To QE or not to QE? That is the question


Readers have asked me to update them on the debates about QE. The UK is not adding to its stock of £375 bn of created money and bond purchase. The US is just about to end its latest programme of money creation. Japan is well advanced with another very large programme and is likely to continue for the foreseeable future, as inflation (ex tax increases) is still low. The Euro area is not undertaking formal QE, but is seeking to increase liquidity by the ECB buying loan packages and bonds from commercial banks.

Before the UK crisis hit in 2007 (Northern Rock) and 2008 (RBS and HBOS) I urged a different policy towards the banks. I wanted the Bank of England to lend as lender of last resort . I urged them to supply more liquidity to a very damaged inter bank market. They chose not to, citing moral hazard. As a result they allowed major banks to collapse. The FSA banking regulator switched from being too lax in its standards of cash and capital to being too tough for the circumstances,  increasing the damage done.  This was a predictable tragedy which this site chronicled at the time and warned against in advance.

I also opposed the pumping of large sums of taxpayers money into commercial banks to provide new capital. I recommended controlled administration once they had helped bring the banks down. The shareholders and bondholders rather than taxpayers should have taken the hit. The authorities should have lent money to the parts of the commercial banks they needed to support and preserve whilst they found their own new arrangements for owners and capital. This approach has now been adopted for future crises through the so called living wills, a type of controlled administration.  I wanted to see radical changes to the numbers of banks and the shape and performance of the banking industry by a market led reorganisation and recapitalisation of the commercial banks that were in trouble.

If this had all be done in a timely way the Bank of England would have financed the system by shorter term loans for a period and we would have seen a competitive sensible banking  industry emerge much more rapidly. We would not have needed QE.

QE was required because the Bank did not keep the banking markets liquid and because the badly damaged commercial banks in the system meant they could no longer finance a normal level of economic activity and modest growth. QE did provide some relief to a very troubled market by releasing cash into the hands of people and institutions who previously owned government bonds. This money then found its way into the commercial banking system and averted an even larger decline in the money supply with worse recessionary consequences. Much of this injection in the US, Japan and in the UK did not prove inflationary for the simple reason the commercial banks needed the extra deposits and additional cash and did not lend this money on or gear it, which would have proved inflationary. The only caveat to that comment is in the UK QE may have been a reason sterling devalued, which did give a one off boost to inflation. In Japan a large devaluation of the yen did not have similar consequences as it is an economy less dependent on imports.

I see no need for either the USA or the UK to undertake any further QE. Both have reasonable recoveries. Even with the poor performance of the Eurozone and slower worldwide growth, most forecasters think the UK and US will continue to grow at a  reasonable pace this year and next. Japan needs to fix its commercial banks more successfully. Its massive QE programmes achieve very little by way of extra output or inflation.  I will study the Eurozone in more detail in a later post.

QE has adverse side effects. It damages the returns to savers and grossly distorts the price of financial assets.

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  1. Richard1
    Posted October 19, 2014 at 6:27 am | Permalink

    Certainly your opposition the Brown bank bailout has proven completely right and as you say it seems now to be accepted this would not happen again. It is amazing the Labour Party are not shouldering more blame for this catastrophic policy given it was driven by Gordon Brown together with henchmen Messrs Miliband and Balls. Are people really going to vote back in the authors of this terrible folly?

    • Lifelogic
      Posted October 19, 2014 at 8:21 am | Permalink

      “Are people really going to vote back in the authors of this terrible folly?”

      Yes, well anyway it looks about 90% likely that Miliband will be PM in one way or another in May. It all depends on whether Cameron will finally wake up and do some UKIP deal, or at least move to far more sensible policies & rather faster than he is currently being dragged.

      Lower tax rates, cheaper energy, far less government, selective immigration, a fair deal for the English & far less EU – quite simple really just a 180 degree turn for him on nearly every issues.

    • Tad Davison
      Posted October 19, 2014 at 8:50 am | Permalink

      ‘Are people really going to vote back in the authors of this terrible folly?’

      Possibly. We’re back to the old pinball table syndrome where the electorate continually bounce between one main political party and then the other. The trouble with that though, is sooner or later, they disappear down a black hole into oblivion. Better not to get blasted into the maelstrom in the first place and abandon the usual untrustworthy parties who have such a dark and dismal record of blather, BS, and failure.

      Tad Davison


    • oldtimer
      Posted October 19, 2014 at 8:53 am | Permalink

      If the polls are to be believed, they will vote them back in. In voters minds, they understand what the initials NHS mean. It is something they will be bothered to vote. QE is meaningless and entirely off the voter radar.

      • fedupsouthener
        Posted October 19, 2014 at 10:24 am | Permalink

        Cheaper energy is important too. The key to a flourishing economy. Ditch the Climate Change Act brought in by Labour and a few radical charities such as FOE. Another policy written on the back of a fag paper.

        • oldtimer
          Posted October 19, 2014 at 4:57 pm | Permalink

          I agree with you about cheaper energy and the desirability on the suspending/repealng the Climate Change Act. But it was not written on the back of a fag paper. And it has been backed by a highly professional PR propaganda campaign for the past ten years at least, and has been and continues to be relentlessly promoted by the BBC. It is unlikely to be overturned any time soon unless UKIP does exceptionally well at the next GE.

          • Lifelogic
            Posted October 19, 2014 at 6:58 pm | Permalink

            Indeed it is pushed endlessly by the BBC, through schools and the exam system. Usually explained by dim art graduates waving their hands about. People who think positive feedback is “positive” and often do not understand the difference between the units of power and energy or anything else much about engineering or physics.

          • fedupsouthener
            Posted October 20, 2014 at 1:01 pm | Permalink

            For all it’s worth it might as well have been!

    • Denis Cooper
      Posted October 19, 2014 at 1:11 pm | Permalink

      “Are people really going to vote back in the authors of this terrible folly?”

