Just follow the money

Maybe if the banks weren't lending out to people in other countries, there'd be more money for the people of this country.

Dear Governor,

I'd like some money please. I can't give you anything in exchange, but if you give me some money I promise to spend it as recklessly and rapidly as possible.

signed

The Taxpayers of the UK

This seems to be as good as way as any other to conduct 'quantitative easing' - it is what they are going to do anyway so what shouldn't every taxpayer not benefit - why should it be just bankers!

I would like an economic explanation of why the people who caused the problem should continue in the lifestyle they have become accustomed to at the expense of the taxpayer.

Why is it so wrong to give money directly to taxpayers - surely this is far more economically efficient!

This whole business shows just how incompetent the Bank of England and the other regulators have been.!!!!)

Whether it works? Printing money? Yes of course it will work. It will water down the debt so much and so quickly.

BTW, the Banks are effectively adding to their balance sheets by keeping the loan rates around 3-4% above base - that another scandal especially as the culprits include the Banks that we own!

It seems like the effect of this is just to transfer wealth from normal people (whose money is now worth less) to banks (which now have more money to make up for that).

Is this really in citizens' best interests? Perhaps the banks should have been allowed to fail after all...

I think you have got it wrong. Issuing T-bills is very different to issuing money. I can buy a car with money but not with a T-bill.

If the banks get a T-bill in exchange for a poisened mortgage they can use the T-bill to raise money. They can then lend me the money to buy a car. However, there is no extra cash in the economy.

Whereas, if the BoE exchanges money for mortgages, there is extra money in the economy.

But then, I'm only and engineer!

QE or not QE. It's still a lot of Friedman speak. However you cut it up, the following is true:

1 You end up with more 'money' in the system.

2 The banks will cover their losses before the do anything

3 There is little or no confidence within the economy to borrow even more.

So, you have more money with nowhere to go.

Are we now trying to play one-club golf in the snow?

"As I pointed out yesterday, banks have to do something with it to increase "broad money" and get it out into the economy. In Japan's case, a lot of the money just sat in the banks' accounts and didn't achieve much at all. "

Exactly!

And why didn't the banks lend? Simple - because with interest rates close to zero it wasn't worth lending it.

The solution to this crisis is to raise interest rates, so that banks want to lend again.

The current policy is simply mirroring what happened in Japan, and we risk having a 'lost decade' too as a result.

Why are Stephanie Flanders and Robert Peston the only BBC journalists who treat their audience like intelligent adults ?

I actually think I am begininng to understand the complexities of what is going on - largely through their writing.

Steve

A commentator on yesterday's Newsnight echoed the belief of many posters here, that the British public view these rapid cuts in interest rates as panic measures by the government. QE is viewed in the same light.
Therefore, the public believe there is going to be a severe recession, or even a depression, because the government's actions keep suggesting this is the case.
The public, rightly, cut back on spending and pay off their debts instead.

The risk with QE is that expanding the money supply when demand is contracting will put further downward pressure on sterling. Britain has a weak currency; the USA and Japan do not. Therefore, QE may not have such negative side effects in the USA and Japan, it may just prove to be ineffectual in those two countries. In Britain we run the risk of foreign investors taking fright and pulling their money out of the UK in favour of the safe haven of US Treasuries. The dollar is still the world's reserve currency, afterall. Why should an investor take the risk on the unknown consequences of QE in Britain? If sterling falls further, foreign investors will see the value of their sterling based assets fall. QE is largely untried and it's difficult for non-economists to fully understand, and "printing money" just conjures up images of Argentina or the Weimar Republic. Hence, foreign investors and the British public (me included) will tend to take fright at the prospect.

Personally, I don't think Britain is heading for hyper-inflation. I think we will end up with stagflation - no economic growth and falling asset prices, coupled with consumer price inflation caused by the weakness of sterling and our dependence on imports.
Of course, inflation redistributes wealth from lenders to borrowers, as it reduces the real value of outstanding debt (as long as wages increase in line with inflation, that is.......).

You and Robert Peston are both doing a sterling (no pun intended!) job in simplifying for us all what is going on.

As usual those in power think they can try to blind us all with science but it won't wash any longer. There are too many of us with half a brain who can work things out for ourselves.

For a long time the average man/woman in the street could see the housing bubble forming; the massive debts people were taking on; the complete mis-match in earnings and work done for various sectors of the economy; the rich getting fabulously wealthy and the poor getting poorer etc etc ie everything going completely out of kilter and nothing in the economy as a whole being sustainable.

