Quantitative easing – "the Robert Mugabe school of economics"?


             In opposition Mr Cable told us “the road to Harare is not as long as we might hope”. Widely reported then  as a staunch opponent of printing money, owing to his colourful language about “Mugabe economics”, his argument was more hedged if you actually read what he said. He recognised that monetary easing was a judgement. You could have too much of it.

             Today in government Mr Cable has throw caution to the winds. He backs more money printing. He is urging the so called independent Monetary Policy Committee to print some more. Is he right to do so? What are the dangers?

              Remember the deal – this Coalition government was to offer us a tight fiscal policy in return for the Bank offering us looser monetary policy. The government  would control excess spending in the public sector, and allow the banks to fuel a private sector led recovery on the back of cheap money.

              I have no problem with the theory. I just have some doubts about whether that is what we are getting. Last month the UK government borrowed a record amount for an August – £15.9 billion  – up from £ 14 billion a year earlier. Tax revenues were up, so the increased deficit was the result of higher spending. That does not sound like a tight fiscal policy yet. If the media stopped saying there had been big and premature cuts in overall public spending it might be possible to have a  more informed debate about what is going wrong with the UK economy.

           Nor do I see the loose money policy for the private sector. Reports continue of small and medium sized companies finding access to new borrowing difficult. The very low interest rates only apply to the government. All the time we have some weak banks, and banks generally under strong regulatory requirements to increase their cash and capital, we will not have an adequate supply of new lending to fuel the private sector led recovery.

         I do not see how another round of creating money to buy up government debt would help much. The government interest rate is already low. It will not of itself unblock credit to SMEs or to the private sector generally. We need to fix the  state banks, and to improve the banking sector’s position  to do that.

         I do see some downside from more QE. The obvious danger is more inflation. I thought the Monetary Policy Committee were meant to keep inflation to 2% on the CPI. They seem to have abandoned all attempts to do that any time soon. Their loose talk about possibly having another bout of money printing has already triggered a slide in the pound against the dollar.

             Don’t they realise that it was the huge devaluation in part brought on by QE1 that produced the high inflation we are now suffering? Don’t they see the danger of yet more weakness in our currency bringing on yet more inflation? In an economy which imports as much as ours it is no good saying they have domestic inflation under control. Go into any shop and see how many things we now import from the emerging markets of the world, and see how vulnerable our living standards are to a weaker pound.

              Inflation is a kind of theft. High inflation is an unfair tax on the savers and strivers, and a windfall to the borrowers. I appreciate the main borrower is the government. That is all the more reason the MPC should for once stand up for the savers, and say “No” to anything which would undermine the pound and rob the prudent.  

             The government should also understand that high inflation this year is itself damaging recovery prospects. It is big price rises for enegry and other essential items that leaves people with too little money to buy the goods and services which would create faster growth. As inflation makes people poorer, so they can afford less tax, which leaves the government unable to afford all its spending. Money printing may not yet be a short road to Harare, but it is  far from helpful to a private sector led recovery.

               Recovery requires the government to fix the banks it owns, and make a bigger contribution to creating a strong and expanding banking sector serving the domestic UK market. Without that growth will continue to disappoint and QE will not get round that fundamental problem. Savers will worry about “Mugabe economics”, which is not good for confidence.


  1. Single Acts
    September 22, 2011

    Bloomberg reported yesterday that Lloyds of London had closed all their European bank accounts! Cable thinks printing money out of thin air is a good thing, meanwhile in the US Bernanke can’t quite bring himself to call it QE3 and so is going for a short for long securities swap and as for Peter Mandelson….okay I will save the moderator’s blushes. Yet it seems the architects of this doom are still substantially in place; the advocates of the Euro are still in positions of power in the UK (forget the bankers being arrested) and the eurosceptics having driven the opposing point from the field entirely are still nonetheless in the wilderness substantially.

    I am glad I am not religous, otherwise I would thnk we are living in the end of days.

    That said, it’s all entirely predictable and so easy to profit from.

    1. lifelogic
      September 22, 2011

      “so easy to profit from” how do you suggest?

      1. Single Acts
        September 22, 2011

        JR is understandably dubious about financial advice on his site, so this view is in no way sponsored by his website. I would also suggest I don’t give it either so this is simply what I did, not advice but anyway….

        1. Dump fiat paper like a bad habit. It is certainly in decline, possibly in a death spiral. You don’t want to be left holding Reichsmarks or Zim dollars etc.

        2. Look at commodities as a liquid store of wealth. Your call on which ones.

        3. Leverage your positions with fixed interest loan instruments in the expectation that inflation will make the debt look small whilst ballooning the asset value.

        If I am wrong and deflation sets in, I am toast. I see no evidence of my inaccuracy so far, but remain open to it of course.

        Reply: Thank you for reporting what you are doing whilst stressing you are not giving financial advice. To give advice you have to be a regulated person and to understand the circumstances of the people you are advising.

        1. JimF
          September 22, 2011

          I think the point is being made here that trashing one’s Country’s medium of exchange is immoral, and on a level with trashing a Palace or Monument. Nobody gets physically hurt, sure, but the only winners from money printing are those with no money and those with plenty, who can afford to take the risks alluded to here with commodities.
          It is also wrong then to have a CGT regime which canes you for holding value in commodities.

        2. lifelogic
          September 22, 2011

          Yes I suppose it is best left to the “qualified experts” such as Gordon Brown like the ones who were at RBS, Equitable Life and the also ones who recommended all the duff endowment policies, and who have lost my daughter £80 on her absurd Gordon Brown £250 (now £170) baby bond. Her 18th might have to be just a picnic a home made cake and a bottle of Perrier alas.

          Mind you all the newpapers, books and magazines are full of advice and if anyone ask me I always tell people not to buy a lottery ticket, or buy a hybrid or PV roof scheme or turbine or to invest in things that only give you a piece of paper in return.

          Am I breaking the law?

    2. Denis Cooper
      September 22, 2011

      As “Operation Twist” apparently doesn’t involve the Fed creating new money, only selling some of its holdings of short term bond for existing money and then using the sales proceeds to buy longer term bonds, surely it would be wrong to call it QE3?

      Reply: indeed.

      1. Bob
        September 22, 2011

        Isn’t that how Northern Rock got into trouble?

    3. javelin
      September 22, 2011

      They say they moved out higher risk accounts into lower risk accounts – I guess that means the money moved north.

  2. lifelogic
    September 22, 2011

    “The government would control excess spending in the public sector” When will they start I wonder after the next election?

    “Recovery requires the government to fix the banks it owns” These banks are the very worse at the moment – clawing back existing lending and not lending more to sound businesses (who are very severely starved of funds even of very expensive funds). Funds to invest even those having a good record and good collateral available. Thus reducing tax revenue to HMRC. Is this self strangulation really a good plan by Osbourne’s banks?

    Do not worry about the inflation they will say that will only be outside inflation “due to world increases in fuel and commodity prices beyond Osbourne’s and BOE control” – not due to the continued devaluation of the pound they are clearly organising.

    Will people have enough money left to to eat and get to and from work soon the few that are still working that is?

    1. lifelogic
      September 22, 2011

      Still at least we do not prosecute seismologists for not being “accurate fortune tellers” as in Italy:

      “Six seismologists and one official have been charged with manslaughter for not predicting the 2009 L’Aquila earthquake.”