      You’re assuming that “people” in general agree with your analysis that the Labour government was to blame, when in fact many of them do not accept that.

      The last time I saw an opinion poll which asked who was most to blame for our ongoing economic and financial problems there was a roughly equal three way split between the present government, the previous government and both.

      It’s too late to change those perceptions now; 2009 was the time for the Tory party to point out that the Labour government had got itself into such a mess that it was having to borrow one pound in every four that it was spending in the year leading up to the election, and that it could only be sure of being able to borrow that much by inducing the Bank of England to create £198 billion of new money and use it to rig the gilts market; but the Shadow Chancellor and Tory election supremo George Osborne chose not to do that, and let them off the hook.

      • Richard1
        Posted October 19, 2014 at 4:49 pm | Permalink

        The official Tory response to the bank bailout was weak. Messrs Cameron and Osborne could and should have listened to what John Redwood (but very few others) were saying at the time and opposed it. The failure to oppose Labour on this has also allowed the political left to blame the collapse and recession entirely on ‘the bankers’ (who do deserve some blame), but to avoid anything like the fair share due to their own high spending interventionist policies.

        • Denis Cooper
          Posted October 20, 2014 at 8:19 am | Permalink

          I’m not talking about the bank bailouts, which were not funded through QE as referred to by JR in his article. I’m talking about the Labour government being allowed to get away with QE to assist in the funding of its budget deficit, without most of the electorate understanding the magnitude of that budget deficit – in some cases not even understanding what it meant – let alone that the primary purpose of QE was not to “stimulate the economy” or “inject new money into the economy”, as they were being told by the media, but instead to make sure that the Labour government did not run out of money to pay all of its bills in full and on time during the year leading up to the general election. If those leading the Tory party had decided that the public deserved a proper explanation then it’s almost certain that enough of them would have been moved to vote Tory, or at least vote against Labour, to have given the Tories an overall Commons majority. For some reason Osborne decided not to do that, instead he and his colleagues decided to join in with the deception being practised by Labour. What that reason was is still open to speculation, but the fact that Osborne himself later added another £175 billion to the QE total may give a clue.

      • Mondeo Man
        Posted October 19, 2014 at 7:42 pm | Permalink

        Denis – “Are people really going to vote back in the authors of this terrible folly?”

        Some deluded fools will. Thanks to UKIP far fewer votes for Labour though. (Little thanks here for that though.) Nor thanks for a voter turnout of 60% where the pre Farage era was 40% (higher turnout is a good thing, surely ?)

        Labour governments are elected because the overwhelming number of conservative people in this country remain unrepresented by the Tory party.

        And now for my Sunday rant. A little later than usual but please bear with me as I believe that I speak for many. Sorry to attach it to your comment but I’m on a roll.

        The latest on immigration beggars belief. Panic measures no doubt but largely bogus.

        In 2010 it was pointed out here that Cameron’s “Limit immigration from *outside* the EU” was a deceit. A senior Tory admitted as much last week.

        Now we have “We want to limit benefits to newcomers from the EU.”

        This is bogus too. It matters not who is receiving the benefits. If someone is coming here to do unskilled work which an unskilled UK citizen should be doing the bill to the taxpayer is the same.

        – It matters not how many jobs are created

        – it matters not how many businesses are started

        – it matters not how many houses are built

        The increase in population will see to it that it is never enough. And this is without mention of the looming energy crisis, an economic downturn or a house market collapse.

        The ‘war’ with Borroso is bogus too.

        The only thing that should convince the British public is troops at the borders and masses of people being turned away.

        Who are your bosses. Mr Cameron ?

        The People or the EU ?

        And if I hear another politician say “Let me be clear.” in response to an interviewer’s question and then answer in completely opaque fashion as Grant Schapps did today.

        Dr Redwood.

        We don’t think of politicians as human. Probably because politicians don’t seem to think of ordinary Britons as human. No ordinary person could cling on and do such embarassing things as many politicians do and come back for more.

        Things are really seem to be this bad.

        • Mondeo Man
          Posted October 19, 2014 at 7:54 pm | Permalink

          How else could someone be so disingenuous in sight of millions unless they think we’re stupid ?

    • Stephen Berry
      Posted October 19, 2014 at 2:05 pm | Permalink

      But some QE must have found its way into the system via the purchasing of gilts to finance the huge government spending on the NHS and welfare benefits. The consumer does pays for QE and my own inflation index has registered this. A tin of my favourite soup cost around 80 pence in 2008. It now can’t be got for less than £1. That’s a 25 per cent rise over the last six years, and most of this came at the beginning.

      It’s quite possible that Miliband’s Labour will be voted in when the majority of the electorate do not want this outcome. That’s how the British electoral system can work. It worked against the left when the SDP was formed in the early 1980s and it could also work by splitting the right wing vote in 2015.

      This is not a particularly an anti-UKIP point. If UKIP had picked up 10 million votes at the last election and the Conservatives at 900 thousand, I would be recommending a UKIP vote. Anything to avoid President Hollande mark two over here.

    • Richard1
      Posted October 19, 2014 at 4:50 pm | Permalink

      The hope is right of centre voters in Labour constituencies will vote tactically for UKIP where the Conservatives have no chance but that in Tory seats they will not be so foolish as to do so. A formal deal has no chance – and I don’t suppose UKIP would want it.

  2. alan jutson
    Posted October 19, 2014 at 6:47 am | Permalink

    NO to any further QE.

    We need to adjust policies to underwrite sound money, not funny money to underwrite policies of political dogma.

    • APL
      Posted October 19, 2014 at 1:20 pm | Permalink

      alan jutson: “policies to underwrite sound money,”

      It’s long been the policy of successive British governments regardless of political complexion, to destroy sterling.

      According to the Bank of England’s own inflation calculator, to buy the equivalent of £1 of goods at 1914 valuations you’ll need nearly £49 today.

