Nov 05 2009
£25,000,000,000 more? Why not?
The Bank has decided to print another £25 billion, presumably to boost inflation more. I think they will find inflation goes up in the New Year anyway. The decision will also have the effect of making sure the government does not run out of cash for its current spending spree in the important period of the run up to the election. Very convenient.
Meanwhile the broken banks are regulated in such a way that they cannot lend more to the private sector. We limp on with a two tier economy. We have a public sector awash with printed cash, and a private sector squeezed by broken banks.
24 Responses to “£25,000,000,000 more? Why not?”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
This madness will be bailed out by The EU, via entry into the euro at a rate sufficient to devalue the Government’s debt. That we all end up paying 10 euros for a litre of petrol will not bother anyone but the poor old man and woman in the street.
This somehow doesn’t feature in Labour List……
I, by the way, am the poor old man married to the poor old woman in the street. Inflation, as Mrs Thatcher noticed, is very bad for people who are living on their savings in old age.
But Gordon Brown really cares about us. That is why he is going to go into Social Service when he leaves parliament. (;>)
If spending gets you out of debt, my wife must be a financial genius.
So utterly predictable. But of the many supposed benefits of QE from the government’s point of view, the most immediately useful is the reduction in long term gilt yields, keeping their funding costs down. But the B of E cannot keep indulging in QE forever, especially when the CPI and RPI figures start to become embarrassing. What then for long term gilt yields? Of course this particular problem may not raise its head until after the General election.
Interesting to listen to Mr Blanchflower on Radio 5 this afternoon.
His solution is simple, and I quote as near as I can from memory (as I was in the car) “all we can do is just keep on printing more money until we get the next boom going, and then we can stop it. Anything else will bring us massive unemployment”
However when questioned he did not really sound convincing, he simply stated over, and over again, that that was the only policy he could say was credible.
I am not a high flyer in international finance, but this sounded all rather glib, unscientific and fraught with danger.
The BoE balance sheet is up to £237,000,000,000 as of yesterday; that’s before the latest print run today! The Banks are holding £151,000,000,000 as excess reserves at the BoE and out of circulation for the moment.
Those reserves are there to make sure that the Banks remain just a few quid short of insolvency. We do not know how many toxics have yet to come out of the vaults and be realistically valued; or, how much the BoE will overpay for them when they do.
The longer and deeper we get into this QE drug dependency the harder it will be to come off it. The economy will undergo structural changes that may well collapse when the drug stops. That includes the BoE using QE to buy government IOUs, Zimbabwe style.
I can’t wait to see how Merv is going to stop that £151 billion hitting the fractional reserve banking system when the banks start getting cocky again. That is when we will see inflation.
I was listening to a lecture by Murray Rothbard recently about the pre-civil war American Gold standard and one of the states (I for get which one) started issuing paper money, initially just to deal with ‘an emergency’ Pretty soon they were hooked on this financial version of crack cocaine and there were of course further issues until the currency was destroyed. Indeed, Rothbard could find no examples of governments that just printed money the once. They all become addicted to this easy money strategy.
So it is with Britain and QE (so far) or to give it a more accurate name, printing money from nothing (i.e. legalised counterfitting).
It’s a wonder nobody else has picked up on the consequences on borrowers of increasing the regulation of the banks.
The arithmetic of gilts and QE is interesting. If the DMO issues £10bn long dated at 2.5% and sells it to the BoE, in effect it hasn’t been sold at all – it is just a shelf tap issue, available for sale in due course to real third party buyers. When the BoE actually comes to sell to genuine third parties, if the yield the market will accept is 10%, then the proceeds generated will be just £2.5bn. The loss will be on the books of the BoE. The idea that the government is really borrowing at low interest rates is quite false. It is printing fraudulent cheques electronically.
Why give it to the banks? If they give it to me it will be sure to be spent in ways that will give a huge boost to the private sector. Inevitably there might be a bit of waste here and there, but nothing remotely like the levels that the banks and government have achieved. And some useful things might actually get done.
As you say, how very convenient that the BoE has printed the same amount of new money as the government’s budget deficit. Are you sure that you really want the BoE running everything if you become the government? I am growing tired of the daily anxiety that most of us are going to be massively impoverished for the foreseeable future and beyond.
Why not indeed? No one is batting an eyelid about it, at least the BBC have it as a photo story, bottom of the list at third but at least £25bn still merits a photo.
What assets are the BoE buying exactly? Are they buying assets from RBS, if so it seems a bit strange they ask for £30bn more of a bailout yet still have assets to sell to the government. Why don’t they sell those assets on the open market and ‘borrow’ less from us?
Seems bizarre that the Post Office part-privatisation fell over due to a £7bn pension gap when there is this massive amount of money being created, why not just make it a nice £32bn and fill the PO pension gap and privatise it? (I am not totally serious about that but I’d rather see the money ’spent’ privatising a pension heavy nationalised relic than boosting banks balance sheets to give good financial year end reports come April)
Reply: The Bank is just buying government bonds from the private sector.