      Then again perhaps we do we need some threat to control the BBC, Huhne, Gore and the other Global Warming exaggerators who are wasting so much of our money on “non solutions” to this vastly exaggerated problem.

      1. lifelogic
        September 22, 2011

        The difference being that the BBC, Huhne, Gore and the rest either know or certainly should know that they are clearly misleading everyone.

        1. lojolondon
          September 22, 2011

          I am glad you isolate the BBC – they are so guilty of poor reporting – the things they emphasise – like the EU, Global Warming, ‘cruel Tory cuts’ and Keynesian financial policies – are all total hogwash, and the true threats to British people – the EU, government spending, uncontrolled immigration and the decline in British living, education, defence and health standards are never reported.

          The licence fee should be eliminated immediately, the BBC cannot possibly get any worse.

          1. Nick
            September 22, 2011

            Make it go subscription. Then no one is forced to listen to their Labour party political broadcasts mascarading as news.

          2. lifelogic
            September 22, 2011

            Alas this BBC line is also broadly the line of Cameron, Huhne, Clegg, Osbourne, Hughes and Cable.

          3. Bob
            September 22, 2011

            The BBC is the glue that holds the socialist house of cards together.

          4. alan jutson
            September 22, 2011


            The BBC is the glue …..

            Very well put if I may so so.

          5. lifelogic
            September 22, 2011

            Perhaps the glue but the other pillars are the state sector unions and many employees, the labour party, the libdems half the Tory party, most charities, the EU (should tax relief be given for these activities?), most pressure groups and most universities and academics.

            I see costing the earth is on again about around 1.5 – 2 M of sea level rises this century. Seems rather unlikely as it is running at about 8 inches maximum per century and we seem to have stopped warming anyway.

    2. lifelogic
      September 22, 2011

      Clegg on the human rights act yesterday talking, in single syllables (for the dimmer LibDems one assumes) “It is here to stay”.

      Just why exactly? Why cannot the UK’s over paid legal system form its own judgements to protect peoples civil liberties and “rights” rather than having to second guess this distant court. As indeed they have done for centuries.

      Is it not perhaps rather racist (and certainly a bit pathetic) to assume that only people who speak another language, have a different history, legal traditions, distant from the local considerations and sit in Strasbourg can decide these things in the best interest of the UK?

      I assume, should life be discovered on other planets, he will insist on these things being decided on planet 56735 in the Andromeda Galaxy just to improve judgement quality and efficiency.

      I notice from the pictures that these judges do not even wear nice wigs and stockings but merely wear a sort of napkin (I suppose they would call it serviette) as a strange white tie – ready for a large lunch I can only assume.

      1. lifelogic
        September 22, 2011

        Probably a huge plate of Sour-Kraut with sausages and pork.

        1. Electro-Kevin
          September 22, 2011

          Perhaps waiting to dine out on some PIGS.

      2. lifelogic
        September 22, 2011

        The daily politics had the shadow minister for small business and enterprise on today. He even managed to make Vince Cable good by comparison.

        He did not seem to even understand Andrew Neil’s very simple economic questions let alone answer them and had no alternative plan to offer whatsoever.

      3. sjb
        September 22, 2011

        “Why cannot the UK’s over paid legal system form its own judgements to protect peoples civil liberties and “rights” rather than having to second guess this distant court[?]”

        Because case-law has established the UK’s domestic courts did not protect civil liberties to the standard set by the Strasbourg jurisprudence: see UK Cases at the European Court of Human Rights since 1975

        Some examples of what the domestic courts did:
        (1) injuncted the Sunday Times from disclosing information about Thalidomide;
        (2) fined a journalist (Goodwin) for failing to reveal his source;
        (3) penalty proceedings against a taxpayer that took over 13 years held not to be an unreasonably long time (King);
        (4) upheld the indefinite retention of DNA samples (S & Marper).

        1. lifelogic
          September 23, 2011

          And what makes you think the European Court of Human Rights will be better, with its judgements. Any court will make bad decisions on occasions and these should be addressed. The European Court of Human Rights has made many bad decisions too. The UK court may perhaps learn from some of their decisions – but why give the full powers away to a distant court do we have no good local judges.

  3. norman
    September 22, 2011

    I’m fundamentally opposed to money printing but it seems inevitable, indeed has done ever since the pie in the sky emergency budget of June 2010.

    The thing that grates most about it isn’t simply that money is being printed, that’s bad enough, but that the government is using this theft in order to maintain their big government position and kick the can down the road yet again (how often have we all read that in the last 2 years!) .

    If the government were to say ‘we’re printing £100bn and using it to give every company a NI employers and employee holiday for the next 3 years’ or ‘lower corporation tax to 5% for the next 2 years’ or ‘raise the income tax threshold to £13k for the next 3 years’ I could just about accept it but to waste it on creating bigger government, which will add future costs and not do a thing to help us in the longer term, is maddening.

    1. lifelogic
      September 22, 2011

      Indeed if they used the cash just to give a holiday on tax and NI to smaller businesses for six month (or even just a deferral) to give them capital to invest that they banks are not lending them it might be good.

      But doubtless it will go on more green bling, HS2, PIGIS, overpaid “Unison” members, the EU and the dis-functional NHS.

    2. Bob
      September 22, 2011

      Why not have a two tier system for the GBP? Private Pounds and Public Pounds. Then the government can pay all public servants, welfare recipients and foreign aid recipients with Public Pounds and they can print as many as they like.
      The private sector could use Private Pounds, which would be asset backed and the government would have to buy Private Pounds to settle debts to the private sector. The interest rate and exchange rates for Private Pounds would be set by the free market.

      There you go – sorted!

      1. alan jutson
        September 22, 2011


        In your scheme

        Would the public pounds have Mickey Mouse on them for insant recognition. Or even be printed in a different colour.

        Us Private people would notwant to be given any in our change after all, would we !.

        1. Single Acts
          September 22, 2011

          In fact, competing currencies might not be such a bad idea. the government won’t allow it, hence legal tender laws.

          Who do you think these in fact protect?

        2. Bob
          September 22, 2011

          Good point. I’m thinking that maybe the Public Pounds could be printed onto long runs of soft paper which would be perforated at regular intervals and wound onto a cardboard tube containing say 280 notes, thus making them easily distinguishable from Private Pounds. Each sheet would be one billion public pounds, so each roll would be worth 280 billion pounds or about 50p in private pounds. This method would have the benefit of providing a virtual peg, which could be referred the Andrex put.

      2. Martyn
        September 22, 2011

        Interesting thought to which there may be a precedent, in that in the ‘good old days’ NATO nations when paying bills etc used the ‘NAU’, the NATO Accounting Unit. It was sort of kept in balance by recalculating the value of the national currencies against the NAU and it seemed to work well enough.
        We could do the same with the Public PubGB£ and PrivGB£. It could start of at 1:1 and then we privates could watch the PubGB£ devalue in a month or so to 20:1. Interesting thought with amusing albeit worrying overtones…

  4. Peter Campbell
    September 22, 2011

    Mr Redwood you are entirely right in all the points you make. Anyone with any economic intelligence should be able to see the logic. It’s no surprise that Cable and co can’t see it- they’ve never been right about anything ever. But the question is why can’t your own party leadership?
    Too much loose money, too much tax, too much regulation, too much EU and a severe lack of democracy is my diagnosis.