      What’s the betting that’s an underestimate?

      • APL
        Posted October 19, 2014 at 1:23 pm | Permalink

        “you’ll need nearly £49 today.”

        Correction: you’ll need £100 today.

        • zorro
          Posted October 19, 2014 at 3:59 pm | Permalink

          Similar to dollar deflation in the USA.


        • Lifelogic
          Posted October 19, 2014 at 7:02 pm | Permalink

          Just another tax in effect – on the prudent!

          • Denis Cooper
            Posted October 20, 2014 at 8:36 am | Permalink

            Yet while MPs insist that they must have control of taxation they have been willing to allow two Chancellors to make the (possibly illegal) decisions on QE with effects which are akin to taxation. £375 billion of QE and never a single Commons vote to expressly approve any of it. OK, I understand that there was cross-party support for the policy and none of the MPs felt the need for a proper debate followed by a vote, but that is not really the point.

            Reply Few, not none – I thought we needed a debate but there was little appetite for it and when Labour first introduced QE there was no provision for backbench debates.

  3. formula57
    Posted October 19, 2014 at 7:00 am | Permalink

    Indeed, although QE has been and is an essential element in facilitating the pretence that the many zombie banks are facing a liquidity crisis rather than the solvency crisis that they face in fact. The asset bubbles that are the consequence of QE present a new danger and meanwhile the solvency of the sovereigns undertaking QE is compromised, although for now not apparently fatally. It is also an unpleasant truth that unwinding QE is likely not possible short of major upset. It is regrettable that your counsel at the time “it all started in America” with the collapse of Northern Rock was not heeded.

  4. Lifelogic
    Posted October 19, 2014 at 7:09 am | Permalink

    I agree fully with all the above.

    Meanwhile I see Cameron is trying to reinvent himself as a pension reformer. I assume he is just trying to buy peoples votes using their own pension pots as an election is near.

    His government has for 4+ years just continued Browns outrageous mugging (of mainly private sector pensions) by further decreasing contribution limit, reducing the cap and keeping the 55% pension tax in place. Just as they are allowed IHT limited to further decline in real terms despite their £1M promise 6 years ago.

    The pension tax reliefs are mainly just trivial tax deferment so rather one wonder what the point of pension vehicles. The tax benefits are often more than used up by excessive fees and complex pension investment restrictions anyway.

    What exactly is the point of the private pensions industry at all other than self enrichment? Who knows what pension rules politicians will change in one years time, let alone over 40-80 years.

    • John E
      Posted October 19, 2014 at 8:57 am | Permalink

      It’s important to remember that no-one in the investment industry entered it out of an altruistic desire to make other people rich. They are there to make themselves rich. It took me too long to understand the effect on my savings of their fees – a couple of percent or so an annum doesn’t sound like much but over a lifetime of saving the fees can halve your returns.
      Best to do it yourself as cheaply as possible through low cost tracker funds. But it’s not easy psychologically to invest patiently for the long term. Pensions do have a place in as much as the money is effectively locked up avoiding temptation to spend it until retirement and most people in employment can benefit from employer contributions. For companies pension contributions are corporation tax efficient. And now of course with the latest proposals a pension fund can play its part in reducing death duties.

      • Livelogic
        Posted October 19, 2014 at 10:31 am | Permalink

        Well Cameron is “unlocking” the pension funds and rightly so. I do not think having your money “locked away” from you would be considered much of an advantage to many people!

        This unlocking does make sense for many individuals. Many are investing in pensions for poor returns, while paying more out much in interest on loans and mortgages personally to banks etc. Many other might have far better ways to invest the money personally in businesses or insulation or home improvements.

        At the save time they should also relax investment the many restrictions for pension fund investments.

    • Tad Davison
      Posted October 19, 2014 at 9:52 am | Permalink


      This is taken directly from the UKIP leaflet that came through my door only yesterday:

      ‘UKIP will campaign to abolish the 40% inheritance tax which has been levied by Labour and the Tories on estates worth above £325,000 – the price of a modest terrace house in Cambridge.’

      The price hikes in the housing market are bringing a lot of ordinary people into the orbit of the dreaded tax, and that wasn’t supposed to happen according to the people who first suggested it, introduced it, and then continued with it.


      • Livelogic
        Posted October 19, 2014 at 10:37 am | Permalink

        Indeed if the money one earns is never actually yours (to dispose of as you wish) why bother to earn or accumulate it?

        IHT is a huge disincentive to the wealthy, hard working & successful to stay or come to the UK only saved, in part, by the Non Dom Rules.

        Abolish IHT now Cameron or at least finally keep your £1M promise.

      • formula57
        Posted October 19, 2014 at 11:35 am | Permalink

        Do not be taken in by the UKIP lies – for much more than £325,000 is needed now to meet “the price of a modest terrace house in Cambridge”.

        Abolishing IHT (which clobbers the middle classes, not the rich) is a very powerful promise by UKIP – and very much more so than waffle about some future threshold increase or tinkering with rates in respect of technical provisions that affect nearly no-one.

    • JoeSoap
      Posted October 19, 2014 at 2:49 pm | Permalink

      This shows how far politicians will change their story just to stay in power. The quite sensible view of pensions is that they are there to provide capital and income in retirement, and, quite sensibly, the quid pro quo for deferring 40% tax and not paying NI is that the state won’t need to support you in old age because you have those savings. Is it being too sensible to suggest that anyone needs to have sufficient capital in their pension at 55 to provide a sensible income, say £20K/year in order to be able to take out the excess at 55? In return you could perhaps get a rebate on your NI contributions as you won’t need a state pension?

      For higher earners, I can’t see a problem with locking up much larger amounts as these will usually be invested long term in the economy anyway. You can’t go out and buy a luxury yacht or home (to my knowledge) with a pension fund.

