Monday, 25 June 2012

Hit me one more time with that QE

David Miles, who unfortunately sits on the Bank of England's monetary policy committee, wants another generous helping of quantitative easing. He claims that an £50 billion is needed to "kick start" the economy.

Haven't we been here before? The Bank of England has already undertaken two previous rounds of quantitative easing. Did the previous efforts "kick-start" the economy? Does England win football matches by taking penalties?

The previous two efforts went something like this; the BoE created billions of pounds of cash. It took the newly minted money to the UK government bond market. It purchased a ton of bonds. If the bond holder was in the private sector, the cash was deposited into a commercial bank, who then placed it on deposit back at the Bank of England. If the bond-holder was a bank, the transaction was even simpler. The cash receipts were transferred directly to the Bank of England.

The upshot of QE was that the balance sheet of the Bank of England increased. Cash deposits of Banks held at the BoE, and so has BoE holdings of government bonds. If you find any of this difficult to believe, then just take a look at the published balance sheet of the BoE. It is called the bank return; it is published every week, and it is available on the BoE website.

QE was supposed to rejuvenate bank lending. Has that happened? Nope. Commercial bank lending to the private sector has not increased; actually, it has shrunk. In aggregate, firms are paying off loans, investment has stalled and the economy hasn't grown in five years.

By any reasonable standard, QE was an utter failure. The obvious British response to that kind of empirical regularity is clear. It failed once, so lets do it again. No need to re-evaluate the strategy; there is no time for a rethink. Failure should not discourage us.

Let us plough on regardless.....


Ralph Musgrave said...

Sorry, but the smartly dressed twits that make up our London based elite couldn’t bear to see money being dished out to the peasants. They’d rather try and fail to channel the money towards “investment” because “investment” is an important technical sounding word. That’s why Gordon Brown always referred to increases in CURRENT SPENDING on the NHS as “investment” in the NHS.

Simon Jenkins has had several articles in the Guardian making much the same point as you make. E.g. see:[topic%3Dgeog7]&searchID=730376&datetime=[t-minus%3D7]&hdlaction=story&storyid=[storyid=FjK_i6QoZSjf5pt6Jm2ZlCw1vFOgAGdg30-veEQdOcfAGNLqu0TR8-YY9qqdfAio]&rtcrdata=on&epname=EFORE&


Stevie b. said...

Gold's recent tumble (along with oil) despite QE all over the global place = pushing on a string = potential global depression.

But...the PTB will try anything - including giving "free" dosh directly to the people with spending conditions & time-limits attached - rather than allow essential economic cycles that correct excesses and keep the capitalist system healthy. By denying this shorter-term cleansing, the quid pro quo is that we are being set-up for a potentially long period (?) of deflation & probable decline.

A further complicating factor is that the West would rather level their economies than accept and come to terms with the inexorable trend to global levelling of pay.

ernie said...

Same old story. As I've said on a previous posting there is no way of avoiding a significant reduction in our living standards as we have reached the limit of our ability to service the debts. This reduction must be painful. The BoE's "cunning plan" will simply achieve it by debasing the currency that incomes are earned in. No amount of printing can "kick start" anything

Stevie b. said...

Ernie - we've also reached the limit of our ability to actually take on any more debt.

I suppose it's possible that the recent gold tumble could have been manipulated by the ptb, but even so, still feel deflation will be more of a force to contend with in the future.