  5. Richard
    September 22, 2011

    Politically, QE, borrowing and inflation is the easy way forward for politicians wanting to remain in power.
    They are nervous that the correct policies will make them unpopular.
    Economically, I think we all know, QE borrowing and inflation are on the road that leads to disaster.
    However, Mugabe proved that even starting from a much lower point on the economic scale a state can use these policies for decades and still remain in power.

  6. waramess
    September 22, 2011

    Perhaps it is a little early to be tallking Weimar Republic but certainly more appropriate than Mugabe.

    What started as a convenience turned into an imperative as the Weimar Republic needed the funding to support government spending.

    Printing money is the easy way out for a government that is unable to reign in its public sector and eventually it becomes the only way.

    Now the spokesman for the Bank of England points to rising prices and manages to fool half the people notwithstanding RPI inflation in Spain is only 2.2 percent.

    How many people will they be able to fool as the margin increases?

  7. Matthew
    September 22, 2011

    Can I suggest that there is another serious problem with inflation: inflation hits the poorest parts of our society hardest.

  8. Brian Tomkinson
    September 22, 2011

    The excuse for the first £200billion of QE was said by the MPC to ward off the danger of deflation. We now have inflation 125% above the target of 2% and predicted to rise to 150% above target before the year end. The BoE has admitted that the £200billion resulted in an increase in inflation of 1.5 percentage points. We are told that they now want to print more money to help growth. The result of their previous endeavour was to stifle growth as you clearly articulate. Why can’t they see the madness of what they propose? Perhaps we shouldn’t be too surprised when you hear just this week how public sector spending has resulted in colossal wastage: fire service £500million wasted; NHS IT system £12billion potentially wasted; unaffordable PFI schemes in the NHS. No one is ever held properly to account for these failures; similarly with the BoE and cabinet ministers. At the same time we also hear that large companies are sitting on 100s of £billions which they do not have the confidence to invest. Restoring that confidence is what needs to be addressed.

    1. Mark
      September 22, 2011

      If we assume the BoE was right and we would have had deflation – say even a mild 2% – then QE has added 6.5% to CPI, not 1.5-2%. Think of a number…double it…

  9. Bazman
    September 22, 2011

    You can now buy packets of tissues with £10, £20, and £50 bank notes printed on them and when folded out look like sheets of money. They cost a pound a pack which is about ten times the cost of a comparable pack the same size. Retailers never miss a trick. Need a few packets to have a billion.

  10. Ralph Musgrave
    September 22, 2011

    The popular idea that QE equals money printing is misleading if not complete nonsense. QE consists of having the central bank create one form of central bank liability, monetary base, and swap it for another, Gilts. However money is BIT more liquid than Gilts, so there is a finite stimulatory effect.

    Re the tight fiscal and lose monetary that JR favours, why boost an economy primarily via the products and sectors that benefit from low interest rates? You might as well boost just the home counties and hope that other counties eventually benefit from a trickle down effect. Or why not boost firms whose names begin with the letters A-L, and ignore the “M-Zs”?

    Re the “inflation” that JR claims results from devaluation, inflation is a CONTIONUOUS rise in prices. Devaluation is a ONCE AND FOR ALL EVENT. It’s in the same category as the so called inflation that derives from a rise in VAT or a once and for all rise in world commodity prices: the effect wears off in a year or two. The latter “temporary” effect is the BoE’s reason for allowing the current excess “inflation” to continue for a while. I think the BoE is right, though I draw the line at inflation, permanent or temporary, of more than 5% or so.

    1. Gary
      September 22, 2011

      Inflation is to increase the money supply faster than the economy is growing. Rising prices are the effect of the increase in the money supply greater than growth.

      If we can’t get our definitions right, we may even end up supporting this theft by inflation.

      1. Ralph Musgrave
        September 22, 2011

        Gary, Your definition of inflation was certainly operative a few decades ago. But nowadays I think almost everyone takes it to mean “rising prices”. My Penguin Dictionary of Economics gives it as, “A process of steadily rising prices…”. My Concise Oxford Dictionary gives it as “A general rise in prices…”.

    2. Nick
      September 22, 2011

      The BOE is wrong. Its remit is control inflation and its failed.

      It is also commiting the biggest insider trading scam with its own pension fund.

      reply: The decision to buy index linked bonds which I guess you had in mind was I suspect based on published information which the Bank has shared with the rest of us.

      1. JimF
        September 22, 2011

        Reply to Reply:
        It might have been based on published information, but it also leads to a more carefree attitude to inflation amongst those responsible for controlling it. How about their index-link is capped at 2%, their inflation target????

    3. forthurst
      September 22, 2011

      “a once and for all rise in world commodity prices: the effect wears off in a year or two.”

      It is utterly delusional to assume that debauching the currency will have no further repercussions in the wider world simply because of a lame excuse given by the BoE for not controlling inflation; fiat currencies have no intrinsic value, whereas commodities have, so it is delusional for those that issue fiat currencies to imagine that if they print more, they will be rewarded with more of intrinsic value.

      Furthermore, there is every indication that the Chinese will no longer be so willing to work in exchange for bits of paper printed by the private secret Fed, when the alternatives such as warehousing commodities would appear to be a better medium term hedge against loss of value.

    4. Kevin Dabson
      September 24, 2011

      “The popular idea that QE equals money printing is misleading if not complete nonsense. QE consists of having the central bank create one form of central bank liability, monetary base, and swap it for another, Gilts. However money is BIT more liquid than Gilts, so there is a finite stimulatory effect.”

      You seem to contradict yourself in your statement. The clue is “the central bank _create_ one form of central bank liability, monetary base, and swap it for another, Gilts.”. Emphasis is mine.


  11. Mark Pasola
    September 22, 2011

    Dear Mr Redwood

    Whilst the majority of the banking sector is struggling to reconcile it’s obligation to improve capital ratios with exhortations from government to lend more to small and medium-sized businesses, surely this need not apply to those banks which are wholly or majority-owned by the state. If a re-organised (and possibly re-badged) Northern Rock were re-capitalised and underwritten by the UK Treasury, it could surely start lending immediately and more freely to creditworthy British businesses, in a way which other banks cannot currently do.

    This is a strategy for growth which surely carries no more risk to the Exchequer than that borne by any other prudent commercial lender (and should actually turn a profit). Temporarily, out of necessity, and making the most of the unexpected state of affairs in which it finds itself owning banks, the government could indirectly offer to be the lender of FIRST resort.

    Insofar as the independent banks lose out in competition against a state-backed lender, that can be their punishment for getting us into this mess in the first place. Maybe their shareholders will take a closer look at their loan books in future and ask tougher questions about the risk exposure of their investment banking divisions.

    1. Gary
      September 22, 2011

      Why this preoccupation with recapitalizing the banks ? They are bust, insolvent. Get rid of them if they cannot trade. Many other lenders will fill the breach overnight. Not least venture capitalists, mutuals, giros, hedge funds. If they are not lending it is because there is so much dead wood in the economy, they are waiting for this to be cleaned out first. The govt is making this impossible.