      Your coalition seems to be intent on limiting the ability of the private sector to contribute, maximising the quick-tax take on the way out, leaving a portion of the population to be supported on benefits where they have p-ssed away their pensions.

      The only QE comment I would make is that it is all part of a market manipulation by the authorities which throws any idea of skill in investing out of the window, as central banks take the stage in manipulating asset prices against bona fide investors via their on/off QE statements.

  5. Lindsay McDougall
    Posted October 19, 2014 at 8:13 am | Permalink

    There may a simpler solution. Find ways of getting the richer pensioners to spend their money.

    • Mark
      Posted October 19, 2014 at 1:03 pm | Permalink

      Would the solution be so simple. The pensioners are the ones who have had their incomes stolen by negative real rates of return on their annuities.

      • Lindsay McDougall
        Posted October 20, 2014 at 5:05 pm | Permalink

        I went to considerable trouble to refuse no fewer than three recommended annuities and insist on a SIPP. That’s now going to be easier; but don’t expect me to buy a Lambouughini.

      • Lindsay McDougall
        Posted October 21, 2014 at 11:30 pm | Permalink

        Apologies, I am out of date. Equity release borrowing is rocketing. But is the money being spent on luxury foreign holidays that don’t necessarily benefit the UK economy? Who owns Viking river cruises, for example? Pardon my ignorance.

  6. John E
    Posted October 19, 2014 at 8:43 am | Permalink

    So much in this economy is now controlled by government and EU intervention and regulation, often contradictory, that I find it hard to think how we can get back to a properly functioning market economy.
    Contrast the experience in the US where they have exited their bank bailouts making a profit for their Treasury with the lamentable state of RBS which is being ruined and made worthless through being a political football.
    The discussion in the latest MPC minutes was interesting. Some members were concerned the banks are no longer prepared to take any risk as a result of aggressive regulation and randomly immense fines for relatively minor infractions. The others thought that less banking risk was the objective.
    The answer must be to find a path to get back to the market making these decisions, not warring aparathchiks.

    • Livelogic
      Posted October 19, 2014 at 10:40 am | Permalink

      If they do not spend their money it is still invested perhaps lent on to businesses or someone else who spend it. That is perhaps rather better than them buying a new Jaguar or similar?

      • libertarian
        Posted October 19, 2014 at 6:23 pm | Permalink


        Really? so the makers of Jaguar cars, the Jaguar car dealers, the service & maintenance of jaguar cars and the petrol stations that supply the fuel to jaguar cars, jaguar car insurance companies aren’t in business then? What an odd statement.

        • Lifelogic
          Posted October 19, 2014 at 7:08 pm | Permalink

          Well it might buy goods like a new car or it might be lent to a bank then on to a company and invested in businesses. The latter might well be a better use of the money for long term growth.

  7. Peter
    Posted October 19, 2014 at 10:04 am | Permalink

    Utterly ridiculous debate on bbc1 this morning on whether Brits are too hostile to immigration. One of the panel pointed out how he could not understand why two thirds of the population were anti immigration. Of the four people on the panel and two experts consulted in Leeds only 1 was vaguely in favour of curbs on immigration! Perhaps the question should be why is the BBC allowed to be so unrepresentative of the population that directly fund it?

    Guest appearances later, on different subjects, from George Monbiot and an Observer columnist; what diversity of opinion! BBC poll on the debate showed 73% believed Brits weren’t too hostile on immigration. No embarrasment from the show.

    • Lifelogic
      Posted October 19, 2014 at 7:13 pm | Permalink

      Indeed the BBC bias is totally absurd one assumes paid for by the EU.

      I am pro immigration but for the people we need only & on a sensible selective basis. The idea that the UK we should take anyone at all from the EU is clearly both racist (against the rest of the World) and bonkers economics.

  8. Bert Young
    Posted October 19, 2014 at 10:11 am | Permalink

    QE provides the false impression that all is well when the opposite is the case . I was brought up to believe that if you wanted something you saved for it and when you got it you took good care of it . The husbandry of asset gain and care seems to be the thing of the past in present day banking ; it has been overtaken by a credit system driving and supporting a retail boom . The young of today have little regard for economy – their modus seems to be ” I want it so I’ll have it ” . This sort of malaise ought to be checked and controlled by the banking system , sadly it is not ; the role of the local Bank Manager has been relegated and been overtaken by a system of centralised decision making devoid of direct contact with the customer . Faceless banking has its consequences and the personal level of debt simply grows and grows .
    The Banking system must now be subjected to a severe discipline imposed from the top and kept in line by regulations that have teeth . The Board Rooms of the Banks must no longer be able to hide behind the morass of their front line activities ; they have to be made responsible for what happens through a tightened system of supervision . Vickers should be implemented without modifications and Political interference .

  9. They Work for Us
    Posted October 19, 2014 at 11:35 am | Permalink

    My grandfather, born 1886, rest his soul, viewed inflation as a calculated theft of a person’s lifetime work and savings, by the state due to their profligacy in “spending” more than they take in taxation of savings. Inflation was similarly explained in Enoch Powell’s book “Freedom and Reality”. QE is more of the same.
    Interest on savings should only be taxable after the inflation loss on the savings had been deducted, giving taxation only on any net gain. This might actually promote savings.
    We would be better served if it was written into a Constitution that a government had to produce a balanced budget that could only be set aside with a referendum to allow a deficit for that year.
    We will become a nation where individuals feel an increasing need to protect themselves from a rapacious state e.g by travelling abroad to quietly buy gold and diamonds, anything, that the state could not inflate.

    • bluedog
      Posted October 19, 2014 at 11:54 pm | Permalink

      Dr JR has written a very astute comment. Far be it for this writer to give financial advice, but it seems that if you are able to work out the weaknesses in the system, whether you are a saver or a lender becomes irrelevant, you merely need a strategy that ensures that you are not impoverished by government policy. It follows that if you conclude a democracy with universal franchise has an inherent bias towards inflation, and the last 100 years should be incontrovertible proof, your strategy may need to include borrowing money. Quite simply, in our system, you will never need to pay it back, your debt will inflate away leaving you with the asset. Cynical? Of course! In other words, align your financial strategy with that of the government!