Something had to give sooner or later.

It just broke in a nastier way than perhaps anyone could forsee.

No amount of fancy talk and spin will fix it though. Why can't they all just talk in plain English instead of trying to pull the wool over our eyes? OK they may have to print more money to oil the wheels. If they do we will all pay for it in the end one way or another but it may stave off the worst effects of the recession/depression.

Meanwhile thanks for your blogs and Robert's too.

Stephanie

Isnt this just an over elaboration. Arent the central banks conducting a huge risk transfer operation to correct a multiplied liquidity disaster because of the banks' stupid business models. New capital is being pumped in to burn off losses to preserve solvency. Debt deflation in the real economy will stalemate the liquidity boost, wont it? When asset prices turn, you might then see an impact ?

I dont know what the markets will do by way of testing out the strength of government / central bank balance sheets when the time comes, partcularly sterling assets. Wont there come a time for swapped assets to be off-loaded?

One question I'd like to ask: Given that all informed opinion suggested that reducing the headline interest rate further would not help improve matters, ie wouldn't stimulate lending or ease credit in any way, plus the fact that it reduces the central bank's room for manoevre - why on earth did they do this?

Surely the central bank is above the sort of cheap politics that this smacks of?

Just now, we might have a touch of deflation - so a bit of printing money may not go amiss.

But we know what will happen next: there won't be a dramatic up-turn (there's far too much bad stuff happening for that); the govt will carry on printing, long past the short deflationary phase ... followed by rampant inflation.

Frightening to watch it happening in slow motion.

I am inclined to agree that quantitative easing has been going on for quite some time.

It should then cause us all concern that it does not seem to be working.

Once again one is left puzzled as to what is really going on.

Does anyone know?

I fear we are in one of those weird binds that arise just before things spiral out of control; if you aren't confused then you don't knowwhat is going on.

All will become clear in due course.

Unless no-one has noticed......banks are lending money via credit card outlets at 20 plus times the bank rate...don't think a little thing like a 1% bank rate will stop banks exploiting as many people as possible, as often as possible, in as many ways as possible.

Quanative easing is state sponsored inflation, this was called in past "pump priming" and leading to prices rising at 26% per year when I got married in 1975.

Stephanie. tell it like it is! If they are printing money then journalist can report that they are printing money. "Truth fears no justice" (although it may be quizzed by the Treasury Select Committee ;-)

They may argue that they are not increasing the money supply because they are issuing Treasury Bills against Bank assets of the same value. However, that flaw seems to be the value of those assets. In a free market, the market determines that price of something. If the value paid by the BoE was the free market value then the banks would not have to sell to the BoE - they could sell to anyone. Therefore, I rather think that the government will be paying over the odds for these assets. Will the difference between the market value of the assets and what the BoE pays not be money that is just created?

If the BoE cannot later dispose of assets purchased under the Asset Purchase Facility for the price they purchases them then the money "printed" cannot be clawed back and the net result will be an increase in the money supply!?

Therefore, in theory they are not printing money, but in practise they will be. As they say: in theory, the theory and the practise are the same, but in practise they are different. (True of many fields, but especially economics it would seem!)

If the banks wanted to lend they would love to at rates 7 points above base (just as mortgage rates being 4 points above base). They wont lend because there is not a market. Companies are going skint because nobody is buying their product and they cant get loans to get by becuse the banks no this is a long term depression.

The BoE have announced that they begin printing money in earnest on 13th Feb. What a lovely pre valentine present for the debt laden as they can begin to watch it dissapear with inflation including the governement.

Enjoy the 1% why you can because it aint gonna last long

BTW, the Banks are effectively adding to their balance sheets by keeping the loan rates around 3-4% above base - that another scandal especially as the culprits include the Banks that we own!

Banks making profits rather than losses, as they will do by being able to borrow cheap money and loan it out at higher rates, will help then stabilise their capital ratios and lend again. Remember that the lower interest rates go, the less banks can match the rates - when rates go down, the proportion of the banks costs of making the loan (from bad loans, administration and overhead costs, and so on) go up. This effect grows exponentially as rates approach 0%.

At least Stephanie is a good teacher. As she says, whether or not these measures work is the real test.

Governments and Central Banks have so far, though at different rates, responded largely as per the monetarist text: bail out the commercial banks, expand the monetary base, reduce the cost of borrowing etc. All supply side stuff.