    2. Mark
      September 22, 2011

      Northern Rock has little expertise in lending to businesses: it was a mortgage bank, born out of a building society.

  12. Nick
    September 22, 2011

    It’s obvious.

    Why invest in the UK and grow when you know the government is going to penally tax you?

    After all they are borrowing so much, and that means more taxation in the future.

    The only thing to watch is that at some point, interest rates will rocket. That will result in a stronger pound.

  13. alan jutson
    September 22, 2011


    Cannot really add anything to your already sensible comment other than to say.

    Printing money and devaluing the pound, is another slap in the face for all those who have attempted to do the right thing by making provision for themselves, and is a betrayal of sound money.

    Once again it is the savers and workers who are going to foot the bill.

    Why is it governments do not get it ?.

    So far this week alone, we have had the fire control centres fiasco.
    £ half a billion wasted.

    The NHS cenral computer system now being scrapped.
    £12 billion wasted.

    The cost of PFI Hospitals now being exposed.
    No one knows the real cost yet, but again £billions which are not even on the balance sheet.

    Before that we had contracts for Aircraft carriers, but no planes.
    £12 billion. Now double original budget, and we still have to purchase aircraft.

    We have a known Black hole of £38 billion in the Mministry of Defence spending budget, but soldiers did not have the right boots or transport for years (aware they perhaps have now)

    Add them all up, and it comes close to £100 billion for services which could have cost but a fraction of that sum if better managed.

    The above of course does not include bank bailouts, money to the IMF and Ireland etc.

    Who dreams up these schemes, and who is responsible for writing the contract terms which forever seem to favour the supplier..

    In the commercial world if you fail to deliver to the agreed contract terms, you get financially penalised or simply do not get paid.

    Aware all this took part under Labour,(other than IMF and Ireland) surprise, surprise, but all politicians (with a few exceptions) seem to be totally incapable of sensible, logical, commercial thought.

    When oh when will it end, you cannot even say when the money runs out any more, because they just want to print more and more.

    Time to invest in a wheelbarrow company me thinks.

    1. Geoff not Hoons
      September 22, 2011

      Alan, What would be realy interesting to know is how many of all the PFI contracts were funded by non UK based companies. I know of one with, I think the MOD, and owned by Warren Buffet that is off shore and therefore paying no UK tax whatsoever. As someone else said here some while ago if UK PLC were a company either the auditors or directors or both should be in jail.

      1. Mark
        September 22, 2011

        I think we should consider a super tax on egregiously profitable PFI businesses: we do it to the oil industry, so why not to PFIs? As an alternative we should consider putting the assets properly on the national balance sheet by using the government’s ability to borrow cheaply, buying the assets at fair value, and renegotiating the maintenance contracts. Of course, renegotiation would have to be done by people rather more competent than those who signed us up for the original deals that look like low start option ARM mortgages.

      2. norman
        September 22, 2011

        I remember reading in Private Eye a couple of years back that the HMRC building in Whitehall is owned and leased back to HMG via a company that employs tax efficient offshore structures.

        You couldn’t make it up!

  14. Martin
    September 22, 2011

    I have some problems with “QE”.

    Did it do much good before? It seems to be to be a sort of stimulus without the stimulant. How does this stimulus motivate any business to borrow to expand?

    If our own BofE are thinking of doing the same then perhaps I need to sell some Pounds and buy some Euros.

  15. Antisthenes
    September 22, 2011

    Western nations got into a mess because government policies sought to change human behaviour. It was believed that by doing so inequality economically and socially could be banished and that everyone could be persuaded to act altruistically for the common good and everyone would attune their lifestyle to that which was perceived to be healthy and wholesome. Apart from the fact that at this stage in human evolution that was a forlorn hope it did not take into consideration the skewing effect it would have. To attain these goals it required as humans would not accept them voluntarily changes in legislation, economic governance and increased state intervention. The outcome has been national structures that are not fit for purpose . So rather than accept that the aims however laudable have not worked and that they have caused the nations to become subjugated to vested interests that undermine rather than enhance prosperity. Those vested interests to maintain their influence need to maintain the status quo and to do that the previous policies have to be continued regardless of the consequences. Until power is wrested away from vested interest, which appears unlikely, then total economic and social disintegration is inevitable. Many on the right know the solution and I do not need to reiterate here as they have been stated on this and other right wing blogs. However as no one of consequence is listening so the solution is not going to be adopted and QE, bailouts, bond purchases and the like will continue to exhaustion. When all is collapsing around us it will be no conciliation in saying ‘we told you so’.

  16. Gary
    September 22, 2011

    “remember the deal”

    The problem with that deal is, in order to recapitalize the banks you may end up sacrificing the country. The black hole is probably so vast that it could consume the entire capital stock of the country.

    So, the question must be asked. What do the banks have on these politicians that they refuse to let them go bankrupt ?

  17. Adam5x5
    September 22, 2011

    We’re already near the tipping point of a massive inflationary spiral. To add to this further with more QE is madness.

    People are already struggling with a nice mixture of inflation and low, if any, pay increases giving a real term income reduction. It’ll come to the point soon when the average person is better off on the dole than in employment…

    Nor is there any point saving as the interest rates offered for savers are generally about 1/2 of inflation and if you do save, the government effectively punishes you for it in retirement… May as well enjoy it now.

    As I’ve said before, the only way out of this mess is to lower taxes substantially. This will actually raise revenues as we move across the Laffer curve. I believe it was FDR who cut the top rate of tax in the US from 75% to 25% in a recession/depression (not a popular move), and in doing so doubled the tax intake from the highest earners…

  18. oldtimer
    September 22, 2011

    This is another nail in the UK coffin.

    There is another aspect of high inflation worth a mention. The higher inflation is within the UK compared with other countries, the the higher the hurdle rate of return is for new business investment. In one way it simplifies the business investment decision; don`t make that investment. Save the cash (if you have it) for the inevitable rainy days to come or return it to shareholders. High inflation is totally inimical to new business investment and thus to the continuing programme of renewal and re-invention that businesses need to become more efficient, create new products and thus remain competitive. For the UK it is a well-travelled post WW2 road to decline.

    It is especially depressing that it is the Business Secretary who is advocating we continue to travel further along this this road. It is a counsel of despair. On this evidence the Coalition has failed and should give up.

  19. English Pensioner
    September 22, 2011

    What is the difference, as far as the public is concerned, between the Government printing more money, perfectly legally, and a forger printing a few tenners in his garden shed?
    In both cases, surely, it simply reduces the value of the rest of the currency in circulation.

    1. Denis Cooper
      September 22, 2011

      The difference is that the forger is unlikely to use the newly printed money to pay public sector workers and suppliers and contractors.

      OK so we all agree that a substantial part of the money spent by government is wasted, but we do need teachers to teach and nurses to nurse etc, and we don’t really want to be in the position where the government has no option but to suddenly sack large numbers of them and cut the salaries of the rest.

      Which is what happened in some countries, such as Latvia in 2009:


      “A third of the country’s teachers are being fired and public salaries will be slashed by up to 35pc to meet bail-out terms imposed by the IMF and the European Commission.”

      1. Jer
        September 22, 2011

        Denis, when you say “we don’t really want” you should remember that you don’t speak for me.

