People’s Quantitative easing

I didn’t know whether to laugh or cry as I heard Jack Straw trying to explain why Mr Corbyn was wrong in arguing for People’s QE to build faster broadband networks and more homes. The problem for Mr Straw – and many others – is how do you persuade people that buying gilts with newly created money is just fine, but buying something else of more potential economic value is not?

My position on QE was I wanted other solutions to the UK’s banking and monetary crisis. I had after all warned of the impending crunch and suggested ways of avoiding it. I had urged the Bank and the government to offer more short term loans to the commercial banks against security to see them through the crunch once the authorities had created it. After the crunch I urged them to recapitalise the banks more quickly – not with taxpayers money but with asset sales and private equity with possible secured Bank of England loans, as I was always sure we could only have a decent recovery once we had banks capable of lending again to finance it.

Those who argued for QE and imposed it assumed it would do the following
1. Drive longer term interest rates down and keep them low – which it did
2. Force investors to buy riskier assets, driving up their price – which it did
3. Allow banks to sell their gilts so they would have more cash – which it did

Some also assumed it would boost lending. There was no obvious reason why it should do that, as at the same time the banks were forced to raise their capital to loans ratios, thereby preventing them taking advantage of the lower interest rates and possible increased demand for loans by offering more loans.

Some argued it would boost demand. It was never going to do much of that. Buying bonds from pension funds did not boost demand, as they were unable to pass on the rise in the value of their gilt holdings in the form of lower contributions, allowing people more spending money. Instead owing to the way pension funds are valued the lower interest rates increased the apparent deficits leading if anything to higher contributions! Allowing banks to sell gilts at a premium did not tackle their capital adequacy problem sufficiently and much of it was taxed back in fines and higher taxes. Some rich people maybe sold gilts at a better profit but overall this would not have boosted demand much.

The QE programme arguably made it easier to finance the large government deficit which both Labour and the Coalition allowed to run at high levels when demand was especially weak. It also probably added to the downward pressure on the pound, which increased inflation, cut living standards a bit more but may have helped some price sensitive exports.

The reason why all QE is usually wrong is very simple. It is pure inflation, if all other things are equal. IF you have functioning banks and reasonable use of resources in the economy and print a lot more money, you will find most of the printing just boosts the price of everything. Inflation is theft. You only get away with QE if the banking system is badly impaired and unable to lend all the newly created money on. QE to expand state spending is best left to Zimbabwe and Venezuela. Countries which try it on any scale usually end up with inflation, high debt and recession.

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  1. alan jutson
    Posted August 14, 2015 at 5:36 am | Permalink

    How refreshing to hear from one of the few politicians with real Banking experience, about the real limitations and failure of QE to boost the economy.

    The simple fact that many of us suspected was to get the Government off the hook with cheap money for a while, simply by producing more of it, by in effect planting a money tree in the back garden of 10 Downing Street the fruits of which could be harvested for a few years.

    Smoke and mirror type accounting only covers up the true facts for so long, before the truth is out, and the deceit is there for all to see.

    No substitute for facing up to the facts, being open and honest, and tackling the real problem head on to actually solve the situation, rather than attempting a cover up.

    • agricola
      Posted August 14, 2015 at 8:19 am | Permalink

      They cannot in fact cover it up, the Debt is £1.6 Trillion and rising. They try by only referring to the deficit which is no more than a flow meter. I think government hope that the smaller deficit figure might be confused with the Debt figure. The Debt can only reduce when government reduces it’s spending and the deficit flow reverses.

      • Tad Davison
        Posted August 14, 2015 at 10:53 am | Permalink

        I wonder if they dare tell us about the tipping point and what it would take to produce a sovereign debt crisis?


        • Mitchel
          Posted August 14, 2015 at 1:49 pm | Permalink

          I think its impossible to predict the timing as there is no formula;it depends on the circumstances of each country.For instance,Japan’s debt:GDP ratios have looked horrific for a long time(although it has had a high savings ratio to compensate)and it has not tipped over yet.I suspect we will only know when we get there,the direction of travel seems clear though.

      • Bob
        Posted August 14, 2015 at 12:09 pm | Permalink


        ” The Debt can only reduce when government reduces it’s spending and the deficit flow reverses.”

        That would be the best available solution, but the Tories seem to have bought into the tax, borrow, print and squander mentality.

      • Ralph Musgrave
        Posted August 14, 2015 at 3:06 pm | Permalink

        “The Debt can only reduce when government reduces it’s spending…” Eh? Staggeringly large chunks of debt have been made to disappear by printing money and buying it back. That’s known as QE. And you can’t claim QE is inflationary – QE’s been going for years and there’s no sign of inflation.

        • APL
          Posted August 14, 2015 at 10:17 pm | Permalink

          Ralph Musgrave: “QE’s been going for years and there’s no sign of inflation.”

          You are correct that QE has been going on for years – over a hundred years, in fact.

          But absolutely wrong that there is no sign of inflation. More than 9,000% since the beginning of WW1.

          You could live for a week or more on £1 sterling in 1913, but can’t use a £1 sterling to buy much more than a chocolate bar in 2015, a bar of chocolate that weighs less and smaller in size than its equivalent in 1970

          A house in 1950 cost £250, yet in 2015 you’ll be lucky to buy one for £200,000.

      • Iain Gill
        Posted August 14, 2015 at 10:59 pm | Permalink

        plus half a trillion unfunded liabilities like public sector pensions

  2. Richard1
    Posted August 14, 2015 at 5:44 am | Permalink

    It is clear that Brown-Blair era Labour ministers like Mr Straw don’t have a clue what they are talking about on these issues. No wonder Labour left behind such a mess. I wonder Mr Corbyn doesn’t propose QE to ensure a minimum income of £100k each a year, 9 weeks holiday for all like the tube drivers and free beer for the workers. What’s different about that from his other proposals?

    • Tad Davison
      Posted August 14, 2015 at 10:59 am | Permalink


      Certain surveys of our MPs say that as many as 80% of them do not understand how the banking and finance system works. Even 10% would be staggering. And these people vote on matters pertaining thereto. No wonder so many sharks get away with illicit practises. MPs ought to be made to sit exams in economics first. There it is, the accusation of ‘out of touch’ holds good.


  3. Lifelogic
    Posted August 14, 2015 at 5:55 am | Permalink

    Exactly & perfectly put.

    I see that Yvette Cooper has said that Jeremy Corbyn’s economic policies are ‘not credible’. Well being married to Ed Balls she should know a lot about “not credible economics”. Indeed it is true of all the Labour party (and indeed even much of Osborne’s given his recent largely socialist budget).

    A very silly discussion on radio 4 just now on women and computer coding. Even bizarrely giving Martha Lane Fox as an example (ancient and modern history at Magdalen College, Oxford I see).

    Apparently lots of people have “old fashions” views on genders, (I assume this means they look at the reality). The number of women getting computer studies degrees or even just a levels is is well under 20% and not much higher in Physics or Further Maths.

    I am all in favour of more female scientists and know several excellent ones. But reality is reality, most women simply do not choose to study the subject for whatever reason. BBC drivel & nonsense will not change this not with feminising the subject as the exam boards have done.

    Nor will such a daft wishful thinking approach change the fact that the world has not warmed up for 17 years.

    • agricola
      Posted August 14, 2015 at 8:12 am | Permalink

      Any country which ignores it’s talent based on sex is utterly stupid. It needs to evolve a system in which it can capitalise on it to the maximum. I agree with Nigel Farage that the majority of women respond to different life forces and society needs to accept this. What is a fifteen minute process for men is at least a five year haul for women and professional life needs to accept this. Otherwise it amounts to a great waste of an asset.

      As to whether the World has warmed or cooled in recent years is academic. It may have done both in different areas, after all fluctuation , sometimes in the extreme, has been the name of the game for millions of years. The total dishonesty of some to attribute it all to man, and then for opportunist government to try to make a money stream out of it is risible, but for the fact that it is our hard earned , already taxed income that they are plundering.