If these policies don't work we can probably throw out supply side economics for good and go for plan B: continuous demand management within an international framework that provides adequate liquidity for steady growth, as per Keynes. The Tories won’t like it of course but they appear to have their survival instinct back (well, apart from George).

It strikes that just now a policy of investing heavily in public works, raising disposable income, subsidising housing and stringently managing the financial sector might go down very well with the electorate.

Those ideologically opposed to Plan B really need to come up with a remedy better than mass bankruptcy and unemployment to get my vote.

Having said that, let’s not get carried away. The economic situation facing ordinary people today does not remotely resemble that of the hungry thirties. My grandfather shed the only tears of his life then when told it would cost more to get his crop to market than he would get paid for it – and was forced by the bank to destroy it. There really were hungry people in Europe then.

Today the only pressing issue is housing for young couples and those made redundant: but we already own two mortgage providers so that shouldn’t be half as complex a problem as QE!

"As a result of those policies, the monetary grew by 35% in the second half of 2008 alone. And the Bank's balance sheet expanded by around 160%. "

A typo? I'd be interested to know what word, if any, should come after "monetary". Thanks

Hmmm... printing money eh? I can't get that image out of my head of the well-known story from 30's Germany, of someone pushing a wheelbarrow full of notes to buy a loaf of bread...

... and if memory serves me correctly, weren't they mugged, and the robber tipped out the cash and made off with the barrow?

While I'm fairly confident we're not heading down the same route as 30's Germany, or even present day Zimbabwe, I'm still not encouraged to go and spend, spend, spend. The hatches will remain battened down for quite some time yet, I'm afraid.

Quantitativeweasing

Sounds so like the last days of Sodom and Gomorrah,with the sodUKomites doing their best to get the most out of their inflated upside down digits [SIX TO NINE]and into the diminishing number of solvent AAA's holes [666]given away free with conflakes

The tripple whammy of FINANCIAL,INDUSTRIAL, ,POLITICAL and MORAL disintegration


With the viagra of freshly printed money for those who still beleive in promices promices finding its way to the Mall adjusted city centres converted into red light districts.

Here comes the fiscal stimulass for the trojan whores doublentry book keeping system masquerading as Democracy

5. 111John

You seem to have contradicted yourself.

"I think you have got it wrong. Issuing T-bills is very different to issuing money. I can buy a car with money but not with a T-bill."

"If the banks get a T-bill in exchange for a poisened mortgage they can use the T-bill to raise money. They can then lend me the money to buy a car."

If the banks can use the T-bill to raise money, then the T-bill is not very different to money. T-bills do in fact have a monetary value!

The question that remains is whether the banks will actually lend you the money to buy a car, or just buy cars for themselves. I think Stephanie should "Just follow the money" a bit further to find out where it all goes.

You can never trust these QE 'er types ,they should be castigated before they damage themselves or the economy with their counter cycllical electronic digits

They are worse than money grubbing £i$$ard$

Are they printing money already? Well after the government altered the 100+ year old Banking Bill regarding the BoE having to no longer make notification if it was doing so, then who knows?

Re entries 9 and 12, it seems to me that no one addresses the law of unintended consequences. Either that or stupid politics are entering the fray too much.

The Government is desperate to boost spending to try to re-inflate the consumer bubble and get re-elected next year. The falling interest rates clearly keeps cash in the pockets of borroweres. However, any sensible person with large mortgage or credit card borrowings will use their extra funds to pay off those debts, not go out to the shops to buy more stuff. Meanwhile anyone with savings is seeing their income fall hugely - hence they are not going to the shops either. Net effect is not to get the economy moving.

The cost of borrowing is not causing the contraction in the economy - it is the fear of unemployment. No one is going to buy a new car or house if he/she might be unemployed next month.

The VAT rate reduction clearly makes prices cheaper and was quick to implement (albeit with some pain for retailers). However, given the quantity of imported goods any positive effect on high street spending is likely to benefit foreign industry. Why did they not see that reducing employers' and employees' national insurance, which is levied on a weekly or monthly basis, could have been implemented quickly and might have helped preserve jobs.