        I don’t want a third of our teachers sacked and 35% pay cuts, but I do think the government should have imposed 10%-15% pay cuts for all civil servants (except possibly the army and police – might need them…) in an emergency budget on day one. That would have solved a lot of the financial problem, and banged home what a deep hole we’re in. Strikes would doubtless follow, but frankly the whole lot could strike forever for all the value I get from them.

        Now it’s too late for that anyway, and the strikes will happen anyway, and sure as night follows day Ed Balls will become chancellor. At least that might lead to sensible policies – as soon as the IMF are brought in…

      2. Adam5x5
        September 22, 2011

        ‘we do need teachers to teach and nurses to nurse etc, and we don’t really want to be in the position where the government has no option but to suddenly sack large numbers of them and cut the salaries of the rest.’

        The first part is true, but the statement relies on the assumption that the state is the best/only supplier of these services.

        Why not privatise both and let the tax fall and standards rise?

    2. lifelogic
      September 22, 2011

      The difference is that the forger will probably spend it more wisely than the government.

      1. Electro-Kevin
        September 22, 2011

        And the printing work won’t be at risk of being outsourced either.

  20. Nick
    September 22, 2011

    The next reason why people aren’t lending to companies is because interest rates are so low. For the risk, the profit margin isn’t there.

    It’s contradictory with your argument that they are lending but at higher rates.

    However, inflation at 5%, lend at 6-7% to a risky enterprise? Doesn’t add up.

  21. Electro-Kevin
    September 22, 2011

    Inflation is only a windfall to borrowers if their wages go up in line with it and the correct measure of inflation is used.

    I estimate that – for things we cannot avoid buying such as food, fuel and travel – inflation is running at a level of 10%. Big ticket items remain cheaper but there’s no spare left to buy them so what relevance do they have to the average person’s budget ?

    Then there is hidden inflation – the quality of items getting worse and packet sizes getting smaller. 0.5% loans are not available to borrowers anyway and if a business dare ask for more money they risk losing their overdraft in a reassessment.

    No. Inflation is only a boon to those who DO NOT NEED TO BORROW.

    1. Mick Anderson
      September 22, 2011

      Inflation is only a boon to those who DO NOT NEED TO BORROW

      I don’t need to borrow – my earnings are higher than my outgoings, so I am a net saver – I don’t need to borrow. If I save £100 this year, its worth is reduced by the amount of inflation, year on year. The loss is offset slightly by any interest I can find, but that is only around the 3% mark compared to the 10% effective inflation that you suggest (and I agree with that part of your comment). Individuals are always worse off unless their income (in pay rises and interest on savings) is greater than effective inflation.

      So, inflation is only really useful to Government because the outstanding debt becomes progressively proportionately less significant.

      If Government borrows £100bn out of a £1tn economy, then prints another £100bn (QE), the original debt is effectively only worth about £92bn pro rata. The new (inflationary) money has diluted the money supply making everything worth less, including the original debt. Debt is paid back in absolute terms, but printing money has a relative effect. Inflation generally happens anyway, which gives the same effect but more slowly. QE just accelerates the process.

      1. Electro-Kevin
        September 22, 2011

        Thank you, Mick.

        Inflation works against borrowers whose income is not rising in line with it – that means the majority of borrowers are in trouble. They are having to manage rising costs (10%) while the repayments on their borrowing feels the same.

        Low interest rates are a different thing to inflation. Many people aren’t getting the benefit of that anyway.

        1. Electro-Kevin
          September 22, 2011

          One group which may be doing well out of inflation and low interest rates is established landlords.

          Are they passing on their State innitiated good fortune to renters ?

          It doesn’t seem so.

          What cost in disaffection among our youngest and brightest over taxes, high rent and inflation ? I foresee a succession of brain drains over the years. Until fthings are so bad that the maxim Location, Location, Location determines the true value of housing stock in Britain.

  22. stred
    September 22, 2011

    The civil servants that advised and presided over the list of bungled IT projects, the PFI fiddle, the ‘socially helpful’ immigration wave, the setting up of useless quangoes, the speading of local authority regulation, the use of management consultants to do their work -waste after waste after waste. These persons will be found to be still there, promoted and even with honours. Some of the people behind the biggest scandals and whislteblower silencing in the health service have moved to top ministry and quango posts. The PFI zeolots are back in the Treasury. The aircraft carrier enthusiasts are ther in the MOD, cancelling and scapping the aircraft.

    What hope do we have of genuinely cutting the waste and costs to the taxpayer? Much easier to print it, and if inflation is the result, the rich can always buy inflation proof national savings.

  23. Disaffected
    September 22, 2011

    Mr Redwood the Coalition know and are aware of what you are saying but choose a different course of action despite the realities and consequence of their follies to the UK finances. Governments use power in an insidious way. This is liberal/socialist political ideology not economics. People do not always act for the national interest, their own greed etc. Spies are motivated by belief ie Burgess, Maclean, Philby. They were quite happy to be treacherous to the country and some politicians are motivated in a similar way to achieve their ideological dreams (pan European state), it does not matter what the UK public think or a few loyal MPs. They will be sidelined, as you are, and they continue to achieve their goal.

  24. Caterpillar
    September 22, 2011

    [I agree with much of JR’s excellent post today, as expressed in the feedback loops described in my aside when commenting on yesterday’s ‘Why spending an extra £5 billion is a stupid idea’ post. So I won’t repeat the loops again, but just continue to worry about them.]

    Two thoughts;

    (1) CPI inflation was at 2.9% in March 2009 and interest rates had already been slashed to half a percent, when the MPC/BoE last panicked about hitting the 2% target and began the print run. CPI inflation is now at 4.5%.

    2.9% +QE => 4.5%
    4.5% + QE => ???

    (2) A factory metaphor: Willy-nilly throwing in a bunch of extra kanbans won’t improve a factory, all it will do is cause more inventory to pile up in different areas of the factory, and hide where the problems are. The good old JIT boat analogy keeps coming into my mind; with a lot of water (- inventory) the boat floats high above the rocks, as the water is removed the rocks (- constraining problems) become visible and are acted upon, a little more water (-inventory) is removed and more rocks (- constraints) become visible….is flooding with money simply an attempt to hide the rocks and hope they go away?

    1. Jer
      September 22, 2011

      Without disagreeing with the thrust of what you say, your note (1) is a bit misleading unless you factor in that in March, 2009 the CPI benefitted from a 2.5% reduction in VAT rates and currently it includes a 2.5% increase.

      I don’t know how much of the CPI basket is vatable, but it must be significant.

      1. Mark
        September 22, 2011

        If the ONS hadn’t made such a mess of their website and data presentation (which now muddles up monthly, quarterly and annual values requiring tedious disentanglement) it would be easy to see what was going on by looking at the index numbers rather than the annual increases: VAT changes are almost step like.

        Footnote: JR – I think you should formally complain about the way in which the ONS is obfuscating access to public information. It wasn’t easy before, but now it’s almost impossible in many instances.

        Reply: If you give me a bit more chapter and verse I will put it to them.

        1. Mark
          September 22, 2011

          Here is my attempt to get CPI data:


          You will note that these series descriptions do not explain the differences between them, and present the data awkwardly for analysis.

