It’s a cosmic game of pin the tail on the donkey. The tail is the amount of money creation that the Bank of England deliberates over. The donkey is the British economy.
The Bank has just voted to increase its money creation exercise to £200 billion. A £25 billion increase is a little less than had been expected.
The Monetary Policy Committee is marginally less worried than thought about last month’s shock news that the economy is still in recession. It may be marginally more worried about the prospective inflationary consequences of its epic money creation scheme than the City believed.
What we can say now is that Britain is the undisputed QE world champion, that this policy has been pushed further than any developed country in modern history.
So ‘is QE working?’ is now a £200 billion pound question.
Passing judgement on quantitative easing (QE) is a bit like divining the impact of water fluoridation on Britain’s dental standards. You can see some sparklier teeth in Britain’s credit markets, but is all of that really down to the Bank’s extraordinary experiment?
The most tangible impact has been on the market for government debt, where the Bank of England has gobbled up the extra government debt, lowering the price the Treasury pays by over a full percentage point.
Today’s news saw a sell-off in that market, with that interest rate increasing by 0.1 per cent. The markets clearly see the fact that there will be “just 25 billion” of QE in the next three months, as a high watermark for the policy (QE to date has been running at £25bn every month).
David Cameron warned in his Tory party conference speech that QE had to stop at some point, and only then would we see the true demand for British government debt. We are now close to that point.
So what’s it achieved? Well there has been a flurry of larger companies that have bypassed the stodgy banks, by raising money from capital markets to reduce bank debt. Typically they issue corporate bonds sold to the likes of pensions and insurance companies. This is part of the story of how QE has helped the economy.
But it is impossible to say what proportion of this extra lending has come as a result of the Bank’s experimental policies and what has come from a general improvement in sentiment.
So QE has disproportionately helped larger companies rather than smaller companies. It has helped banks too. It may have helped pump up asset prices around the world. And, indirectly it has clearly contributed to a helpful fall in the value of sterling. Not quite a devaluation, but not a million miles away from it either.
The donkey has been kicking a little in the past few days. There have been some strong manufacturing and services sector survey numbers earlier in the week. But there were more bad numbers out today.
So the question remains about when this policy gets unwound. When does quantitative tightening begin? Well it’s never been done before. And the Bank will want to be completely certain that the donkey is alive and kicking, before they remove its tail.
As part of the QE arrangements the Chancellor and the Bank of England Governor Mervyn King swap letters. Normally it is an eminently forgettable spot of legalese.
Not this time.
The Chancellor chose to use the letter to issue what can only be termed ‘a gentle prod’ aimed at the Bank of England. Mr Darling appears to want the Bank to use QE to lend to companies directly by buying so-called commercial paper. This hasn’t happened so far.
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Hi Faisal
I to have wondered about how they will withdraw QE. So much so that my pension funds have index linked gilts in them ready for the inflation that may be created.If you heard Danny Blanchflower an ex-MPC member yesterday saying it doesn’t have to be unwound for years you would be as concerned as me I think.
People can be reassured that Government Bonds bought by our Bank of England is nearly the same amount issued to fund this year’s Government deficit.
Selling extra Government Bonds mops up money supply. A classic way of sustaining money supply is through the sorts of Government deficits we have now. Another is to encourage borrowing by reducing interest rates to push up demand for loans. Which is less effective whilst demand for loans has been lowered by families’ and businesses’ current aversion to debt.
So, to avoid money supply being reduced just when we need to sustain spending, the Bank of England purchased Bonds in the City at about the same rate as the Treasury issued them to fund the deficit.
Money supply is nicely controlled, inflation remarkably low and absorbing the inflationary effects of devaluation. And neither unemployment nor growth has followed doom mongers’ predictions.
A welcome effect of QE is that the Treasury has financed Government Debt for a great deal less interest than we were burdened with twelve years ago. Then, one pound in eight of tax revenues was needed to pay interest on debts. It’s less than half that now.
I understood that Q E was likely to fuel inflation , as in Zimbabwe.I begin to feel we are in a state dictatorship,with increasing big brother surveilance,empire builders who do as they wish and not as they promise.Who use the full force of the law to crush small protests.A paranoid leader who seems to think he is God.He is in the process of destroying the British economy.So i think i will join him and print some money to pay my toxic debts
Get your own saying Faisal that’s mine I used that in a comment last week . Anyway the monopoly money being printed is being played with by the boys in the city and we all knows what happens when they get their hands on it nobody sees it again. They like Gordon Brown have a very nasty habit of losing the lot and they start shouting print some more!. I would start buying share in wheel barrows if I were you something tells me we will soon need them when inflation kicks in. Remember what happened in germany well history has a very nasty habit of repeating itself.
The economy is a bit of a disaster area really. The fundamental mistake is endeavouring to reflate the old failed system. We need something different to the system that crashed last year.
Reflate that system and sooner or later it’ll crash again, particularly if the economy is as precarious as it is at the moment.
Its like pumping hot air into a ballon that’s got a whacking great hole in it. As soon as the hot air goes in it comes out again. The balloon only stays afloat because so much is constantly being pumped into it and rate of replenishement approximately equals rate of loss. When you run out of fuel, its a big crash again..!
The powers that be will come round to that view one-day, but by then it could be too late.
Just remember that I told you so…
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