      • Lifelogic
        Posted August 14, 2015 at 5:33 pm | Permalink

        I am all in favour of using all the talent regardless of gender but if on average women tend to chose to study languages etc. and not Physics, Maths and Computer Studies they can hardly complain when they are not selected for jobs in these areas. There is nothing old fashioned about looking at the real facts rather than living in a BBC dreamland.

        • outsider
          Posted August 14, 2015 at 9:21 pm | Permalink

          Dear Lifelogic: A young friend of mine went to a girls’ Comp that got together with the nearby boys’ Comp in a joint sixth form. There, my friend discovered that while the girls had been taught “science”, the boys had been taught physics and chemistry and she was rather forcibly discouraged from taking A level chemistry on the grounds that she would be so far behind. She now has an MSc in a maths-related subject but has no idea where Birmingham or Manchester might be located on a map. Our non-selective education system, it seems, is rather selective. .

    • JJE
      Posted August 14, 2015 at 10:39 am | Permalink

      I would sell tickets to see you argue with my daughters!

      • fedupsoutherner
        Posted August 14, 2015 at 4:38 pm | Permalink

        But that generation has been brainwashed! The BBC and schools have done a great job put together with drivel and emotional crap from Gore.

      • Lifelogic
        Posted August 14, 2015 at 5:35 pm | Permalink

        And are they choosing to study Maths, Physics, Further Maths and Computer Science?

        If so they would probably agree with me as reason dictates.

    • Iain Gill
      Posted August 14, 2015 at 11:10 pm | Permalink

      certainly mixed sex submarine crews is political correctness gone mad and flying in the face of common sense

  4. Iain Gill
    Posted August 14, 2015 at 6:24 am | Permalink

    Yes the politicians have destroyed the value of savings and hyped house prices into the clouds while importing large numbers of immigrants. A disastrous cocktail.

  5. formula57
    Posted August 14, 2015 at 6:29 am | Permalink

    Indeed so – although let us not overlook Obama’s people’s QE (or at least industrialists’ QE) that saved GM and Ford.

    It remains to be seen of course whether QE can be unwound and if so without adverse effect.

    • Roy Grainger
      Posted August 14, 2015 at 8:33 am | Permalink

      It won’t be unwound.

    • oldtimer
      Posted August 14, 2015 at 12:50 pm | Permalink

      Ford did not seek nor did it receive any bail out cash from Obama. GM did and so, IIRC, did Chrysler.

      • formula57
        Posted August 14, 2015 at 8:13 pm | Permalink

        Quite right, thank you. GM and Chrysler received bailouts from the US government, not Ford.

    • acorn
      Posted August 14, 2015 at 4:58 pm | Permalink

      QE does not need to be unwound. When the BoE buys in a Treasury Gilt, it is the same as if the Treasury Gilt had never been issued in the first instance, by the Treasury. The Treasury and the BoE are one and the same in consolidated Government Accounting terms.

      When the Treasury sold the Gilt through its, so called, debt management office, it was bought with “financial assets” previously issued by the Treasury as ” reserves” spending. That is, for instance, it payed your pension by putting a deposit in your current account. At the same time, it put an equivalent deposit in your banks current account, (called “reserves”) at the BoE. That way, your banks balance sheet continues to balance. You could have used that deposit to buy a government gilt, if you wanted some free money (as interest payments) from the government.

      If you shifted your pension deposit to another bank’s account, the “reserve” asset at the BoE, would shift overnight, via the settlement system, to that new bank’s account at the BoE. Both Bank’s balance sheets, continue to balance.

      You have to understand that the UK Treasury does not have to borrow its “unit of account”, which we call “money” from anybody. It creates the “money” every time it spends to buy goods and services from the private sector. There is no limit to how much the government can buy, as long as the goods and services are available. If they are not, then you get too much money chasing too few goods and services. That is the definition of inflation.

      • Denis Cooper
        Posted August 15, 2015 at 2:02 pm | Permalink

        Try telling that to Mark Carney.

        He would no doubt be surprised to learn from you that all the gilts held by the APF have ceased to exist and should not be valued at £375 billion:

        Instead, they should be valued at zero, no longer existing.

        And if he believed you I expect he would fish out that letter from the then Chancellor Darling to his predecessor in which he gave the Bank and the APF an indemnity against any losses, and ask Osborne if he would mind making prompt payment to cover the £375 billion losses he had just discovered with your assistance.

        reply Of course if the gilts are cancelled it will be when they are repaid, with indemnity against loss on those bought above par

        • Denis Cooper
          Posted August 15, 2015 at 7:36 pm | Permalink

          I’m working on the fictitious scenario that acorn had convinced Carney that the gilts no longer existed and so had zero value, whereupon losses of about £375 billion would be crystallised and the indemnity would immediately be triggered.

  6. JJE
    Posted August 14, 2015 at 6:51 am | Permalink

    It is long past the time to start restoring interest rates to more normal levels. I do not understand the MPC caution over a small initial rise. It’s time to declare the emergency over.

    • zorro
      Posted August 14, 2015 at 7:24 am | Permalink

      The governments (including U.S./UK) do not want interest rate rises to rise because they will have to pay huge amounts of interest on government liabilities. You have to realise that the western governments are effectively running a continual war economy to try and get control of what they see as critical mineral resources…..


      • Mitchel
        Posted August 14, 2015 at 9:12 am | Permalink

        …helped by the fact that many of the West’s central bankers are now alumni of a certain megalithic investment bank and act in concert. A proper free market in government securities would be terribly unhelpful.

    • Dame Rita Webb
      Posted August 14, 2015 at 1:37 pm | Permalink

      What planet are you living on? I presume (like me) you have absolutely no personal debt, inc a mortgage so as to be able to say such a thing? The problem is though lots of other people have lots of it. Start jacking up there payments and see how many of them become insolvent. Can you not also see that you are being pauperised too? If you are retired and living on a defined benefit start worrying about QE putting a strain on the trustees being able to match their liabilities. While if you are still working and are in a money purchase arrangement, best of luck with the investment and annuity risks. Meanwhile if you are kids signing up for a degree this week get them to be blunt with the admissions office and get detailed data on exactly what sort of jobs last years graduates are doing. Dinner was interesting last Saturday. Three of the waitresses had degrees from Bristol and still cannot get anything better to make a living

  7. Mrs Rita Webb
    Posted August 14, 2015 at 6:51 am | Permalink

    I do not know whether to laugh or cry either when I see Dave and Osborne on the TV explaining their “wirtschaftwunder”. The BoE may not be QEing at the moment but there are plenty of other indirect stimulants from HMG instead at the moment, like student loans. Thats apart from the deficit spending and super sized national debt. JR why do you keep supporting a continuity nu labour economic policy.

    • zorro
      Posted August 14, 2015 at 7:26 am | Permalink

      Anyone can see that there is no classical economic recovery….. Why are interest rates being held at such low levels if there really is a sustainable economic recovery?


      • Lifelogic
        Posted August 15, 2015 at 1:21 pm | Permalink

        Indeed unemployment is rising, government getting still more bloated, taxes increasing further and productivity unsurprisingly rather dire.

        • Iain Gill
          Posted August 15, 2015 at 6:39 pm | Permalink

          According to the radio 40 % of people in a Kings Cross homeless shelter are employed. Funny old world we live in.

  8. Margaret Brandreth-J
    Posted August 14, 2015 at 6:53 am | Permalink

    I believe that the banking system was badly impaired and this is why we had to quantitative ease.However to my understanding once the value of anything is watered down , initially things look up , but when more assets are sold to maintain that level then there is bound to e a downward spiral. First aid and long term management are not either/or solutions.
    I didn’t hear the Straw/ Corbyn interaction due to a 14 hour working day with different sets of management getting large salaries for things which we have been doing for years better than them, however, both sides of the argument seem to be valid to me.As usual it is about the degree of investment or the amount of new houses or balance.

    • Denis Cooper
      Posted August 14, 2015 at 11:59 am | Permalink

      “I believe that the banking system was badly impaired and this is why we had to quantitative ease.”

      Whatever the state of the banking system may have been in early 2009 it is certain that government finances were badly impaired, with the Labour government having to borrow a quarter of all the money that it was spending and beginning to run out of private investors to lend it as much as it needed to borrow, and that is why they had to turn to the Bank of England as a kind of captive gilts investor.