Did anyone hear the Today programme earlier this week when a rep. from RBS was saying that RBS has £3 billion to lend to business. Someone else was saying that business is still seeing a shortage of available funds. The presented tried unsuccessfully to reconcile this apparent contradiction. The reconcilation was, however, obvious but no one said anything - RBS has the funds which were stated to be available for borrowing for investment (presumably secured on the resulting fixed assets), whereas the other chap was saying businesses need funding for working capital. Chalk and cheese.

I have an increasing concern that our leaders have not analysed the problem correctly - and hence are failing to come up with the right solution. The reality is that we are going through a huge re-balancing exercise, to find a new long term stability. Policy needs to ease the pain of getting there and should also be seeking to improve that long term position through, for example, encouraging expenditure on green and infrastructure investment projects.

So now can we dispense with the MPC?

Direct control of the terms and conditions of supplying finance and credit is more important. Great opportunity for publicly controlled banks

Beyond this is stimulating the economy by putting money in people's pockets - tax reductions for lower paid, uprate benefits by 20% allowing inflation to gradually return the purchasing power to long term level, increase min wage and reduce employers NI to compensate etc

As long as they are right three Stephanie, as Peter Jay would have said when he was economics editor of the Times.

How is the baby?

What is most worrying is the deception.

The key point of a democracy is if you can't find a way to sell it to us and gain our agreement, then don't do it.

It seems to be a key policy of this government that they know what's good for us and we're not clever enough to work it out for ourselves.

It may be a good policy or a bad one, but without exposing it to debate and public scrutiny we'll never know - and what people don't know they are automatically against.

17. simonmw3:

"....in theory, the theory and the practise are the same, but in practise they are different".

This was said by Yogi Berra. Two of his other remarks seem to characterise the authorities' confused thinking at the moment:

"When you get to a fork in the road, take it"

and

"They give you money, which is just as good as cash!"

It's more of the financial engineering which got the world into trouble in the first place. Meanwhile, those who produce wealth and prudently save for the future are being royally shafted to pay for the profligacy of others. A country which continues to punish the prudent and reward the feckless deserves to go into terminal decline. What's the point of telling my kids to work hard at school to get good qualifications ? They will become tax-slaves supporting the clientele state.

Follow the Money - interesting concept.

Banks had two sides to them - those happy to take in money from savers, lend to borrowers and make a few per cent in the middle and those who were betting on rises and falls in the market and aiming to get rich quick.

If the latter is out of favour, surely these people will follow the money - i.e. out of banking. If so where will these gamblers go? More importantly, have they already been ousted from our banks or are they still there making the decisions (and if so, are they the right people to do so)?

This personal aspect of banks' futures is vital - and it must be asked whether the weasel words from top bankers are an attempt at sleight of hand - while they come up with their next trick!

So to get us spending more the lending rate is now on the floor? Good thinking Gordo( well you dont really think the bank is now independant)

Push the rates so low, guess what? those who now have spare cash because they are paying less on their mortgage are now paying off more of their mortgage.

The pensioners and savers are fed up and getting poorer by the day, so we are certainly not out spending. The banks are lending very selectively. We are also contributing massively to the stability of the banks and building societies by lending them our money and getting nothing for it.

Time for a new plan.

#5 "But then, I'm only and engineer!"

In engineering terms, T-bills are the equivalents of potential energy. *Cash* money are the equivalents of kinetic energy. *BOTH* are forms of energy !! When T-bills are cashed in that is the equivalent of turning potential energy into kinetic energy.

Therefore, by creating more T-bills this government is, in effect, storing up more potential energy (of debt, in layman's terms).

When there is a sudden release of that potential energy in the form of kinetic energy, it is known as a *CRASH* and Britain ends up as a Third World country with worthless paper money, rather like Zimbabwe !!

It is this government's belief in an economic "perpetual motion machine" that is killing this country's economy.

You, sir, as an engineer, *should* know that there is no such thing as a perpetual motion machine !!

#20 Garthking

"let?s not get carried away. The economic situation facing ordinary people today does not remotely resemble that of the hungry thirties. My grandfather shed the only tears of his life then when told it would cost more to get his crop to market than he would get paid for it ? and was forced by the bank to destroy it. There really were hungry people in Europe then."

I'm sad to say that it will not be long before we are back in a similar situation.

There are huge differences in the way that this depression is developing to what happened in 1930. However, the outcome will be fairly similar. As with now the governments in 1930 thought they were dealing with one problem only to find that the whole economy was imploding. With us, both here and the US, we have focused upon the banks and spent tremendous resources trying to save them. However they are only one element in a much wider disaster.