      • sm
        Posted October 25, 2014 at 12:25 am | Permalink

        Align with a debt strategy.

        Only works if you can pay less interest than inflation and do not lose your income or otherwise default and lose any or substantial asset/repayments made to date.

        If you are close to or connected to the fiat spewing spigot then it makes sense. Particularly if your assets are overvalued and poor quality and your debt is high.
        Then you have little to lose.

        Tax relief on debt interest should be phased out slowly.

    Posted October 19, 2014 at 12:43 pm | Permalink

    Treating Customers Fairly ( FSB )

    If you head in hands are sat at your desk in a financial institution and patiently read through what your boss, his boss, his boss and his have had to be TOLD in infinite detail by an ever-forgiving Nanny Government then you cannot help but wonder why that same Nanny has not quit her job altogether. Why care for children who are so terribly delinquent?

    Of course these people in such institutions are not children . They are adults. They have qualifications. They have intelligence. They must not be given any more money. They must not be encouraged to stay in authoritative and responsible positions. If they need to be TOLD and all staff under and above them need to be TOLD how to behave….

    If in a sense the Bank of England and the FSB or FSA or whatever acronym is appropriate nowadays can be seen as the brain of the financial institutions and networks in Britain then whatever is not the brain is the body. The brain is not brain-dead? The body is. A suppurating cadaver. The remains of what it could have been and should be.

    No tick-sheets of child-like morals in the shape the test papers given to UK financial staff members periodically is going to do the slightest good.
    The banks should have been allowed to fall despite the terrible initial economic consequences. New blood, literally as well as figuratively, should have been brought in.

  11. Mark
    Posted October 19, 2014 at 1:24 pm | Permalink

    QE cash went to the banks, who invested it in commodities, bonds and shares. The end of this cash injection in the US is part of the reason why we have seen falling stock markets and lower oil prices recently: the latter are at least welcome.

    You are right that banks have done little to resolve their underlying domestic balance sheet problems. That can only be achieved with a concerted approach to deflating the property bubble and winding down the stock of overseas borrowing that supports it.

    • Denis Cooper
      Posted October 19, 2014 at 3:04 pm | Permalink

      No, QE cash went from the Bank to the Treasury via the gilts market, with some minor transmission losses, and from the Treasury it went to whoever was owed money by the government, ranging from old age pensioners to large corporations with government contracts. Most of the cash will have been put on deposit with the commercial banks by the recipients and/or by those to whom it was then passed on when the recipients spent it, and the banks may have used some of it for their own speculative investments, but it had still gone from the Treasury to all those millions of recipients small and large right across the country and the economy, plus some foreign recipients such as the EU Commission.

      • Mark
        Posted October 19, 2014 at 9:03 pm | Permalink

        What you describe is deficit financing, where the DMO sells new issue gilts and hands the cash to the Treasury. In QE, the BoE bought gilts directly from banks (who sometimes were acting as agents for other gilts sellers) in exchange for cash.

        • Denis Cooper
          Posted October 20, 2014 at 9:03 am | Permalink

          In fact most of the previously issued gilts bought by the Bank were not bought from banks, they were bought from insurance and pension and other investment companies and private investors.

          (Some may have been bought from various public bodies in foreign countries which can also be counted in as “private” investors for this purpose, insofar as they were not UK public bodies amenable to control by the UK authorities.)

          The simple point, which some still seem incapable of grasping, is that during QE the SALE of new gilts to private investors by the Treasury’s DMO to finance the deficit was not stopped, instead it proceeded as planned in parallel to the PURCHASES of previously issued gilts from much the same set of private investors by the Bank of England and at much the same rate, week after week.

          The example mentioned below quoting from JR’s article of April 3rd 2009, about the Treasury selling £3.5 billion of 2015 stock, while in the same week the Bank had bought back £3.5 billion of stock with maturities in the range 2014-18, was just one instance of what was being done week after week, often with the Bank buying on two days and the Treasury selling on two other days.

          It baffles me that even when it was so transparent some people still could not see that the gilts market was being rigged and effectively used as a conduit to pass the newly created money from the Bank to the Treasury to fund the government’s deficit.

          • Mark
            Posted October 20, 2014 at 7:31 pm | Permalink

            Having looked at the data in some detail, I can report that the first £125bn of QE was issued at more than twice the rate than the government was borrowing: the next £75bn was at the same pace as borrowing. There was then an extended pause before the next round got under way in late 2011, which again was at a rather faster pace than borrowing for £125bn, before the final £50bn kept pace with borrowing again.

          • Denis Cooper
            Posted October 21, 2014 at 11:09 am | Permalink

            Having watched it happening week by week in detail, and having posted many comments about it here at the time, some of which comments I still have on file, I would not disagree with you that at times the Bank got ahead of the game in its rigging of the gilts market for the benefit of the Treasury.

      • petermartin2001
        Posted October 20, 2014 at 4:51 am | Permalink

        “QE cash went from the Bank to the Treasury via the gilts market, with some minor transmission losses, and from the Treasury it went to whoever was owed money by the government, ranging from old age pensioners to large corporations with government contracts. ”

        That’s simply not true.

        The BOE created ££ from nothing which is where all modern money from. Even Euros.

        It then used those ££ to purchase gilts from financial institutions in the private sector. $375 billion worth which it now owns.

        So providing the price paid by the government was fair then neither the government nor the financial institutions should be any better off than they were previously. Having said that, I suspect that it may not be quite fair given that the Banks haven’t raised the slightest word of protest against being cajoled into doing what they may otherwise have been unwilling to do.