      A wholly owned subsidiary of the Bank of England owns gilts valued at £375 billion:

      and every one of those gilts says that the Treasury owes money to the subsidiary, and therefore indirectly to the Bank.

  9. Ian wragg
    Posted August 14, 2015 at 6:58 am | Permalink

    ….making it easy for government to finance the deficit. Well we are still running an out of control deficit adding daily to the debt which ignorant politicians say we are paying down.
    I believe it stands at £1.6 billion and rising. What with the next generation not being able to afford a home and having this enormous debt to service I think you have lost the argument on being a fiscally responsible government.
    Anyway you can continue to import half a million foreigners every year to suppress wages and make matters worse.

    • agricola
      Posted August 14, 2015 at 7:52 am | Permalink

      Ian, people cannot afford a home because homes are in finite supply or the population increase is such that fewer are available to those that want them. Bit like Chateau Latour, more people want to drink it but they can only produce a limited amount a year. The price adjusts so that it all gets sold but at a much higher price. No one in government considers how we can supply high quality housing in quantity that at least equates with demand, or put another way at a stable price.

      Government probably find it convenient to import generally well educated Europeans to fill vacancies which cannot be filled by the indigenous unemployed, who have been failed by our abysmal education system. Additionally there is a support system in place for those inclined not to work.

      • StevenL
        Posted August 14, 2015 at 8:58 am | Permalink

        I think you’ll find that an awful lot of MP’s, their immediate families, senior civil servants and other establishment figures are heavily invested in rental property. Any policy that makes rents and house prices go up makes perfect sense to them.

      • fedupsoutherner
        Posted August 14, 2015 at 4:41 pm | Permalink

        Well with all the ‘refugees’ coming into the country the housing situation is going to go from bad to dire!

  10. Narrow Shoulders
    Posted August 14, 2015 at 7:03 am | Permalink

    But most created debt is printed money Mr Redwood.

    You are happy with private banks being able to print money but not government?

    Surely leaving printing money in the hands of those with a profit motive can not be right.

    Positive money campaigns against this and has compelling arguments.

    • outsider
      Posted August 14, 2015 at 9:29 pm | Permalink

      Dear Narrow Shoulders: The B of E creates money, commercial banks create credit. Sadly, economists who are not concerned with such niceties now prefer to define money statistically in such a way that it includes credit, Hence ( I’m relying on memory here) we had the ludicrous situation where the B of E was creating large amounts of money while economists told us the money supply was falling.

      • Narrow Shoulders
        Posted August 15, 2015 at 7:59 am | Permalink

        Dear Outsider

        Thank you for adding the finesse to my post.

        To the layman the difference is not hugely apparent and it does appear that banks creating credit upon which they charge interest is both inflationary and immoral and lacking proper oversight.

      • Gary
        Posted August 15, 2015 at 8:47 am | Permalink

        this is just not true. when you get a loan from a commercial bank you get money deposited into your account. And then you pay a merchant out of that account, the merchant deposits money into his account. This is called fiat money.It is an absurd creation, to say the least, and also crooked. But it’s still money, by law.

        • outsider
          Posted August 15, 2015 at 11:48 pm | Permalink

          “It’s still money, by Law”. What law is that Gary?
          What you call fiat money, by the way, is I think fractional reserve banking, the sine qua non of the credit system but the bane of American hayseeds since the Great Depression, when hundreds of small town banks suffered runs and went bust.
          Fiat money is money is money such as Bank if England notes that is backed by an official promise rather than by reserves, once usually of gold and/or silver but in the case of the esteemed but short-lived Estonian kroon, wood.
          Is it worth remembering that without fractional reserve banking, there would be hardly any short-term credit in the economy, except for rich moneylenders on payday loan type terms or revolving mutual credit unions?
          Losing perhaps three quarters of all the credit in the economy would not come without economic costs, to say the least. A more direct cost would be incurred by anyone wishing to deposit their cash, pay or whatever for safe keeping, let alone the cost of settling transactions without actually handing over cash.
          Holding deposits would have no benefit to a bank beyond the charges that could be imposed on the depositor so if you could find a bank, which might not be easy, having an account would become an expensive item in the average household budget.

  11. zorro
    Posted August 14, 2015 at 7:18 am | Permalink

    Banks QE all the time for their own purposes. It’s called fractional reserve banking and they charge interest on the money created. The advantage of QE, if done properly, is that although it may expand the monetary base, it is not in itself interest (debt) bearing. It is just the same amount which does not increase over the years. I am not suggesting that it is always the right thing to do, but neither is irresponsible bank lending/private money creation and the consequences that this can lead to……


    • Gary
      Posted August 15, 2015 at 8:58 am | Permalink

      QE money is debt bearing. It is created by doing a repo of previously issued govt debt, purchased through affiliated broker dealer banks. The fresh printed money is money that increases banks’ reserves and they can in turn print the fractional reserve multiplier of loan money into the economy. Problem is none of that money reaches the economy, the banks use the money to buy more govt debt and resell it back to The Bank. The system is a closed loop between govt, the central bank and investment banks. Hardly any money reaches the economy. That is why the govt stepped into the housing loan market.

      This is voodoo economics that is frightening. And I’ll bet you , apart from our host, probably only Steve Baker and Douglas Carswell in Westminister understands this.

      • Denis Cooper
        Posted August 15, 2015 at 1:47 pm | Permalink

        “the banks use the money to buy more govt debt”

        Gilts investors in general, who were mainly not banks, having sold some of their holdings of previously issued gilts to the Bank in one of its reverse auctions, then used the money received to buy new gilts from the government, which then spent that money received paying the government’s bills, so in fact almost all of it did get spread around the economy.

  12. agricola
    Posted August 14, 2015 at 7:28 am | Permalink

    Please consider a maybe simplistic none professional view of the situation.

    Fluctuations in the price of Gold are largely down to supply and demand with periodic times of fear thrown in. However the difference in price between 1975 at $100 per ounce and today at $1115.97 an ounce are not due to a perception that supply is about to run dry or that there is so much pending disaster in the World that many wish to get their hands on the maximum and hoard it.

    The difference is down to the debasing of our paper currency whose basis has nothing of real substance to back it. It’s value is being systematically eroded because Government spend more than they earn, or put another way the ever increasing involvement of Government in our lives. Government spends money it does not have because it has no responsibility for outcomes, no need to make a profit, no shareholders to answer to, and no responsibility beyond five years. Just think of what they are committing to spend on HS2 and the new EDF/Chinese nuclear power station with money they do not have. A PFI of gargantuan proportions.

    Be in no doubt we are using the same route map as Zimbabwe and Venezuela, but with more Happy Eaters on the way to delude the traveller into thinking he is having a good time.

    Reply It is true that all major currencies were inflated substantially 1971-2011. It is however difficult to measure this in gold, as gold is so volatile. Gold has just fallen from $1900 to $1100 but that does not mean the price level in dollars has fallen by that much.

    • agricola
      Posted August 14, 2015 at 8:43 am | Permalink

      Surely if the number of US Dollars in circulation was based on$1900 an ounce for Gold, I know it is not, the message to the US Government would be, do not print any more dollar bills until the price of Gold rises from the present £1100 to a figure above $1900. Conversely if the price stays at $1100 you need to take some bills out of circulation . If you continue printing because the US government wishes to spend more then the value of the dollar reduces.

      A speculative thought. Were the US Dollar based on the value of Gold would this have a stabilising effect on not only the Dollar but Gold itself.

      Reply It was until 1971. There was still inflation in dollars, and considerable volatility of the gold price. The gold price is simply driven by the balance between supply and demand. In recent years there has been a huge speculative surge in buying, followed by a lot of investment selling and speculative shorting to drive the price down again.

      • Gary
        Posted August 14, 2015 at 10:12 am | Permalink

        There is one important fact that you are missing, John. The price of gold is set in terms of a currency that itself is volatile. This is the crux that people overlook. You cannot gauge accurately the supply/ demand price of any commodity if the currency itself in which the price is quoted is volatile. You lose your yardstick, your calibration. This is exactly why under a volatile currency you cannot accurately guage where surpluses and shortages exist and make investments accordingly. You end up making mis-investments or mal-investments and the economy gets ruined. People end up involved in gambling instead of investing. Unstable money is the number one economic cancer.