      2. Caterpillar
        September 22, 2011

        I didn’t mean to misrepresent (well not too much, but I suppose there was a touch if headlining in it), nevertheless I don’t believe the CPI target given to the BoE states that CPI be adjusted for constant tax. Moreover if you plot the CPI (the index level) from Dec 2003 through to the present day and overlay a 2% per annum line from the first point, then you see a basically on target BoE until Dec 2007/Jan2008 followed by a ‘nice’ upward kink in the CPI.

        Also if one takes the August 2011 CPI of 120.1 and assume that the index is now increasing at only 1% per year, it would take until April 2012 for the reported annual rate to drop below 2% and it would stay aroung 1.5% until July 2012. Taking a 1% annual assumption is equivlaent to monthy changes in CPI of around 0.08% to 0.09%, this doesn’t look too likely based on this year’s data post VAT rise.

        And finally the BoE QE article in the 2011 Q3 Quarterly Bulletin suggests QE1 added 0.75% to 2% to inflation, and the way it is worderd therein would seem to ignore confidence and exchange rate effects e.g. page 210.

  25. wab
    September 22, 2011

    “Inflation is a kind of theft.”

    If inflation is theft then what is deflation? Most economists will tell you that some inflation is a good thing, and that deflation is a terrible thing (c.f. Japan). We are not yet even close to having Weimar or Zimbabwe inflation problems, and this kind of exaggeration is not helpful.

    “I thought the Monetary Policy Committee were meant to keep inflation to 2% on the CPI.”

    Correct, but it’s not a very sensible policy in all circumstances.

    I would bet that a lot of the people who comment on this blog bought their first house for pennies several decades ago and have personally benefitted (through no effort on their part) from the subsequent huge house price inflation. For these people to now complain about inflation and about how they have allegedly been “prudent” and are being robbed by inflation is ridiculous. They have been lucky to have been born at a time when houses were cheap and when university education was free and when pensions were generous. The young people of today have no such luck.

    Reply: We are not beneficiaries of paper gains on our homes unless we want to sell and live in something cheaper. We get taxed on them for just living in them.

    1. zorro
      September 22, 2011

      Fear not fellow posters, we are not close economically to Zimbabwe…. Next you’ll be saying our Chancellor has the same name as Zimbabwe’s….oh wait

      If Cable and his crew exert any more influence they’ll make Mugabe look like Hayek next to them (well, maybe a slight exaggeration).

      The killer for the B of E is that they have already admitted that previous QE has been inflationary. So, how can they continue, with a straight face, to claim every time that inflation will be back at 2% within 2 years. They know full well that they have no chance of achieving that rate with the current tactics.


  26. GJ Wyatt
    September 22, 2011

    The MPC’s commitment to a symmetrical 2% ±1% inflation target is disingenuous. It has been surreptitiously replaced with an output target, the pretext being that causation runs from low output now to low price rises in one or two years’ time, and printing money now will offset that. So the danger they want to forestall is too much disinflation! Their nudging the exchange rate down is all to do with improving the foreign balance (and thus output), never mind the induced inflation.

    The MPC must be judged by their performance over the years, which reveals a clear inflationary bias in its decision making. This is largely due to the composition of the committee, which is appointed by the Chancellor of the Exchequer.

  27. sm
    September 22, 2011

    Questions you hardly hear politicians ask or discuss honestly? Why?

    We also need to understand why the governments have not acted to purge the debt and act in the national interest.

    Reading Golems blog and some of the links on an expose of the larger strategic debt problem .We all are guilty of looking at short term issues and policy response such as QE2.

    One illuminating link from an ex IMF chap ‘A quiet coup’

    Monetary easing is judgemental. Agreed more so under fractional reserve banking.

    Priority should be to reduce imports and encourage exports, stimulate the multiplier effect and retain spending power within the UK. If it is inflationary then surely interest rates not taxes should rise further. (It seems taxes and inflation are preferred. Why?)

    Why not stimulate the economy and get on with restructuring the banking industry today – I don’t see a choice? Vickers will likely be outrun by events.

    Wont bad debt write offs cause deflation in the money supply. Business , individuals and banks will invest if they feel the downside risks have dissipated.


    The loose monetary policy is supporting favoured sectors, the Zombies, not the decision makers and business which called it right and made prudent decisions. It appears interest rate policy is hampering fiscal policy and asset adjustments via excessively low interest rates. How could an insolvent bank expand lending? Monetary policy is inflating only favoured bad debt away and also savings.
    Unless you’re an insider or can borrow at 0.5% or omnipotent how can you invest with so much short term political manipulation in the economy? Why have not house prices corrected nominally in terms of wages?

    Stimulate the economy and restructure the banking industry- I don’t see a choice?

    A quiet coup indeed.

    I would be interested in you covering the history and the subject of fractional reserve banking and alternatives?

  28. javelin
    September 22, 2011

    And it looks like the FED today focused its money on bonds and not on equities – hence the 4% fall in the FTSE.

    We are in a situation where the so called “bond vigilanties” and “equity vigilanties” are fighting their corners. If the “bond vigilanties” win the taxpayers cash will be spent on Government bonds otherwise it will be spent on a Corporate Stimulus.

    What alot of readers need to understand is that at the moment its not clear whether the fiscal stimulus (i.e. QE or Twists) are going to favour bonds or equities. That is will the stimulus be spent on propping up corporates to try to achieve growth or bonds to stop Governments defaulting.

    The uncertainty in the market is not knowing where the Governments are going to print money. Greece IS as dead man walking the reason it hasnt been burnt by the markets is that the Government is still propping it up and may continue to do so. In fact both could go belly up – and probably will – but its becoming like a tight rope walker losing their balance.

    Reply: I thought the Fed had indicated it would be buying longer bonds, not shares, and some mortgages to replace ones that are repaid.

    1. zorro
      September 22, 2011

      The latest zombie ‘kick the can down the road’ tactic (aka Op Twist) shows how the US administration is fast running out of options which it feels that it can politically afford.

      It intends to take action to influence a more favourable bond yield curve. The Fed will buy $400 billion of Treasuries with maturities between 6 and 30 years before the end of June 2012 and will sell the same amount with maturities of 3 years or less.

      Effectively, it is a disguised QE2, and the targets will be the long term savers (pensions). Doubtless, Gideon will be watching closely for a year or so hence….


  29. Ian B
    September 22, 2011

    One of the most disturbing elements for me about all this is that, as the inflation predicted by us far-right-loony-mad-people has come to pass, it has been blamed on speculators pushing up commodity prices; this despite the fact that a speculative price rise in a commodity cannot create a general inflation of the price level (Economics 101). The rhetoric being deployed is eerily reminiscent of the same rhetoric used in the Weimar inflation, which blamed it all on speculators; and of a certain ethnic origin too, which led to unimaginably horrific consequences a few years later.

    It is the greatest mistake to deploy this kind of blame throwing. Whatever happened to “inflation is always and everywhere a monetary phenomenon”?

    We do not need more money. We need the price system to correct to non-bubble levels. It cannot do that with the continual meddling by people who think they can fix things by just dumping money into the markets.