        So QE is not the same thing as just creating heaps of new money and spending it into the economy. There is a good case for doing that but certainly nowhere near to the amount of £375 billion. If the government had indeed done what Denis has suggested it has done, the £ would be worth maybe 10 US cents now!

        Government could go down that road tentatively to see what happens though. The only snag would be a tendency to create inflation. It could quickly back off if and when that turned out to be a problem.

        Neither is QE the same as the government running a budget deficit. Yes deficits were high after the 2008 crash, but so they were after the 1992 crash, shortly after Mrs Thatcher resigned from being PM. There was no QE then. So her legacy from the POV of debt reduction, if that is what is considered important, cannot be considered to be very good!

        • Denis Cooper
          Posted October 20, 2014 at 10:05 am | Permalink

          What isn’t true?

          What did Treasury do with the money that it had borrowed from private investors by selling them new gilts, with the assistance of the Bank buying up previously issued gilts from them?

          The Treasury used it to help pay the government’s bills, that’s what it was intended for and that’s what it was used for; and that means some of it was used to pay public sector workers, and some of it was used to pay the invoices of private sector suppliers and contractors to the public sector, and some of it was paid to recipients of social security benefits including old age pensioners, and some of it was used to pay our subscription to the EU and meet our other foreign aid commitments, and so on.

          It’s perfectly true that QE need not involve the central bank helping the government to cover its budget deficit, if the newly created money is not used to buy up something which the government is selling at the same time; originally that was the case in the US, and initially it was indicated that the same would be true here.

          If the Bank of England had used the new money to buy corporate bonds or company shares or even real estate then it would not have found its way into the Treasury coffers because the government had none of things to sell, at least not on any scale; but instead the Bank used about 99% of the new money it created to buy something that the Treasury was selling week after week, and needed to be able to sell week after week, and could also instantly create in theoretically unlimited quantities, UK government bonds or gilts.

          And now, according to the Bank’s summary, it holds gilts to the tune of £375 billion but it no longer holds any corporate bonds or secured commercial paper at all, having disposed of the small quantities which it did buy:

          Perhaps the most surprising aspects of all this are that while it has clearly had an inflationary effect that has only been at the level of adding maybe 8% to CPI, and moreover it has had no discernible negative effect on the external value of sterling.

          • petermartin2001
            Posted October 20, 2014 at 10:35 am | Permalink


            What you are saying is that the Treasury had run out of money so it asked the BoE to give it some.

            If this was the case why was there any need to involve the private banking sector by buying back their gilts?

            Why didn’t the Treasury simply sell some gilts to the BoE? If there is some regulation against this, as I understand there is in the USA, there is an easy work around whereby a private bank acts as an intermediary. But this process isn’t QE.

            QE is supposed to increase the liquidity of the commercial banking sector.

          • Denis Cooper
            Posted October 20, 2014 at 1:49 pm | Permalink

            Well, Peter, just for a change I have deliberately refrained from mentioning that not only would any form of direct financing of the government’s budget deficit by the Bank of England have been far too transparent, it would also have been illegal under the EU treaties.

          • Mark
            Posted October 20, 2014 at 7:33 pm | Permalink

            The effect on the value of sterling against other fiat currencies was muted by competitive money printing. The effect against real assets is a different matter: oil and gold both soared in sterling terms.

    • zorro
      Posted October 19, 2014 at 4:04 pm | Permalink

      Exactly, stock markets loved QE as the indexes have shown over the last 6 years. As I said in the previous blog, if you threaten to remove the junkie’s fix that’s when the threats begin…..


  12. Denis Cooper
    Posted October 19, 2014 at 2:17 pm | Permalink

    Well, JR, I have to say that I am quite shocked by what you are now saying about QE, one of the standard but incorrect versions, when back in 2009 you wrote articles about what you called the “money-go-round” and clearly understood that the primary purpose of QE at that time was to make sure that the Labour government didn’t run out of money to pay its bills in the year leading up to the general election, in the same way as some of other governments, notably that of Greece, had run out of money to pay their bills.

    April 3rd 2009:

    “The money go round”

    “Several people have reminded me that the government and Bank are going round in circles. They have sold £3.5 billion of 2015 stock, and bought back £3.5 billion of stock with maturities in the range 2014-18. They did the first to fully fund their spending. They did the second as part of their quantitative easing policy.”

    £200 billion of new money created by the Bank of England under Labour; despite the official statements at the start that a substantial part of the new money would be used to buy up private sector assets, in the end £198 billion of it had been used to buy up gilts, bonds issued by the UK government, from private investors; while in parallel the UK government was selling much the same volume of new bonds to much the same set of private investors at much the same rate to “fully fund their spending”.

    I did warn back then that this cunning ploy could have political as well as economic consequences, and it did – the Tories’ failure to properly expose it to the electorate during 2009 was a major reason why the electorate was not sufficiently moved to give the Tories an overall Commons majority in May 2010, and with the perfidy of the LibDems blocking the boundary changes that the Tories wanted that now feeds through to the Tories still having an uphill struggle against an electoral system biased in favour of Labour at the next general election, so that while on the face of it they are only about 3% behind Labour in the opinion polls effectively they are about 10% behind.

    Reply I haven’t changed my view and am against further QE

    • zorro
      Posted October 19, 2014 at 4:10 pm | Permalink

      The government still can’t pay its bills and is increasing its indebtedness. It will struggle to pay the interest at higher interest rates, and that is why interest rates are being kept low amid the continuing ‘gloomier’ outlook (allegedly). So we all need to make Mr Haldane smile if we are to see higher interest rates apparently!


  13. Denis Cooper
    Posted October 19, 2014 at 2:46 pm | Permalink

    Off-topic, ComRes have done a fascinating poll in which they split their overall sample into two equal parts, and asked the first half about their voting intentions in their usual way, which is without prompting for UKIP, ie specifically mentioning UKIP as a possible choice for the respondents, but prompted for UKIP with the second half.