        Reply The price of gold is considerably more unstable than the value of the dollar, as measured by a basket of other currencies or as measured in a non inflationary currency like the Swiss franc.

        • Gary
          Posted August 14, 2015 at 2:51 pm | Permalink

          unless that entire basket is volatile wrt gold.

          What makes me suspect that is the strong gold – real interest rate correlation or “Paradox” that Keynes said was the most solid in all economics, based on observing 200 years of data. Either that has been suspended or the freely printed fiat paper currencies are volatile. I know which theory I choose.

        • Margaret Brandreth-J
          Posted August 14, 2015 at 5:20 pm | Permalink

          but the product will always be there and the dollar is metaphysical .

    • Mitchel
      Posted August 14, 2015 at 9:03 am | Permalink

      All major western currencies (particularly $ and £)will have to be inflated again.There is simply no other way that the shackles of the stratospheric rise in sovereign debt can be thrown off.The issue is when.Also,I believe it is rather more likely that we will have further QE than a serious rise in interest rates,particularly as the next downturn cannot be more than a few years away….unless boom and bust has been abolished…..and our national debt in absolute terms will still be rising.

  13. Gary
    Posted August 14, 2015 at 8:29 am | Permalink


    Now you are talking. QE has resulted in a stuff up of epic proportions. Unwinding that will be interesting to say the least.

    No officials or their media mouthpieces have even dared whisper this, you are the first.

  14. Vanessa
    Posted August 14, 2015 at 8:37 am | Permalink

    QE is counterfeit money ! Something which is illegal if we, the public do it, but the governments and bankers can do it with impunity ! It has the same effect gross inflation. If you watch RT dot com and the Keiser Report they are interviewing some very interesting people on this issue who say there is inflation. There are packets of the normal size with less or lighter contents with no reduction in price – that is inflation. All fares are constantly going up with no improvement in journeys. You see inflation all around but nobody acknowledges that it exists.
    Until bankers stop printing money the only way to go is Bitcoins or Bitmoney or Bitgold. We have got to get back to normal and let the markets balance out.

    • Denis Cooper
      Posted August 14, 2015 at 11:45 am | Permalink

      It was the excuses for QE which were counterfeit, not the QE money itself.

      Old Mrs Smith would not have been pleased to find that she was only getting three quarters of her normal state pension rather than the full amount, it could easily have made her so angry that she broke her lifetime habit of voting Labour.

      As it was, the Labour government was having to borrow about a quarter of all the money it was spending, and with private gilts investors becoming reluctant to add to their holdings it was easier to indirectly borrow from the Bank of England.

      • petermartin2001
        Posted August 14, 2015 at 11:15 pm | Permalink


        I’d agree with you that Government cannot issue counterfeit money. Money is an IOU of government. That’s all it is. So you can’t issue your counterfeit IOUs, but if I tried to copy them and forged your signature…..

        No government can really borrow money. You can perhaps borrow IOUs that I’ve issued, just as the Government can borrow US$. But it makes no sense to think you can borrow back your own IOUs. How does that make any sense at all?

        It can issue only new ones. Or swap old ones for new ones which is all QE is once we accept that the BoE is just a branch of govt like any other.

        Government has a responsibility to keep the economy functioning by issuing IOUs into the economy at the correct rate. Not too many so as to cause inflation. Not too few to allow the creation of recession and high unemployment.

        • Gary
          Posted August 15, 2015 at 9:08 am | Permalink

          “It can issue only new ones.”

          It (the govt) can issue only new ones(IOUs)….. Which are repo’d by the central bank to create new reserve money. ie counterfeiting of money.

          “The process by which banks create money is so simple that the mind is repelled.”- John Kenneth Galbraith

        • Denis Cooper
          Posted August 15, 2015 at 1:37 pm | Permalink

          “Money is an IOU of government.”

          Nope, not in the UK, now, or anywhere else in the EU as far as I know; money, currency, legal tender, is an IOU of a central bank which is legally independent of government in that respect.

          That is what the Bank of England Act 1998 says, and it is also what the Maastricht Treaty said and the present EU treaties still say about the ECB, the only significant difference being that the UK Act has provision for Parliament to agree to the suspension of the monetary independence of the Bank of England but there is no comparable provision for the ECB.

          Interestingly, I can find no record of Jeremy Corbyn having voted on the Bill for the 1998 Act. There are several instances where he is recorded as having not voted, including for the Second Reading of the Bill, but nothing comes up about him having voted at any point during its passage through the Commons. That doesn’t definitively mean that he never voted on it, I would have to check further, but nothing comes up.

          Anyway, if you cannot accept the simple legal facts that while the Bank is owned by the Treasury it is operationally independent of the Treasury with respect to monetary policy, and that our money is an IOU issued by the Bank and not by the Treasury, and that the Treasury does not issue our money but instead issues its own IOUs such as gilts, then you will never understand that the whole point of QE as practised in the UK was to provide a mechanism for the Bank and the Treasury to swap their respective IOUs, with the Treasury’s IOUs, gilts, moving from the Treasury to the Bank through the gilts market while the Bank’s IOUs, money, moved in the opposite direction from the Bank to the Treasury, which then spent that money when it paid the government’s bills.

          • petermartin2001
            Posted August 16, 2015 at 3:44 pm | Permalink


            The independence of the BoE is like the independence of a learner driver in one of those dual control cars. The learner has control if everything is going well but when things get tricky…

            I looked up the said 1998 Act. The word ‘Treasury’ is used 280 times. Naturally, it’s full of legalese but comments like:

            “The Treasury may give a direction to the Bank of England relating to one or more of the following – ”

            “The Chancellor and Treasury Accounting Officer will take responsibility and ultimate control over all decisions involving the use of public funds.”

            “The Bank has primary responsibility for financial stability and operational responsibility for managing financial crises. But consistent with the Treasury’s overall responsibilities, the Chancellor may, in some circumstances during a financial crisis, use additional powers to direct the Bank.”

            leave no doubt that the word “independent” as applied to the operations of the BoE is somewhat conditional, to say the least.

          • Denis Cooper
            Posted August 17, 2015 at 8:28 am | Permalink

            Well, one of my gripes is that Darling never asked Parliament to agree to the activation of the reserve powers as he should have done, and yet he was in effect giving the Bank directions with respect to monetary policy.

  15. Aatif Ahmad
    Posted August 14, 2015 at 9:06 am | Permalink

    The question now is how do they unwind it? If they sell off the 350bn (?) of gilts in a quick sale, the Bank will take a big hit to its balance sheet and will need to be recapitalised with real taxpayer money (not printed money, as that would be issuing liabilities to pay liabilities… leading to the compounding, downward spiral characteristic of hyperinflations).

    • JJE
      Posted August 14, 2015 at 10:49 am | Permalink

      I think they sold the pass when they created the QE. They could just cancel out the debits and credits but that would spook people. Best to hold the bonds to maturity and return the interest to government.

    • Denis Cooper
      Posted August 14, 2015 at 11:27 am | Permalink

      Well, the “real taxpayer money” would be the same money, as issued or “printed” by the Bank of England, part of the £375 billion which was indirectly passed from the Bank to two successive governments via the gilts market, which they then spread around the UK economy and the wider world when they paid their bills, and which would have to be recovered through tax and other revenues so that the Treasury could fulfill its promise that the Bank would suffer no losses through QE.

  16. agricola
    Posted August 14, 2015 at 9:08 am | Permalink

    Adendum to Reply.

    Further cursory research suggests that Gold varied from $222 to $615 in the period 1915 to 1970. The pattern was 1915/450; 1920/235; 1933/615; 1970/222. Movement is possibly accounted for by political instability etc. I believe that around the very early 1970s was the time that the US dollar uncoupled from Gold. The price then steadily climbed to the peaks and troughs it has enjoyed in recent years. I would strongly suspect that this was down to the regular debasing of the US Dollar and other currencies that followed. We have reached the point where the value of currency is controlled by the amount various governments wish to spend, not on anything more tangible.