  30. Frank Salmon
    September 22, 2011

    This article confuses two types of inflation. We are experiencing price inflation which means more expense and a cut in living standards. The devaluation of the £ is justified and even now it is about what it ought to be against the dollar. More expensive imports mean we are poorer as a result. This is fine, because we were never as rich as we thought we were in the first place. Almost $2 to the £1 under G Brown was a ridiculous state of affairs. So the inflation we have experienced is a reflection of the misguided Brown boom.
    Mugabe inflation only takes place when prices and wages are rising together. This is general inflation and it is the normal type of inflation, eg 1970s and 1990s.
    This is not the inflation we are witnessing today and it is probably why the MPC is holding off on the 2% inflation rule. Infact, it would be better to follow trends in income growth rather than CPI. If incomes are not rising at a time of price inflation, it is best to leave well alone on interest rates as people are already suffering lower living standards. Yes there will be still be the theft from savers as you point out, but bankruptcy would be even more likely if we put interest rates up now, and if that happened, all savings would be lost.

    1. Electro-Kevin
      September 22, 2011

      That all makes sense to me.

      Could the Coalition hold off energy taxes in view of the reduced levels of consumption already happening ?

    2. Susan
      September 22, 2011

      Frank Salmon,

      At the moment inflation in the UK is squeezing disposable incomes and consumer spending that is why we are seeing weaker growth at the moment. Therefore, the BOE should not be relaxed about not meeting its 2% target, this is there only remit after all. In actual fact more injections of cash are not only risky I would have thought but unlikely to be effective. The last round of QE merely propped up Government debt it was little use to the wider economy.

      If people come to expect inflation to remain high confidence in the economy will lower and we will see wage increases and rising prices. It is far better to see little or no growth and low inflation, than no growth with high inflation which will be the result if more QE occurs, I believe.

      QE which pushes up inflation is the last desperate tool for any economy and is of no use to an indebted country looking for growth. Furthermore printing money that causes inflation is a tax on people, inflation tax.

  31. Bernard Otway
    September 22, 2011

    I don’t know whether it is called inflation or what[I call it criminal].But in Kelvin Mckenzie’s new column in the Mail a couple of days ago ,he sings the praises of his new Samsung 55 inch TV but asks the question WHY it cost him £2500 in this country and yet his son just bought the exact same tv in New York for £1200,also I just had someone put a dent in my car while parked in the local ASDA,I have been quoted £500 to fix it ,I had to be given smelling salts,because in South Africa where I was until 2008 and where all my family still is ,the same dent in the same car,I had a 2002 Renault Laguna in SA and have a W reg 2000 model
    here would cost about R500 to fix exchange rate R11 to £,DO THE MATH, WHY?????.
    Maybe I should set up a business sending cars to be panel beaten in SA.

    1. alan jutson
      September 22, 2011


      Perhaps you should import some labour from SA, but then your man will find out why our prices are so high, its the overheads and other costs which make up the figure.
      There is even a tax/environmental charge for disposing of the excess paint not used here in the UK, similar to oil disposal charge when the car goes in for a service.

      If your paintwork is not broken or scraped can only suggest to contact a dent removal company for a quote, they usually charge about £70.00 per panel no matter how many dents they remove from that panel (providing dent is not an actual deep metal crease), they can if they are competent produce excellent results.

    2. norman
      September 22, 2011

      My wife needed (well, she says so anyway!) braces fitting so we asked our dentist how much it would cost – between £3,000 and £5,000 he said. I just about fell away.

      My wife is Brazilian and next time we went there for holidays she got her braces fitted – around £100 for the same work. I thought the same thing, we should have came back carrying two suitcases worth of braces and cleaned up!

  32. Neil Craig
    September 22, 2011

    Mr Cable says that our economy is currently in the rquivlent of war.

    He is correct. What he omits to mention is that Britain’s political classes, with the LudDims being the most destructive part are, in terms of the destruction they have caused, rather worse than the Luftwaffe.

    Britain’s economy is probably about 40% of the size it would be without decades of deliberate economuc destruction brought about under the ecofascist banner by our political classes.

    This is indisputable and no politician, particularly no LudDum one even attempts to dispute it. In fact the Luftwaffe’s damage was considerably less than they have achieved.

  33. javelin
    September 22, 2011

    So I’m sitting here before lunch looking at the Italian economy. I’ve said all along its gloomy because of the high debt and low growth AND downward strategic growth trajectory for the Italian economy.

    The Euro Purchase Manager Index is out monthly and shows a steep fall – as this correlates strongly with GDP one would expect the Italian GDP to fall sharply – and it is only 0.1% at the moment.

    If you look the Euro Wide figures are not good.

    If you look (and speak Italian) you can see new orders are down more steeply in Italy. It looks like a recession is blowing through the Med and that is not good for Italy given its huge debt need for liqduity and current lack of liquidity in the Bond market.


  34. Kenneth
    September 22, 2011

    I am a simpleton in financial affairs but at least it allows me some uncluttered thinking.

    My questions is: while banks are so hard up and so tied up in sovereign debt (and regulation) etc and at the same time while some organisations (not just pension funds etc but large corporations) are building up cash that they cannot find a place for, why can’t non-banks become de facto bankers when it comes to investing in other companies?

    Have I missed something?

    Reply: They can advance the money to goos prospects if they wish. They usually chose to use banks as the intermediaries, as the funds themselves do not have the expertise or the staff to control the loans

  35. Mike Fowle
    September 22, 2011

    Mr Redwood, your entire article seems to me a trenchant and accurate analysis. The media are incredibly irresponsible and damaging, especially the BBC. But I am not sure the problems can be fixed. I see a great depression coming.

    reply: The BBC did allow me on the World at One to explain why QE is inflationary.

  36. RDM
    September 22, 2011

    Well, If we have too?

    Why does’nt the BoE buy £10bn of equity or bonds off 20 new regional banks, with a promise to hold it for 10yrs?

    Banks based within Technology Parks or Enterprise Zones?

  37. James Reade
    September 22, 2011

    Yet again, plain and simply wrong.

    Please look at http://dl.dropbox.com/u/6596845/RedwoodWrong.pdf

    As you can clearly see, the 25% devaluation in the pound happens in mid-to-late 2008.

    The thick vertical line, in March 2009, is when QE1 started. Note that actually, the pound appreciates in the immediate aftermath of QE1 starting.

    So the devaluation thus could not possibly be caused in part by QE1.

    It would be really helpful if influential people actually checked facts before writing things of huge economic importance.

    Reply:Markets move to discount events

    1. Mark
      September 23, 2011

      Exchange rates move because of changes in supply and demand for currency. In 2008, there were very large capital flows as US banks withdrew short term wholesale lending to UK banks in a bid to generate cash and stay solvent: those loans were replaced in part by BoE lending via the SLS and CGS (over £320bn) and other devices, including the state purchase of interests in UK banks and added guarantees on liabilities. These devices were all effectively money printing on a massive scale. The formal QE of unfinanced government spending that followed prevented any bounce back in sterling, despite the fact that sterling was no longer being sold to repatriate loans on the massive scale of 2008. It is worth noting that foreign purchases of gilts were all but halted by QE, and only resumed once there was a clear prospect of a government promising to do something about the deficit rather than trying to print its way out.

      1. Denis Cooper
        September 23, 2011

        Actually on a net basis all private purchases of gilts were halted during the formal QE, by which I mean that private investors carried on buying and selling but there was no net increase in their total holdings.