Perhaps, the best illustration of what is going on is a flood. Once your defenses have been topped you can only wait and try and pick up the pieces when it has passed. Problem is, it is going to destroy a lot of businesses and people in it's path. At present we are trying to fill sandbags - trouble is we are running out of sacks.

The thing that is exacerbating the problems is that this flood is effecting all countries are experiencing the flood at the same time. So there is nobody to arrive as the emergency services with a pump.

The Federal Reserve and the Bank of England are talking about using fresh Treasury debt issuance to mess with private debt yields. Creating new debt to bid up the prices of assets naturally trading far below par increases the quantity of money however you justify it. It also moves much of the debt burden to the innocent, which though off-topic, must be pointed out each time.

As you observe, this additional liquidity may be sterilised as it was in Japan, that is, not leaving the bank. The problem then becomes akin to water building up behind a dam. As is happening in the US, lobbyists and politicians then reflexively demand more water be pumped in to clear the blockage.

Will it work? For your next post, why not discuss what would happen if it does not? The consequences of failure would surely be worse than the consequences of allowing a natural unwind.

In her article, Stephanie says: "Cheap money means more lending by banks; having higher interest rates encourages less".

We can see that this isn't true. Interest rates have been falling for months and lending has not increased.

Even if the Bank of England stuffs the banks with money through QE or whatever, I don't think that bank lending will increase by much.

In a recession, the risk of defaults on loans rises. Why on earth would any sane bank lend at low interest rates in these circumstances? Banks need to earn higher rates of interest on all loans to cover the losses on those that go bad.

The risk to banks of lending to individuals and business has increased significantly - today we read that the rate of business failure has increased significantly.

The reward (interest rate) for a loan has to reflect the risk. As risk has risen, interest rates need to rise or the market will remain frozen.

Increased interest rates would also encourage depositors (institutions in particular, who have greater choices available than individuals) to lend to banks again.

Increasing interest rates will ease the credit crunch.

I am even more confused now. What exactly does that all mean?

Not sure Pesto does treat his audience as intelligent, except that you have to be pretty sharp to disentangle the threads and disregard the gushing superlatives. Stephanoie on the other hand explains relatively complex economic ideas with great clarity.

If the BoE's current intervention is not expanding the money supply, it is very close to it. Gilts are virtually as good as cash and do they not count as part of the Banks' Tier 1 capital? The end result is that for every £1m the Bank raises by selling Bills, £2m of cash and Bills will end up in private hands.

It is indeed a mystery why the BoE hasn't done this earlier - it is recognised that interest rate changes take 12-18 months to have full effect in normal times, let alone the present problems. QE should have begun last summer if not sooner.

Yes, the Government has effectively been printing money for some time, and it has been necessary to do so. It's a shame they didn't feel able to do this in a more open fashion, which would have allowed them to do something useful with it (like public works or just handing it out to taxpayers) rather than just giving it to the banks. Just printing cash would presumably have been cheaper in the long term than printing T-bills too.

But if we still can't get consumers to spend, then we are going to need to see increased public works etc to keep unemployment down. People keep saying that the 30s Depression was only finally brought to an end by WW2. How much of that was because the War Economy was largely a centrally planned command economy?

Printing money in this situation will never work and never has unless for the short term, look back through history of any fiat money system, it eventually fails.
Even if we do get out of this unless we change our monetary policy ie dont have one, let market forces control the interest rates, there arent the booms and busts in a totally free market economy.
"Money is just a commodity just like any other, it should be produced and managed under competitive market conditions, just like shoes eggs computers.
Banking to is market service to be managed by the market order with no government invovement, and so subjected to the discipline of market forces including the restrictions against fraud" thanks to lew rockwell of the mises institute for that,
why are we so in awe of money its blinded our perspective on life

peace and liberty

Oh my god it's SO complex... Not...

You can increase the amount of money, you can keep it stable or you can decrease it.

Those are the options, no matter how you try to dress them up.

I have been doing a lot of thinking about this downturn, and I have come to realise that the solution is not an economic one, or rather solutions lie outside the current economic framework.

First, these levels of quantitive easing can not actually work. If you want proofs, you can look for non-mainstream economic viewpoints that most convincingly present them. The basic idea is that the West, especially the US, is overindebted, and the volume of private bank issued credit money contracting cannot be offset by these levels of base money injections. In any case, in a deflationary environment, which is what we have, the demand for credit (and hence money) is dropping. The result is that the base money injections go straight into liquid assets such as government debt, to help keep the banks from going bust, but doing nothing to help society.

