timeframe , a grand
    compromise was struck somewhere
    between seven and eight years in
    terms of nations’ typical average
    maturity, but lenders demanded an
    additional feature – a positive yield
    curve with a substantially lower policy
    rate that would allow “rolldown ” and
    incremental yield – especially if
    levered . Thousands of billions of
    dollars of credit were extended on
    this basis , some of it as short as a
    one-week or one- month maturity
    extension, but all of it – almost
    everywhere, nearly all of the time – on
    the basis of a positive yield curve
    encompassing potential rolldown and
    incremental returns .
    However , in recent weeks , at least in
    the United States and perhaps soon
    elsewhere in the Fed dominated
    global monetary system , the rules
    have changed . Pilot Bernanke has
    changed planes from a fixed wing to a
    rotor -based helicopter by
    “conditionally ” freezing policy rates for
    at least the next two years . As such
    the front end of the curve has for all
    intents and purposes become inert
    and worst of all flat as opposed to
    steeply positive. Two-year yields are
    the same as overnight fund rates
    allowing for no incremental gain – a
    return that leveraged banks and
    lending institutions have based their
    income and expense budgets on . A
    bank can no longer borrow short and
    lend two years longer at a profit .
    Common -sensically, an observer might
    simply suggest that the bank lend
    even longer with similar risk as before
    the conditional freeze , but regulators
    frown on these maturity extensions
    and discourage them either explicitly
    via regulations or implicitly via moral
    The conundrum is not limited to
    leveraged lending institutions . Even
    investment firms such as Pimco have
    client guidelines in many cases that
    impose maturity caps. Short maturity
    accounts , for instance , might logically
    benefit by purchasing three – or four-
    year maturities at presumably similar
    historical risk as two-year notes, but
    prospectuses, and slow to change
    committee structures forbid the
    maturity extension. The net result, for
    both banks and investment firms is to
    reduce financial system leverage. This
    should be positive on a long- term
    basis , but negative in the near- term as
    credit is in effect destroyed as
    opposed to created.
    By flooring maturities out to two years
    then, and perhaps longer as a result
    of maturity extension policies
    envisioned in a forthcoming operation
    twist later this month, the Fed may in
    effect lower the cost of capital, but
    destroy leverage and credit creation in
    the process. The further out the Fed
    moves the zero bound towards a
    system wide average maturity of seven
    to eight years the more credit
    destruction occurs , to a US financial
    system that includes thousands of
    billions of dollars of repo and short –
    term financed- based lending that has
    provided the basis for financial
    institution prosperity.
    The Fed ’s old M3 yardstick of credit
    growth which includes repo
    monetisation would likely similarly
    decline . If so the posit of American
    economist Hyman Minsky of an
    unstable financial system based on
    the leveraging of a positively sloped
    yield curve – and deleveraging when it
    was not – would be obvious for all to
    see . Helicopter Ben should be careful
    – another Blackhawk Down might be
    in our near-term future .

    1. Gary
      September 10, 2011

      Or to put it another way, when the yield curve flattens and lending is no longer profitable and you are at the peak of a credit bubble, then the resulting contraction of the economy forces the indebted to withdraw any facings they may still have. And in a 10% fractional reserve system, if 11% of savings are withdrawn, the banks are insolvent. If at the same time the banks’ assets are dissolving, eg. as house prices fall, they go insolvent quicker and deeper.

      If you want a sustainable economy you have to goto a 100% reserve system. Or better still, repeal legal tender laws and the market will price frb out of existence.

  37. Mark
    September 11, 2011

    If we ignore arguments about the riskiness of government bonds (especially Greek ones, but also those from other PIIGS, or even most Western governments generally including ours), we find that the riskiest UK lending has been on unsecured domestic lending (mainly credit cards). The volume of such lending has fallen sharply (down over 20% since the credit crunch started). If it were to be increased by a QE mechanism it seems likely that extra credit card spending would leak heavily into imports.

    Probably the next most risky tranche in reality has been interbank lending. That too is down sharply – in part because the BoE replaced large chunks of such lending with lending of its own via the Special Liquidity Scheme and Credit Guarantee Scheme, and extra secret use of discount window facilities. The maturing of those schemes is creating a funding squeeze for banks who have been reducing their loan books to businesses – down 15% since the peak.

    Banks have taken no action whatever to reduce the size of their mortgage lending books: the rate of repossession actions is now lower than during the housing boom years as they extend and pretend and bow to politicians (both the previous Labour government and the current coalition one) who are afraid to tackle the real issue that caused the banking crisis in the first place – a housing bubble of gargantuan proportions.

    Pumping more money into mortgage markets seems a bizarre thing to consider: firstly, the average new mortgage is now £143,000, some 87% of the average house price – which hardly leaves any space for falling prices. Higher house prices in the short term are only going to lead to higher mortgage payments and less money for other spending. Treating houses as ATMs is what got us into trouble in the first place: the “income” to pay the larger loan seems to have come from reserving some of the additional borrowing, and then resorting to paying mortgages by credit card in too many cases. The reality is that the banks should be shrinking their mortgage book and reserving their lending capacity for businesses, with a rebalancing of loan terms so that business is not unduly penalised, and mortgages are not flattered with cheap rates and high levels of forbearance.

    Pumping money into the economy is simply going to cause inflation. It is not going to solve our lack of economic growth. The effect is like trying to pump up a bicycle tyre that has a large gash from a nail in it. The puncture needs to be mended first before the tyre can be inflated. Likewise, the damage to the economy caused by over-regulation and over-taxation needs to be fixed before any stimulus can be expected to work.

    Any further QE will undermine the credibility of the government plan to reduce the deficit.

  38. Caterpillar
    September 11, 2011

    I don’t believe the QE2 argument has anything to do with economics. Clearly the BoE have now admitted that they took 50billion from savers and gave to (wreckless?) mortgagees. This probably took a large chunk of spending out of the economy, perhaps more than a ‘stimulus’ of another 50 billion print run, and this ignores the inflationary cost brought on by the currency devaluation

    (Let’s pretend that) I am prepared to give the benefit of the doubt to the MPC and assume that at last the members privately appreciate that QE/ZIRP has been empirically tested and refuted. That said they will still have academic careers that are tied to/predicated upon this, they will still have psychological decision biases, and some may simply want to go through with QE2 just to ‘win’ the argument. Continuing and expanding QE/ZIRP may well be economically and ethically wrong, but I suspect the MPC will do it for aforementioned reasons, and the Chancellor will be in a political position where he will not disagree. No MPs are standing up and questioning the independence (or sanity) of the MPC, so the only way to return to sensible inflation rate and interest rate policy is for the MPC to complete the devastatingly stupid policy they began, and under the cover of this sham success they can then start to unwind the policy. Until the MPC has gone all the way with its incorrect policy, destroyed lives, wasted two years of recovery … until they have played their game / had one more go at the academic experiment … until then there will be no correct and appropriate policy. I have no belief that the MPC behave on either economic or ethical grounds.

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