    The results are very interesting not just because prompting for UKIP raised their support from 19% to 24%, but because of that 5% increase in the support for UKIP 2% was at the expense of the Tories while 3% was at the expense of Labour, so for the second half the Labour lead over the Tories actually shrank from 3% to 2%.

    Of course there are margins of error and the numbers could easily have been the other way around, but it is yet another indication that the Tories cannot realistically hope to beat Labour by bashing UKIP.

    • petermartin2001
      Posted October 19, 2014 at 11:31 pm | Permalink

      Yes I saw that. ‘Prompting’ just means that UKIP is mentioned by the pollsters as one of the possible voting options in the same way as the other three main parties would be included. So, as UKIP will probably run candidates in large numbers in May, it wouldn’t be realistic to not include them.

      So, it could well be that 5% should be added giving them something close to a quarter of the vote. There’s also the factor, which shouldn’t be overlooked, that voters of a more leftish disposition, might not feel entirely comfortable in admitting to wanting to vote UKIP. They may be anti-EU for similar reasons to those espoused by the late Tony Benn, and are prepared to do whatever it takes to get that referendum.

      So, I would expect that UKIP could do very well indeed in 2015. Much better than top line polling figures have so far suggested.

  14. Brian Tomkinson
    Posted October 19, 2014 at 3:00 pm | Permalink

    JR: “I see no need for either the USA or the UK to undertake any further QE.”

    Perhaps you would care to comment on what were the BoE’s expressed intentions when QE was introduced; that this was a temporary policy and the Bank expected to sell the government bonds back into the market when the economy recovered. We never hear anything about doing that nowadays. Was it just another example of being economical with the truth? No doubt we shall be told that the economy has not yet recovered sufficiently and hope that we shall all forget about it in the fullness of time.

  15. ITF Tory
    Posted October 19, 2014 at 4:16 pm | Permalink

    I thought the original official reason for QE was to combat the threat of deflation.

    What I want to know is whether the BoE will reverse QE over time, by destroying £375bn when it sells the gilts.

  16. acorn
    Posted October 19, 2014 at 6:40 pm | Permalink

    It is difficult to imagine how you could get more total economic nonsense on one page. I would seriously suggest that you watch the BoE videos “key concepts explained”. Particularly the ones on money creation in the modern economy and Bank capital and liquidity.

    Reply It is difficult to imagine a more pointless post, slanging off this page with no reasons or examples given.

    • acorn
      Posted October 20, 2014 at 11:29 am | Permalink

      How many words would you let me have?

      Meanwhile. QE does not purchase Gilts from Commercial Banks only from Insurance and Pension Funds and the like. It is not a liquidity (cash injecting) operation for banks, they are intermediaries in the process.

      The BoE is not adding more / new financial assets into the economy, it is swapping maturity on the assets already in the private sector. They are taking away the interest paying guilts and depositing cash in the funds bank accounts. They are supposed to invest it in supply side riskier entrepreneurs projects.

      The banks have to match the new liability, the cash deposit, with “reserves”. Cos loans create deposits which create the need for reserves. Not the other way around. Banks don’t lend or swap “reserves” outside of the BoE banking system.

      The Treasury and the BoE are one and the same. As Peter said, if the BoE is holding Treasury IOUs / Gilts, they might as well set fire to them. What remains is the original cash the Treasury spent into existence and is called “reserves” (and some cash notes) at the BoE.

      Reply I love the idea that UK debt takes the form of “guilts” but they are more prosaically “gilts” or gilt edged, meaning they are backed by the state and should therefore be repaid in full (in nominal terms of course). I cannot see from your latest piece that you disagree with what I have been arguing about banks, cash and money supply.

      • acorn
        Posted October 20, 2014 at 4:43 pm | Permalink

        It’s the bits you chop out of my posts that tell me your story. As you have done in my reply above; eliminating the topic link. But it does prove that old Thatcher / Reagan period claim, that you don’t have to know anything about modern macro-economics to be a politician, let alone a Chancellor of the Exchequer.

        Alas, like the TV programme “New Tricks”, I am back into, cold case, economic number crunching. Particularly, from the period Q3-2009 (the end of the GFC), through the next three quarters when Labour was running an 11% fiscal deficit and the economy was expanding at 2% through Q2-2010. And then, at the exact moment when a Mr Osborne was the last thing the UK economy needed; we got him.

  17. petermartin2001
    Posted October 19, 2014 at 7:58 pm | Permalink

    To understand QE we need to better understand the nature of money.

    In a nutshell, money in the form of cash is an IOU of government (or the State if you prefer). Or a tax credit , as government insist, albeit with a few possible exceptions, their taxes are paid in ££. Government bonds/gilts are also an IOU of government. Usually, but not always, bonds/gilts have a yield. In effect Government pays out interest to the bond holders. Bonds/gilts have a market value so the holders can exchange them for cash any time they like. They don’t have to wait for maturity.

    For the commercial banks, holding bonds is just like having money in a savings account which pays interest. The commercial banks also have reserve accounts at the BoE which didn’t pay any interest at all until recently. They can be considered to be functionally equivalent to our current accounts.

    So, if we consider Government/the State (including the BoE) to be a single entity, the following questions may be a little easier to answer:

    1) How does forcing commercial banks to switch their money from one account to another, when interest rates are close to zero, have any significant effect on our economy?

    2) What is the point of worrying about an IOU of £375 million which is owed by one arm of government/the state to another arm of government/the state?

    • petermartin2001
      Posted October 19, 2014 at 8:41 pm | Permalink

      Correction: Sorry. That should be £375 billion.

      I might just add that I’d just written out myself an IOU for £375 million and I didn’t feel any better off afterwards. Do I need to repeat the experiment with an IOU for £375 billion?