  17. acorn
    Posted August 14, 2015 at 9:11 am | Permalink

    I didn’t know whether to laugh or cry either JR, having read your post and the first ten comments.

    “The reason why all QE is usually wrong is very simple. It is pure inflation, if all other things are equal. IF you have functioning banks and economy …” No central bank would do QE if it had “functioning banks and economy” and the policy interest rate was not at or near zero.

    “The QE programme arguably made it easier to finance the large government deficit …”. The government never ever has a problem financing its deficit, it issues the currency.

    “Allowing banks to sell gilts at a premium did not tackle their capital adequacy problem sufficiently …”. QE had nothing to do with banks capital adequacy. Banks were only intermediaries in the QE process.

    “3. Allow banks to sell their gilts so they would have more cash – which it did” No matter, banks don’t lend reserves to retail customers only to other banks. Banks issue loans to customers they think could pay them back, they ran out of those, not the ability to create deposits within capital ratios.

    “… I urged them to recapitalise the banks more quickly – not with taxpayers money but with asset sales and private equity …” With the state of the capital investment market, who exactly was going to buy these assets?

    People’s QE as stated by the Corbynites is, in macroeconomic terms is “fiscal stimulus”. Governments normally do this by increasing public sector spending and/or reducing taxes. But, I must admit that if the term catches on with the little people, life could get interesting, particularly for Mr Osborne.

    Reply I seem to remember the Labour government of 1975 had grave difficulty financing its deficit and ended up going to the IMF. Long gilts had to pay over 15% at issue! Why did Argentina go bust if all they had to do was print more? Why isn’t Venezuela rich?

    • Gary
      Posted August 14, 2015 at 9:58 am | Permalink

      If printing money was the path to economic nirvana, Zimbabwe would be an economic paradise. If it were as simple as printing money there would be an end to all economic problems. Leslie Singleton said it in one sentence below : at least you cannot print gold (ed:but you can divide it almost infinitely). Govt hates money that it cannot inflate.

      • acorn
        Posted August 14, 2015 at 2:42 pm | Permalink

        Zimbabwe was the same as Weimar, the economy was ravaged and there was nothing to buy. If a government spends; or, it allows Banks to lend, more money into the private sector than there are goods and services to buy; you get inflation.

        The UK had a touch of this problem in 2010 – 2013. The government was running a high deficit to encourage aggregate spending, but the private sector was asleep, and didn’t get off its **** fast enough to supply the goods and services that were being demanded by households. Hence inflation started to appear in various sectors.

        If you really want to worry, think about what the UK will do when it has 20 million state pensioners. The government will have no problem paying the pensions, it has a bottomless pit of Pounds Sterling. But, what will be available for the pensioners to buy? There will be less people per pensioner, making goods and services for them to buy; unless, there is a massive increase in productivity.

        That includes developing robots that can wipe your arse for you, when you are in the nursing home or the hospice.

        • Denis Cooper
          Posted August 15, 2015 at 12:50 pm | Permalink

          You do realise that you yourself will get old?

          • libertarian
            Posted August 17, 2015 at 6:39 pm | Permalink


            Based on acorns ramblings on here , there probably isn’t much chance of that, he’s more likely a candidate for a Darwin award

    • Richard1
      Posted August 14, 2015 at 11:05 am | Permalink

      It is clear that Acorn does not have the first clue what he is talking about, this post is replete with nonsense. ‘Issuing the currency’ is not a sustainable way of financing a deficit as numerous historical and contemporary examples show. If investors will not buy debt it is a continuous circular devaluation. Banks can quite easily be recapitalised like any other bust business without the govt buying shares at an arbitrary value as Mr Brown did – its simply a question of finding the market price. That might be a price which puts a zero value on the equity and < 100% on debt. etc etc

      • acorn
        Posted August 14, 2015 at 3:14 pm | Permalink

        Please tell me Lion Heart, how do you think the government puts its financial “unit of account”, into the private sector economy?

        Please tell me, who or what has the power to increase or reduce the financial assets, (measured in the governments units of account) in the economy?

        Where are all these government financial assets at any moment, that is those the government has issued and has not yet had the opportunity to reclaim via taxation?

    • Denis Cooper
      Posted August 14, 2015 at 11:16 am | Permalink

      I would agree with some of your criticisms while disagreeing with others.

      Just the chronology shows that QE was not used to rescue the commercial banks, that had already been done before QE started in March 2009. Likewise the banks could always liquidate their holdings of gilts by selling them in the secondary gilts market, if they wished to do that; there was never any time when that huge and highly liquid market seized up.

      However as has been repeatedly pointed out over the years, commercial banks were not and are not very high on the list of private gilts investors in terms of volume, pension funds and insurance companies and other investment companies are much larger gilts investors. When banks act as intermediaries in gilts transactions that is all they are, intermediaries just like stockbrokers, and while they may hope to profit from that role they do not end up owning the gilts on their own account.

      Where I would disagree with you is on your claim that “The government never ever has a problem financing its deficit, it issues the currency”, when it is simply not the case that the UK government issues the UK currency.

      You recently asserted, here:

      “The UK Treasury and the BoE are one and the same.” ,

      whereupon I replied:

      “If that was true then I doubt that there would be Acts of Parliament governing the relations between the two.

      It would be absurd to pass an Act saying that X may give directions to X with respect to some things but not with respect to some other things, that is unless Parliament has agreed that circumstances are exceptional so for a time X will be allowed to tell X what to do.”

      The Bank of England Act 1998 is here:

      and just looking at the first section in Part II on monetary policy it runs:

      “In section 4(1) of the Bank of England Act 1946 (power of the Treasury to give directions to the Bank), at the end there is inserted “ , except in relation to monetary policy ”.

      Surely you must see that would be utterly nonsensical if the two, the Treasury and the Bank, were in fact “one and the same” as you claimed?

      Certainly our legislators in Parliament can and often do pass Acts designed to implement inherently stupid government policies, but not Acts which are utterly nonsensical in themselves, not least because parliamentary counsel would point that out when they were being drafted.

      The legal fact is that our familiar everyday currency is issued by the Bank, not by the Treasury, it even says so on banknotes, and if the Treasury had not been able to induce the Bank to create more of that currency and indirectly pass it across to the Treasury in exchange for gilts issued by the Treasury then the Treasury could have been left in the position where it had to start issuing its own new currency, like the Bradbury pounds issued by the Treasury during the First World War, and the last thing the Labour government wanted in the year leading up to the 2010 general election was for people to start questioning what the hell was going on when the government was no longer able to pay its bills in normal money.

    • acorn
      Posted August 14, 2015 at 1:04 pm | Permalink

      Argentina’s debt was in a foreign currency, US Dollars, just like Greece that has its debt in a foreign currency, Euro. Denis Healy didn’t have to go to the IMF, he didn’t understand that he was a currency issuer; and, he didn’t have to sell bonds at silly rates either.

      Venezuela isn’t rich because the oligarchs that took-over Petroleos de Venezuela (PDVSA), used it as a weapon to damage the economy and get rid of the elected government that was more US friendly.

      Reply Strange that Mr Healey who was a b right and well educated man missed such an obvious point – maybe because it does not work! Why didn’t Weimar Germany do well with all that extra money?

      • Richard1
        Posted August 14, 2015 at 1:54 pm | Permalink

        what are you talking about?! Zimbabwe issues its own currency and by your analysis should be rolling in wealth as it can simply buy its own debt? Venezuala’s plunge into abject poverty has taken place under a socialist govt – which is of course unable to attract investment….including purchases of its debt. How come it doesn’t just magic itself rich by buying its own debt??

        • acorn
          Posted August 15, 2015 at 7:24 am | Permalink

          Zimbabwe has been using the US dollar since 2009 when the use of the Zimbabwean dollar was abandoned. A multi-currency system has been in operation for the last six years, with the South African rand and US dollar in use since 2009 and the Chinese yuan, Australian dollar, Japanese yen and the Indian rupee joining the list of accepted currencies in 2014.

