Sunday, 26 July 2009

Decision time on quantitative easing

The Bank of England have almost exhausted their authorization to print cash to buy up assets. As of July 23, the Bank of England had purchased ₤121 billion of government bonds, commercial paper, and corporate bonds. The government had authorized purchases up to ₤125 billion under the asset purchase scheme.

Of course, the Bank of England can go back to the government and ask for an increase in the amount of cash it can print. However, ₤125 billion is a huge number. Asking for more would only further increase the risk of an explosion in inflation two or so years down the line.

In terms of kick-starting the economy quantitative easing has yielded dismal results. The economy continues to decline. GDP has now contracted for five straight quarters. Since the recession began, the UK economy has shrunk by almost 6 percent.

Quantitative easing hasn't done much to boost credit; at least not so far. Lending to the corporate sector continues to decline, while consumer credit is flat. It is only the housing sector where we have seen any tangible results. Mortgage approvals are up and credit conditions are improving.

However, the policy of printing money and buying government debt has had one notable success. The Bank of England has used its QE authorization to buy up over ₤118 billion of gilts, allowing the UK government to run up the largest fiscal deficit in history.


mike said...

Clearly the money has gone to the wrong people. Perhaps to those who pointlessly gambled some of it in company shares. Hence the rises of the ftse in the first half of this year which seem to correlate to the QE.

It would have been better to have handed the money out for free in shopping centres all around the country.

Anonymous said...

Isn't it extraordinary that less than 2 months away from an election that the 'independent' BoE can contemplate further measures that could have a big impact 18months to 2 years down the line.

As regards, these walls of money, always end up somewhere, the select few who get their hands on it, will not look a gift horse in the mouth. Short term they gain, long term we feel the pain.


Southerngent said...

Ok, so the BOE prints £125b, then buys £121b of Gov Bonds.

These leaves £4b to kick start the economy, not suprising it has had so little effect.

UK Gov is bankrupt - The emperor has no clothes.

Anonymous said...

No I don't have any special insight, I meant 12 months..

Isn't it extraordinary that less than 12 months away from an election...


Anonymous said...

Mike - the FTSE-100 has risen 3.2% this year. But don't let facts get in the fact of your argument!

Acorn said...

Have a thought for poor old Merv King at the BoE. He will have to get shut of all these government IOUs at some time. Meanwhile, the Treasury Debt Management Office, is vomiting even more of the bloody things.

Still, he knows where £160 billion of his crispy new cash is, the casino bankers have put it back in Merv's BoE. Because there are still a lot of "toxics" buried in the vaults of the casino banks; waiting to be "marked to market" prices. Cash is king at the moment.