It’d be interesting to find out if any British MPs who have formed part of a government have ever been taken to court for acting negligently while in possession of the knowledge of the probable deleterious consequences of their actions.
There’s also the small detail of the EU sticking it’s oar in.
Although detaching the banks for the umbilical cash from the tax-payer is what we want to achieve, their interference is presumably intended to accelerate the process.
Desposing of the problem in an organised manner was always going to be delicate, and the current Government has a poor record in this area. What’s the betting that this will make a bad situation worse?
John
Whats your opinion of Cameron sacking Mervyn King given he unlike yourself believes QE is the right thing to do.
What is to stop the Bank of England simply writing off the government debt it has bought? They created the money with a touch of a button, after all. Easy come, easy go?
Asset prices are already well up (FTSE 100 40% up since March, house prices rising). Asset prices are not included in the official inflation figures. But that inflation will pretty soon hit consumer prices too. It is, as Brown would say, “locked in”.
interesting to see it openly reported that the Indian leader asked Brown to let in even more Indian nationals to work here, you would think millions of Indian nationals here on inter company transfer visas would be enough
really the conservatives could do with jumping on this issue, in line with their immigration policy
and quite why we are printing billions of pounds of cash for signicant public sector projects to be subcontracted to (overseas-ed) nationals when there are equivalent Brits out of work is beyond me
this bubble is going to burst one way or another
Interesting point , Acorn, that the much larger reserve requirements will act as the base for even larger lending – when the banks are ready. Perhaps the lending ratio is capped as well.
At the moment, as JR says, QE doesn’t really touch the real economy. Surely the point of increased inflation, apart from reaching the Governor’s target and reducing the government’s debt, is to reflect increased demand in the consumer economy – which QE isn’t reaching.
When QE stops we could end up with government debt-led inflation without an increase in consumer demand.
Tom Conti, yes he, has the solution. Stop printing and borrowing, simply cut taxes. What a bright idea!
Simple question John
Are we actually PRINTING money that will eventually go into circulation, or are we simply adding numbers to a computer screen, so that the numbers just move about.
For example do the numbers on the computer screen match up with the actual notes which are in circulation (including those theoretically held as savings) or is there a miss match somewhere, if so does anyone know how much, because I am concerned that the printing presses cannot keep up the production rate to sustain such a volume as we are being told is being produced.
Surely if the actual cash does not match up with the computer figures, then this is the biggest con trick since Al Capone, because if money does not circulate, then the economy will never get any better.
reply: It adds to deposit money, which is turned into notes to the extent that deposit holders wish to do so. Notes are a small part of total money. To most of us these days money is a deposit or book entry, moved by using a plastic card or a cheque.
When finally the banks finish their intended purchase of long dated fixed rate gilts and interest rates then start to move in a verticle direction then that will be what we call a banking crisis.
Who said turkeys don’t vote for Christmas?
John
Many thanks for your answer Ref Actually Printing Money.
It is then what I feared, we are not actually printing any money at all, we are just enlarging the figures on a computer screen to whatever we feel is needed, until we all want it out in cash.
Whilst I fully accept many transactions are done this way, and with plastic, the opportunity to manipulate those figures on a computer screen with creative accounting, legal or otherwise, is surely a very big worry, a huge temptation, and very, very simple.
One other point on the arithmetic of gilts I should have mentioned. The government changed the rules on pension funds, forcing them to hold gilts in preference to other investments they would have chosen in a free market. This enforced asset switch created a false market in gilts – and will also be to the detriment of pensioners who will see a negative real yield on the gilts investment. In other words, once again the government is guilty of robbing savers.
I can see why the government wants QE and low interest rates. I can also see why banks are conservative about lending to the private sector. But what I could not fully understand were the motives of the Govenor of the Bank of England.
It was first necessary to understand what a “toxic asset” is. Google turned up answers.yahoo.com with this explanation:
Bob borrows $200,000 from a mortgage company at 6%. The house is collateral and is value at $275,000. The mortgage is then sold on to a (say UK) bank. But Bob defaults after paying only $1,000. Meanwhile the value of the property falls to $150,000.
So the bank now has an unrecoverable debt of $199,000 and collateral worth $150,000. The “toxic asset” isn’t an asset at all. It is a liability of $49,000.
How can the liability be reduced? By reinflating the house price – there is no other way. Here is where the American Fed. and the Bank of England come in. They can do their best by creating conditions to reinflate house prices across the board. How? By creating inflation via QE and low interest rates. And the lower the total liability from “toxic assets” the better the price that will be obtained when selling on the partly nationalised banks.
It all sounds hunky dory but somebody must be losing. They include savers in banks who are getting interest that will soon be lower than inflation. And they include the general public who will soon pay more for goods with no compensating increase in salary. This is blatant FRAUD; there is no other word for it.