        How holdings by different categories of investors changed during the calendar year 2009, rounded to the nearest £ billion at market values – in each case the first number is for Dec 31st 2008, before formal QE started in March 2009, the second number is for Dec 31st 2009, when formal QE was complete apart from about £8 billion, and the third number is the change over the course of the year:

        Insurance companies and pension funds: 246 -> 254, + 8

        Overseas 216 -> 224, + 8

        Bank of England Zero -> 190, + 190

        Other financial institutions and other 110 -> 82, – 28

        Banks 18 -> 25, + 7

        Building societies 8 -> 14, + 6

        Households 18 -> 6, – 12

        Local authorities and public corporations 1 -> 1 unchanged

        TOTAL 617 -> 796, + 179

        These data were abstracted from tables in Debt Management Office Quarterly Reviews, the Jan – Mar reviews for 2009:


        and 2010:



        Apart from the most obvious changes of “Bank of England” leaping from zero to £190 billion, greater than the increase in the total gilts in issue, £179 billion, one striking feature is that at the start of the year “banks” held only £18 billion of gilts, not even a tenth of the volume required by the Bank for its purchases, and in fact at the end of the year they had slightly increased their holdings to £25 billion.

        Which rather knocks on the head the oft-repeated claim that the sole purpose of the formal QE was for the Bank of England to kindly help out banks by relieving them of their unwanted holdings of gilts.

        reply: Indeed. The main consequence of QE was to allow the government to spend and borrow without worrying about gilt prices.

    2. James Reade
      September 24, 2011

      Have you done something like, say, a Google Trends search for the term “quantitative easing”, John? That would give some idea whether markets were “expecting” QE 6 months before it happened.

      Funnily enough, when you do look, you’ll find that there were no Google searches in the UK for QE before January 2009, by which time the 25% devaluation had happened.

      It would help if you just admitted you were wrong. I find it infuriating how many of my Tory friends are unable to do this. Facts just shout out, scream out, you are wrong.

      Reply: I find it extraordinary that you think £200 billion extra money can be created and it should have no impact on its value, which is best measured by the exchange rate. Why do you think there was such a sharp devaluation of the pound and so much more inflaiton in the UK if it was not to do with monetary policy? Why do you think the pound fell last week?

      1. James Reade
        September 25, 2011

        The point is plain and simple: The devaluation was not caused by QE. Plain and simple. The devaluation happened 6 months before QE started.

        I don’t get why you’re changing the point here. You were wrong, just admit it, and we can move on to other parts of your blog where you’re also wrong.

        We can then start talking about the impacts of QE. That’s completely different.

        Actually, I know why you find it hard to admit it, and to answer the question – it’s because you’re a politician.

        Reply: The Bank have recently reported that QE caused some of the inflation. You seem to be unaware of the way markets move ahead of events and discount them.

        1. James Reade
          September 26, 2011

          For the nth time, the devaluation happened SIX MONTHS before QE happened, SIX MONTHS before the first Google Search for QE in the UK.

          I’m perfectly aware of how markets process information – heck, I only do research on them most days. The point you seem unable to grasp is that the devaluation, and hence the inflation it caused, was NOT caused by QE. The point is not how markets process information.

          Is it that hard to accept this very simple point? That you were factually inaccurate in your original article?

          reply: We disagree about an interpretation of events, not about facts. You seem to agree with me that the government did create more money,(fact) and that we did have a much higher rate of inflation than other major western economies(fact). You I think agree that the Bank of England itself says that it thinks some of the inflation was caused by QE.(fact) You do not agree that the pound has fallen and prices risen in part owing to fears of QE confirmed by actual QE.(interpretation) So I repeat my question – what is your explanation of why the Uk had much higher inflation than comparable economies which were not undertaking QE? And why is your response so personally aggressive?

          1. James Reade
            September 27, 2011

            John: The only point I have made is that your interpretation of events is factually incorrect – the devaluation happend six months before QE1, and a long time before QE1 was seriously contemplated.

            I get annoyed when people are unable to just accept they are factually incorrect – which you are. We can then move on.

            At no point have I said that QE1 would never lead to a devaluation, I have just pointed out where you are wrong in your interpretation of events. You should do me the decency of admitting this instead of diverting attention to other things.

            Then, if you do wish to think about the value of a currency, and quantitative easing, well let’s think about what the exchange rate is fundamentally: It’s a market perception of the future viability of a currency, akin to a share price is the market perception of the future profit stream of that company.

            Hence it *could* be that the currency falls because of QE because more money is being printed. But the share price of a company doesn’t necessarily fall if more stock is issued – if the expectation is that this will lead to greater profitability in the future.

            The pound fell in late 2008 for obvious reasons: Confidence in the UK economy plummeted. This is a completely different event to QE1. It is possible QE1 staved further devaluations, and it is possible the recent fall in the pound is entirely separate from talk of QE2 – who would have great confidence in the UK economy right now?

            So, we do agree that it’s all about interpretation. You take a very narrow view on things which is politically motivated. It’s my job not to, and surprisingly enough, I don’t.

            Reply: Thank you for the more sensible tone. It is my judgement that QE in the UK does lead to weaker sterling. Sometimes the movement takes place ahead of events as markets discount. You are of course entitled to argue that QE does not cause devaluation for sterling. I would still be interested to know what did cause the bid devaluaiton in your view.

          2. James Reade
            September 27, 2011

            It looks like we have reached the limit for replies!

            You still aren’t getting my point: It is that this devaluation, the 25% one that happened around 2008, could not possibly have been caused by QE.

            I’m not saying QE would never cause a devaluation, and in fact in my last reply I said it *could* do so.

            It seems you think my tone “aggressive” because I used some capital letters, yet it seems even the capital letters weren’t sufficient to get the simple point across.

            I repeat, once again: the 25% devaluation of sterling in 2008 which helped fuel inflation (along with the VAT hike), happened before QE was even discussed in the UK. Six months before. Therefore this devaluation was not caused by QE.

            The subsequent movements *could* have been caused by QE but again needn’t be, and a careful analysis is required, not simple point scoring politics.

            But the point remains, and I would really like it if you were just able to admit how wrong you are here John: the 25% devaluation in Sterling in 2008 could not have been caused by the initiation of QE1 in 2009. Full stop.

            Reply: My judgement is the active belief that they were going to print money did hit the pound, and the movement was confirmed when they went on to do so. To persuade me I am wrong I need to hear from you why you think sterling fell so much, if not owing to worries about UK money policy.

  38. Denis Cooper
    September 22, 2011

    It seems most likely to me that the next round of QE won’t be used to fund the government’s chronic over-spending, which is how Labour got the last one to work in the year leading up to the general election, but instead it will be used to save the UK banking system from potential collapse if/when one or more of the eurozone states defaults on its debts.

    Osborne has already publicly anticipated that there might be more QE, in his Mais Lecture of February 24 2010.

    “But given the fragility and uncertainty in financial markets, let me make it absolutely clear that we have no plans to change the CPI inflation target, and we will maintain the current arrangements and protocols for making decisions around quantitative easing.”

    1. Mark
      September 23, 2011

      See comment above: we already had massive QE in favour of the banking system.

  39. Andrew Duffin
    September 23, 2011

    “The very low interest rates only apply to the government”

    No, Mr. Redwood: the very low interest rates apply to savers too. They are one of the many ways we are being ripped off to pay debts of the profligate.

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