          Mugabe’s land grab from the Whites, destroyed the mainly agricultural economy that the Blacks he gave the land to, knew nothing about running farms. Again, there was nothing left to buy and staples like bread became rare and prices hyper inflated.

      • acorn
        Posted August 14, 2015 at 2:05 pm | Permalink

        Why didn’t Weimar Germany do well with all that extra money? Because there was little to buy with wages the government kept paying, hence hyper inflation.

      • petermartin2001
        Posted August 17, 2015 at 1:29 pm | Permalink

        Yes, Denis Healy was bright and well educated but so are Wolfgang Shauble, Jeroen Dijsselbloem, and Angela Merkel. Yet all three have just imposed economic policies on Greece which hardly anyone thinks will work.

        I’m not quite sure what it is about economics but even a good IQ doesn’t seem to help politicians at times.

        Denis Healey thought he had to defend the £ at some arbitrary value of about US$2.00. For that he needed to borrow in US$. Of course he just created a rod for his own back.

        The Tories made the same mistake in 1992 when their attempts to defend the pound’s value against the DM failed. They were bright and well educated too. So why hadn’t they learned from Denis Healy’s mistake?

  18. Leslie Singleton
    Posted August 14, 2015 at 9:12 am | Permalink

    Say what you like about Gold but at least you cannot print it

    • Denis Cooper
      Posted August 14, 2015 at 10:17 am | Permalink

      If you’re lucky you can mine it, and silver as well which was arguably even more important at some points in history, for example when the rulers of ancient Athens used the silver from the mines at Laurium to finance the fleet which enabled them to defy the Persians and gave their city its rather short-lived regional hegemony:

      Or you can steal from others who have already done the hard work of extraction for you, which is what the Spanish did in the New World, with the English then stealing from the Spanish treasure convoys … I believe that the massive influx of gold and silver, used by the Spanish monarchs to finance their state and their powerful armed forces, kicked off inflation across Europe.

      • Leslie Singleton
        Posted August 14, 2015 at 8:46 pm | Permalink

        Dear Denis–Yes indeed: however you cannot mine etc without limit (ad libitum as they used to say) and ‘without limit’ is the essence of what is wrong these days.

    • DaveM
      Posted August 14, 2015 at 1:25 pm | Permalink

      Neither can you eat it. Nor can you eat paper money or electronic money. As people will find out when the farming and fishing industries in this country have been destroyed by the government-loved retailers underpaying. Not that we’ll have any hauliers left by then to move the food – they’ll all have gone out of business thanks to the govt’s failure to act over immigration even though they could just ignore EU rules and do what they wanted if they had any balls. God knows the French would. And who’d want to be a lorry driver now anyway?

    • Mitchel
      Posted August 14, 2015 at 1:33 pm | Permalink

      “they” can take it off you though!F D Roosevelt’s Executive Order 6102 of 1933 prohibiting the “hoarding” of gold coin/bullion/certificates of deposit…..your gold goes to Fort Knox (you get paper dollars in return) or you get ten years in jail.

  19. Tad Davison
    Posted August 14, 2015 at 9:17 am | Permalink

    How much cyber money do banks create whenever they lend to others?

    I suggest that needs to be looked at.

    Tad Davison


    • petermartin2001
      Posted August 17, 2015 at 1:34 pm | Permalink

      They can’t create money in the same way as the BoE. Pound notes are the liability of the BoE which is wholly owned and supported by the Treasury. ie Government.

      They can only issue credits, which you can call money if you like, but they are the liability of the issuing banks.

  20. Gary
    Posted August 14, 2015 at 9:53 am | Permalink

    Let history be our guide to the possible outcome of all this. This is nothing new, we never learn. A case study of 18 century France, 60 pages of the possible consequences are contained in this classic book available for free as a download from many sources

    Fiat Money Inflation in France: Andrew Dickson White

  21. Jeffery
    Posted August 14, 2015 at 10:43 am | Permalink

    When a crackpot (although longstanding) idea from the fringes of economics is treated this seriously, you know there is a problem. It may be a symptom of a more serious issue – the complete disarray of macroeconomics. For once, the way the airhead media cover this up seems like a good idea. But the fact is, after nearly 7 years, there is little understanding of why the recession was so deep and the recovery so muted. Plus a host of other questions. Nature abhors a vacuum?

  22. Bert Young
    Posted August 14, 2015 at 10:50 am | Permalink

    The arguments for and against QE are all valid ; the bottom line is, increased debt has – at some time , to be re-instated . Government borrowing is still far too high and more enforced discipline is necessary to reduce it . I still find it strange that we give so much in foreign aid when we have much to put right in our own country . The mistakes the Banks made when overstretched are nothing compared to the stupidity of the Governments expenditure programmes ; things like HS2 etc. George Osborne -who lives very much in a glass house , should not throw stones .

    Posted August 14, 2015 at 10:56 am | Permalink

    It was clever of Mr Corbyn to juxtapose QE with what he calls People’s QE. Quantitative Easing is not understood. Even its pronunciation trips up many a young nervous TV journalist. In this morning’s TV News, a Business journalist proclaimed: ” QE has generally worked in the EU “. [ The TV licence is theft ( but I digress )]

    We are being palmed off with cute polysyllabic economic explanations. OK QE is not exactly printing money. But that is what it amounts to. Mr Brown famously went to the USA to tell them his bright idea of printing money. But, “everyone, in the world, must agree to it and do the same. “. Very much like the traditional LIE, if everyone sticks to the same story no-one will find out the truth. Mr Brown returned from the On The Never Never land and in Parliament with Freudian slip said he had gone over there and “Saved the World “. He should be forced to give us it back!

  24. Rods
    Posted August 14, 2015 at 12:33 pm | Permalink

    An excellent summation of QE.

    I have a couple of questions:

    How is the Government / BOE going to unwind QE as from what I can see there is currently no attempt to do this with maturing QE bonds buying new longer dated ones?

    With QE raising the amount of money in circulation I expected more immediate higher inflation in the UK and US, but this has not happened. Previous Fed. Chairman Bernanke in his Brookings’ blog has suggested that this is due to a high savings ratio and was part of his rational for US QE. Therefore, is this inflation just delayed until savers, particularly commercial savers, see better domestic opportunities for spending their money?

    Reply The inflation is delayed or cancelled depending on when and whether the banks have enough balance sheet strength to pump up credit again.

    • acorn
      Posted August 14, 2015 at 2:24 pm | Permalink

      There is no direct connection between QE and “money in circulation”. QE increases bank “reserves”. Banks do not lend reserves except to other banks as part of the settlement process. There is no “multiplier” of bank reserves into M2 or M3 money in circulation. This is another neo-liberal myth.

      This is starting to be fun JR 😉

      • Denis Cooper
        Posted August 15, 2015 at 12:40 pm | Permalink

        Well, the volume of money passing across supermarket checkouts each week would have dropped substantially if the Labour government hadn’t indirectly borrowed £198 billion of new money from the Bank of England, and had then been unable to borrow enough of the money already in circulation to fund its budget deficit, about a quarter of all the money it was spending. In a way it’s a pity that these days the Bank didn’t need to have the new money literally printed up as banknotes, because then people might have noticed that suddenly there were a lot of crisp new banknotes in circulation. People having a payment from the government electronically credited to their bank account had no way to see that on average a quarter of the payment was new money that the Treasury had indirectly borrowed from the Bank, but the simple fact is that the Treasury now owes the Bank about £375 billion which it didn’t owe the Bank before QE:

        Every one of the gilts owned by the APF says that.

  25. Denis Cooper
    Posted August 14, 2015 at 12:41 pm | Permalink

    If the Bank of England was going to create more money to fund broadband, would it have a subsidiary which held investments in broadband, which could be valued as assets to set against the liability of the loan from the Bank on its balance sheet, and thereby also enable the Bank to put down the loan as an asset on its balance sheet?

    Or would it just be a case of the existing wholly owned subsidiary, the Bank of England Asset Purchase Facility Fund Limited:

    taking another loan from the Bank and using it to buy up previously issued gilts, while in parallel the Treasury increased its issuance of new gilts in order to borrow money to fund increased government action on broadband?