      • stred
        Posted October 20, 2014 at 11:05 am | Permalink

        I would feel better if I had written myself an IOU for £375m, then exchanged it by paying in digital money from a bank I owned to people that trusted me, including employees and investors in my Ponzi for retirement.

    • Denis Cooper
      Posted October 20, 2014 at 10:27 am | Permalink

      Actually all you need to do to get an essential understanding of QE as practised in the UK is to draw up a flow chart, with the Bank of England in a box on the left hand side, the Treasury in a box on the right hand side, and the private investors who make up the gilts market in a central box, and then add two arrows showing the flow of money from left to right, from the Bank to the Treasury via the gilts market, and two arrows showing the flow of gilts in the opposite direction, from the Treasury to the Bank also via the gilts market.

      You could then add a clutch of other arrows showing the money created by the Bank and indirectly passed to the Treasury flowing out to various destinations when it paid the government’s bills.

      If you liked, you could also add two dotted lines running up from the Bank of England box and the Treasury box and converging on a box labelled “UK state”, to indicate that while the Bank is not actually part of the UK government both it and the Treasury are arms of the UK state, and that these two arms of the UK state have swapped their respective IOU’s, the Bank’s money exchanged for the Treasury’s gilts, through the medium of the gilts market.

      • petermartin2001
        Posted October 20, 2014 at 1:45 pm | Permalink


        It seems to me that you’re over-complicating the issue. Governments, or the State if you prefer, have always been able to create new money. That’s where money comes from. Governments just spend it into the economy. That’s nothing new. Even in the days of the gold standard, governments could create new money by paying mining companies for digging out new supplies of gold.

        Now that gold is no longer involved, the idea is that money can be created by Governments paying for the creation of more useful assets like motorways and other items of infrastructure – for example.

        Whereas QE is relatively new. You may disagree with the government purchasing financial assets from the private sector but QE isn’t necessary to create new money. If it were we wouldn’t have ever had any new money until 2009.

        • Denis Cooper
          Posted October 20, 2014 at 5:42 pm | Permalink

          It’s not at all over-complicated if you start with the necessary basic background knowledge, for example understanding what is meant by a “gilt” and by “rigging the market”. If the Bank of England had not started to create new money and use it to rig the gilts market then it is very questionable whether the Labour government would have been able to borrow enough from private investors to get itself through 2009 without having to make drastic cuts in its spending, not something any government would want to do in the year before a general election. Whether that was economically the right thing to do or not, it was an utter disgrace for our democracy that hardly any of the electors really understood it when they came to cast their votes. Indeed, more than five years later there are still many people who do not understand it and instead accept the inaccurate garbled versions of the truth they’ve been fed by the media.

          • petermartin2001
            Posted October 21, 2014 at 12:22 pm | Permalink

            We may disagree on just how this trick was done, and the motivations for it, but I suspect we may well agree that there was a fair bit of smoke and mirrors involved to maintain a certain illusion at the time.

            I would say if there is any problem involved for our democracy it is not so much that the workings of the economic system aren’t at all understood by the electorate it is that neither are they at all understood by many of those who they are voting for.

            We can also ask if those who actually run the economies of the western world too have the necessary level of understanding. If they don’t , that’s a big concern. If they do, and what we have is somehow what they’ve engineered, then that really is a huge problem for democracy.

  18. margaret
    Posted October 19, 2014 at 9:33 pm | Permalink

    Surely selling things off quickly also may be a temporary solution and in some circumstances loose important national ground.
    Mervyn King wasn’t that stupid.

    • margaret brandreth-j
      Posted October 20, 2014 at 8:07 am | Permalink

      sp’ lose’

  19. outsider
    Posted October 20, 2014 at 1:28 am | Permalink

    Dear Mr Redwood, When QE started in earnest the Bank of England made its absolutely clear that when the time came for monetary tightening (or at least a return to normal conditions) , the first element of this must be to unwind QE before resorting to any increase in Bank Rate.
    Personally, I always argued that this was unbelievable, if only because it would wreck the gilt-edged market and lead to the Treasury having to borrow at interest rates above an undistorted market rate just as QE had enabled it to borrow at much below such a fair market rate.
    Do you know if this “pledge” has been abandoned formally, or if the Bank is just hoping pragmatically that everyone will have forgotten what it said when it was trying to justify printing money to finance the deficit?

    Reply I do not recall that statement by the Bank. Their plan appears to be to raise the official interest rate prior to or instead of selling back the gilts.

  20. Rob
    Posted October 21, 2014 at 10:14 pm | Permalink

    It’s not just QE that is the problem. We now have ZIRP, QE, Funding for lending, Help-to-buy #1, Help-to-buy #2, and over £18 BILLION in housing benefit going straight to BTL landlords.

    Savers and pensioners are paying for all this, as are our children by seeing house price inflation easily outstripping their earnings growth. I was raised to believe that the Tories were for rewarding hard work and prudence. How wrong that has turned out to be. All they seem to care about now is house price inflation to benefit the BTL brigade and the banks, although I don’t point the finger of blame at the likes of yourself or the now ex-Tory Douglas Carswell in this. Now it looks like rates may fall even further after Haldane recently opened his mouth. Haven’t borrowers, BTL landlords and banks had enough help already?

    It really is disgraceful what is going on now under Osborne and Carney, and I shan’t forget this at election time. Actually, I shall never forget this in my lifetime.

  21. Rob
    Posted October 21, 2014 at 10:22 pm | Permalink

    One more thing, the sustained “stimlus” of ZIRP, QE, Funding for lending, Help-to-buy #1, Help-to-buy #2, and over £18 BILLION in housing benefit (translation – theft from the prudent) has just led people to believe in the free lunch of rising property prices for doing absolutely nothing.

    Why take the risk of investing in a business and working hard when you can just sit back and do nothing and watch your property value increase with double digit inflation, gains not taxed either when you sell?

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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