    That subsidiary, and the Bank, have been indemnified by the Treasury against any losses which may arise from its activities, would the same be true for any new subsidiary of the Bank which was investing in broadband projects rather than gilts?

  26. alte fritz
    Posted August 14, 2015 at 1:14 pm | Permalink

    Absolutely. Mr Corbyn is, in effect, saying that just because one fellow has had the wrong medicine, the other should have it on demand. Whatever it is, it is not rational policy.

  27. Atlas
    Posted August 14, 2015 at 2:14 pm | Permalink

    Would it be true to say that opening a new gold mine adds to inflation as well?

    C.F. the effect in Spain of all the “New World” precious metal during the 16th & 17th Century.

    That is, it is not just ‘fiat’, or paper money that can destabilise matters.

    • Gary
      Posted August 15, 2015 at 9:18 am | Permalink

      No. The total amount of gold mined annually is nothing compared to the above ground stock if gold. Almost all gold EVER mined still exists. New supply of mined gold is immaterial to the price of gold. Gold’s value is only demand sensitive. It is the perfect money, except maybe crypto currencies are more portable.

  28. waramess
    Posted August 14, 2015 at 2:32 pm | Permalink

    Inflation certainly is theft but, how many appreciate that it is form of income redistribution from the poor to the wealthy, in whatever form it manifests itself?

    If it results in an increase in retail prices then those who are unable to increase their earnings in advance of the price increases will be the poorer for it and if it manifests itself in asset inflation then those who are able to hold assets will be the winners whilst others will, either directly or indirectly be contributing to those gains.

    A classic example at the moment is the rise in the price of housing where the owners and landlords make huge gains whilst the tenants see their rents increasing as a direct result of house price increases.

    Next time we hear this, or any other government, lament about increasing poverty or the rise in the number of food banks or the gap between the rich and the poor widening we might dwell on the fact that it is actually all a result of government policy

  29. Ralph Musgrave
    Posted August 14, 2015 at 3:02 pm | Permalink

    JR says “I was always sure we could only have a decent recovery once we had banks capable of lending again to finance it.” On the contrary. The crunch happened precisely because banks loaned too much. In that scenario, lending should certainly not return to the point it was prior to the crunch (if that’s what JR was suggesting).

    Next, in his last para, JR trotts out the old myth that QE equals printing money, ergo it must be inflationary. As Martin Wolf pointed out recently, there is little difference between money (base money to be exact) and government debt). Ergo it is debatable as to whether QE actually amounts to printing money. And (surprise surprise) QE has not actually proved inflationary.

    See passage of Wolf’s starting “Central-bank money…” here:

    • petermartin2001
      Posted August 14, 2015 at 10:10 pm | Permalink


      For once I agree with you! Ultimately the crisis occurred because too much private debt occurred in the economy which was unsustainable. The situation had to be resolved by injections of Government cash which meant large deficits and the introduction of QE to fund those deficits. Unlike the private banks, and the private sector generally Government, including the BoE, doesn’t have to repay debts in the normal sense.

      When a chain is put under tension it is of course the weakest link that breaks. We can do a metallurgical analysis on that link and say it failed because it was defective in some way. So its fine to correct the defect but at the same time we need to recognise if hadn’t been that link it would have been another.

      After the crash there was an analysis of what went wrong. Of course the weakest links turned out to be those banks those banks which were overstretched. But if they’d not failed something else would have had to have given. It was the imbalance in the sectoral balances, in the USA, the UK and elsewhere which was ultimately the cause of the tension in the system. So fine, correct any problems we find and make the chain a bit stronger next time, but don’t expect it to never break. It will just break somewhere else.

      Government’s have to acknowledge their responsibility for those imbalances. Private sector debt has been allowed to increase to levels much higher than government debt. It’s about 180% of GDP even without counting the debts of the financial sector. When the debt is increasing there is a stimulatory effect on the economy as we all remember in the years up to 2008. House prices rise. People borrow more. Spending increases, unemployment falls. Government deficits are manageably small.

      Everything, at the time, looks superficially good. BUT……..

    • Denis Cooper
      Posted August 15, 2015 at 12:05 pm | Permalink

      What short memories some people have; already forgotten those four years of CPI inflation running above the 2% pa target, month after month.

    • waramess
      Posted August 15, 2015 at 4:49 pm | Permalink

      “JR trots out the old argument that QE equals printing money, ergo it be inflationary” I for one am unclear what part of this you disagree with, Ralph.

      QE does equal printing money as it does expand the existing money supply and from that you may deduce that, as money is a medium of exchange, if you double the quantity, all other things remaining equal, then you halve the quantity of goods that money already in the system might have otherwise purchased.

      Little difference between base money and government debt? Well, I guess existing base money might be seen in this light as government debt is a means of transferring spending power from one part of the economy (the buyer of the debt) to another (the government) and, in this context is quite benign, but it is hard to see how you make the great leap in suggesting this might demonstrate that QE does not amount to printing money.

      QE has not proved to be inflationary? Well in the context of the Keynesian world of Disney you are right however, the Keynesian definition of inflation is deeply flawed: “The rate at which the general level of prices for goods and services is rising”. I might just as well transpose “cabbages” for ”goods” for all the good it does in illustrating the cause and effect of inflation.
      An increase in the money supply does not affect only goods and services, and therefore, to suggest QE has not resulted in inflation, is to ignore all aspects of inflation other than goods and services which was one of the reasons the government failed to spot the last crash.
      Seems to me that JR was pretty well spot on and you are pretty well spot off.

      • Denis Cooper
        Posted August 16, 2015 at 9:33 am | Permalink

        It seems that the £375 billion of QE cumulatively, and permanently, added 6% – 8% to CPI. Not a huge inflationary effect, but there all the same.

      • petermartin2001
        Posted August 17, 2015 at 1:41 pm | Permalink

        As money is a medium of exchange, if you double the quantity, all other things remaining equal, then you halve the quantity of goods that money already in the system might have otherwise purchased.

        That’s not true. A pound coin which changes hands ten times has the same economic effect as a £10 note which only changes hands once. If that £10 note hadn’t changed hands at all it would have zero economic effect.

        Government can’t control the velocity of circulation of its currency. But it can control the amount. So if it wishes to stimulate the economy it can only issue more. Conversely if it wishes to slow it down it ca only remove currency in taxation.

  30. petermartin2001
    Posted August 14, 2015 at 3:08 pm | Permalink

    We have had all the same arguments about the end result of QE being high inflation in all countries where it has been tried. Japan, the USA, the UK. Yet, high inflation has not occurred recently anywhere in these countries.

    The usual explanation is that QE is just “money printing”. Money printing is supposed to convey images of trillion Zimabwean dollar bankotes. But, isn’t all money either printed or created in a computer these days? That would include all euro notes too. Where else do people think it comes from? What’s the alternative to “printing money”? Go back to having gold coins? Is anyone seriously suggesting that?

    A more sensible objection to QE might be that it leads to printing too much money. Too much money chasing too few goods would certainly cause higher inflation. If and when that happens we should certainly think about scaling back or even stopping. Note that inflation is not just about too much money. It’s also too few goods and services.

    If QE can stimulate the economy to increase production then we end up with more goods and services which nullifies inflationary pressures.

    From a political POV the people who are attracted to the idea of people’s QE want to know why it was OK to have £375 billion worth to bail-out the banks, but a tenth of than amount is not OK to bail out the real economy? Why not just give it a try and see how it goes?

    It’s a good question.

    • outsider
      Posted August 14, 2015 at 10:56 pm | Permalink

      Dear Peter Martin, Agree with many of your points but may I put a gloss on your factual statement that QE has not caused inflation in Japan,US or UK? Establishment economists proposed QE because there would otherwise be deflation, in the US and UK cases because torpedoed banks had to cut credit and conventional ways to boost credit had been exhausted. Personally, I did not think there was any danger of serious UK deflation (Japan and US maybe) but the outcome so far backs the official economists. If so, QE has caused “non-deflation”.

      I still think that there may be other reasons QE has not caused UK inflation. In particular, the combined effect of all the fines and regulator/ Court mandated compensation payments made by banks is huge compared with their reserves and has wiped out much of the credit-creating potential of QE.

    • Denis Cooper
      Posted August 15, 2015 at 11:55 am | Permalink

      “Yet, high inflation has not occurred recently anywhere in these countries.”

      That depends on what you mean by “high”; you may recall that there were four whole years when the CPI rate of inflation in the UK exceeded the 2% pa target set by the Chancellor, and cumulatively QE added 6% to 8% onto CPI.

      “From a political POV the people who are attracted to the idea of people’s QE want to know why it was OK to have £375 billion worth to bail-out the banks, but a tenth of than amount is not OK to bail out the real economy?”

      Hardly any of the £375 billion of new money created by the Bank of England went to bail out commercial banks, and nor was that its purpose. Almost all of it went to bail out the government, although Osborne did not really need the second lot of £175 billion anything like as much as Darling needed the first £200 billion.

    Posted August 14, 2015 at 3:53 pm | Permalink

    Just heard Mr Corbyn intends some People’s QE by implementing Universal Free Child Care. Says it will not mean new borrowing. It should not, in that the resultant influx of already UK domiciled women into the workforce will stop the peripheral costs and new child benefits of new imported migrants. Plus the money they earn will be solely spent in this country and not sent or taken abroad for migrants’extended families and their own periodic short returns to their homelands.

    The Conservative Party is underestimating Mr Corbyn. It is vastly overestimating the political worth of the other Labour candidates.

    I believe the Tory idea that there will be a smooth transition from PM Cameron to PM Osborne is predicated on the economy doing well for the next few years ( it will not ) and on Mr Corbyn becoming Labour Leader. With the ramifications of QE and what is really, no really , happening in the global economy a Labour leader other than Mr Corbyn would be seen and actually is very much part of the incoming economic disaster.

    With ongoing QE ; with Mr Corbyn as Leader of the Labour Party; the Conservative Party needs the person of Mr John Redwood in position of Leader rather sooner than Mr Cameron’s plans for retirement.

  32. Lindsay McDougall
    Posted August 14, 2015 at 6:22 pm | Permalink

    Whisper it ever so quietly, but there is no reason to suppose that 2% or 2.5% pa inflation is better for us than zero inflation. Advocates of ‘moderate’ inflation include those Lords of the Third Way (whatever that may be) Harold MacMillan and Tony Blair. These gentlemen are hardly renowned for their economic acumen, so why should their bad ideas survive them?

    Pensioners like me would benefit from the end of QE and higher interest rates, so some of their perks could be ended or reduced, thus contributing to public expenditure deficit reduction. There’s plenty of low hanging fruit.

    • Gary
      Posted August 15, 2015 at 9:25 am | Permalink

      Quite. The notion of 2% inflation is risible. It is a number plucked out of the air by thieves who want to steal savings at a rate slow enough that the savers may not notice. is boil the frog slowly.

  33. outsider
    Posted August 14, 2015 at 11:37 pm | Permalink

    Dear Mr Redwood: Thank you for your analysis.

    What Mr Corbyn and his “advisors” propose is simply a further increase in the Government deficit or more properly, as they are interposing a new state body, the Public Sector Borrowing Requirement. Their argument could just as easily be applied to paying for the current Government deficit by QE. But they do not do this, perhaps because the public would see through a crude plan to just print money as an ongoing way to finance higher state deficits.

    Hence the supposedly novel and radical “People’s QE”. Except that it is really not very novel is it. In effect, a Left Labour government would simply rename the Public Works Loans Board, which was set up under Gladstone’s first Administration, expand its remit by taking on more of the work of the National Loans Fund relating to state enterprises and call the whole thing a state investment bank. The Public Works Loans Board already lends to local authorities, Port Authorities, metros and the like. So will this convince the public any more?

    Higher public deficits and money printing will not in all circumstances acelerate inflation, especially if private business is shrinking under other Left policies. But it will certainly ensure that the UK continues to run a big trade deficit. As you have pointed out, unless foreign deposits are flooding into UK banks, unlikely with the Left in charge, those trade deficits will continued to be paid for by selling UK assets, particularly British business, utilities and infrastructure to foreign investors.

    That means ever less profit available for British workers, not least in private sector pensions and inevitably far less tax going into the Exchequer. And it is a vicious spiral, because ever rising net profit and interest payments going abroad increases the deficit that has to be financed by selling up the capital that the Left wants to benefit the workers.

    That argument needs to be spelt out to counter the potential popularity of People’s QE. Perhaps you or others might list all the utilities and infrastructure, if not all the UK multinationals, that have already had to be sold to pay for the effects of chronic public sector deficits.

    • Denis Cooper
      Posted August 15, 2015 at 11:43 am | Permalink

      “But they do not do this, perhaps because the public would see through a crude plan to just print money as an ongoing way to finance higher state deficits.”

      Maybe the public would see through it, or maybe the mass media would help the politicians to mislead the public so that they didn’t see through that crude plan any more than most of them have seen through the more cunning QE plan first devised by the Labour government and then accepted by the coalition government.

      It is after all more than six years since it became apparent that the new money being created by the Bank of England was almost entirely being used to buy up previously issued gilts from private gilts investors while in parallel the Treasury was selling new gilts to much the same set of investors at much the same rate, and yet most people still don’t understand it, and they still believe all kinds of nonsense about it other than the plain truth that the Treasury was indirectly borrowing from the Bank of England to help fund the government’s budget deficit.

  34. petermartin2001
    Posted August 16, 2015 at 5:19 am | Permalink


    “The reason why all QE is usually wrong is very simple. It is pure inflation, if all other things are equal. ”

    The first thing to say is that, in economics, “all other things are” rarely “equal”. For example if government spending is cut by £ N billion, tax revenue will probably fall by close to £ N billion too, and so the deficit will end up pretty close to what it was previously.

    Back on the question of PQE, we can ask if it really is “pure inflation”? Well, no, it’s not pure at at all! PQE could possibly cause inflation is the correct way to put it. All government deficit spending is possibly, or not as the case may be, inflationary whatever its origin.

    We need to understand that deficit spending is necessary to keep the economy functioning when users of the currency wish to save some of it. Those who doubt that might just like to consider the very simple economy of a baby sitting circle. If everyone in the circle readily spent a token and received a night’s baby sitting in equal measure to their willingness to do a night’s baby sitting to receive a token, there’d be no problem at all. But, say, for whatever reason, some of the sitters decided to accumulate tokens. Fairly quickly there would be a shortage and the system would not function. There would be a demand, from those without tokens, that the baby sitting council should issue extra ones. Those with a stockpile of tokens would object, saying the “printing” of new tokens would devalue their existing tokens.

    If the hoarders lent the tokens back to the council they could be pacified with some reward. Just as lenders of pounds to the government are pacified with a reward of extra pounds. But if the hoarders of the tokens saved them in a piggy bank and refused to lend them back, all the council could do would be to create new tokens and inject them into the system. This would be the equivalent of PQE.

    Is one method more or less inflationary than the other? There’s not much in it. Arguably PQE would be less inflationary because there are no extra rewards needed. If the issuing of new tokens, by either method, was just enough to restart the system, not too much and not too little, then neither method would be inflationary.

    So who are the hoarders in the real economy? The central banks of the big exporters are the biggest. The big exporters don’t want to spend all they earn by selling goods and services into the British economy. So they buy Govt bonds and so effectively lend back their surplus tokens, or ££. The wealthy are the other ‘culprits’. They tend to accumulate more ££ than they need.

    But what if not everyone recycled their extra tokens back through the banking system? Suppose they kept suitcases full of cash in safes or bank deposit boxes? The government can’t borrow those back. All they can do is create some new tokens. PQE in other words.

    The government can’t know just how fast money is moving or if lots of it is being stored this way. All it can do is monitor inflation. If it is engaging in PQE and inflation starts to be a problem it needs to back off. Alternatively if it’s not a problem it can do a bit more. The govt needs to be careful, but shouldn’t be so scared of the idea that it doesn’t even try it out.

  • 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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