Second, you have to carefully choose what you are trying to solve. Do you want to preserve the financial institutions, or do you want to help people stay in their homes, avoid reposession, and avoid reposession of goods on consumer credit? If you want to preserve the former, you tax everybody and pump base money into banks that buy government debt (but do not increase the money supply because during deflation they cannot and will not ). If you want to preserve the latter the solution is simple:

Everyone stay in your homes, hang onto your goods, and tell the banks to go to hell. The money they lent you was created from thin air by them, so why should they be entitled to the stuff you work for?

This is the crux of the issue - the solution is the same as it has always been - when the system breaks down, people get angry, and they synthesise a new social order to replace it, with new economics to match.

It was in the context of post industrial revolution early 20th century, in the context of depression and world war, that the ideas of Socialism and Communism were born and adopted. I am curious to see what emerges this time, but I am fairly confident that banks won't be a large part of the picture - they'll go back to being places where people pay to store things, and maybe get a loan if they are someone special.

# 39

I meant the statement by the BoE.

"The consequences of failure would surely be worse than the consequences of allowing a natural unwind."

Werrington, what would you expect those consequences to be?

Well done you obviously held the interest of at least 44 of us, 41 more than you thought.

All of this could more simply be described as filling up the vast nebulous holes left by the popped bubbles of never-never assets sold and re-sold many times over by those clever bankers of the world.

It's a straight baleout, albeit an absolutely necessary one, dressed up in yet another set of cleverly named clothes or disguises.

Wonderful stuff you couldn't make it up!

Why is it so difficult to understand? If you have a monetary system based on debt ( banks creating "money" out of debt") it is unstable, not to mention criminal. We need a new system! The money reform party are proposing attempted solutions. We may not agree with their solutions but we know our system is broken. We may need a gold standard or if we trust governments (I don't) we could try debt free fiat currencies issued by governnments but our current system that NEEDS inflation is ridiculous and hurts so many.

You can watch you tube vids of Albert Bartlett discussing our clown politicians inability to deal with the concept pf exponential growth, and there is a nice little video about "money as debt" on google video.

Now the Local Authorities Association has joined in the chorus calling for a return to sensible interest rates very quickly (See, or rather hear, the Today programmes Sat 7th)

I reiterate (see many of my previous contributions over that last months) that I have been humbly suggesting that this is a 'requirement' for a return to sensible economic policies.

The problem is that those in change were the same people in change who managed the run up to the present economic disaster.

From a sociological stand point it is understandable, even predictable, that these people (i.e. The Governor of the Bank of England, the MPC, HM Treasury and the FSA) would act in this way, but in order that the Country can recover, they must go as they are incapable of understanding what to do - as this requires that they firstly admit to themselves that they partly(?) caused the problem through carrying on with the wrong economic policies.

These economic policies are of course 'soundly based' and the 'accepted' economic paradigms, as Stephanie Flanders is always telling us. It is an uncomfortable fact, but nonetheless true, that all economists trained in the last 50 years (and who are self-selected by their fellows) are part of the system have been incorrectly educated. This is unfortunate for them, but disastrous for the rest of us.

#35
"In engineering terms, T-bills are the equivalents of potential energy. *Cash* money are the equivalents of kinetic energy. *BOTH* are forms of energy !! When T-bills are cashed in that is the equivalent of turning potential energy into kinetic energy.

Therefore, by creating more T-bills this government is, in effect, storing up more potential energy (of debt, in layman's terms).

When there is a sudden release of that potential energy in the form of kinetic energy, it is known as a *CRASH* and Britain ends up as a Third World country with worthless paper money, rather like Zimbabwe !!

It is this government's belief in an economic "perpetual motion machine" that is killing this country's economy.

You, sir, as an engineer, *should* know that there is no such thing as a perpetual motion machine !!"


Absolute dross. As a post-doc research fellow at a russel-group university, i.e. a proper scientist and engineer, I'd like to point out to you that you have absolutely no idea what you are talking about. Don't ever try to dress up your quackery as anything other than what it is (that goes for all economists as well, both amateur and 'professional' - no actually I'll retract that - most of the amateurs on here have more of an idea than the 'professionals') .

#47 and #48
ref your points above

Kaletsky wrote an interesting economics article in Thursday's Times subtitled

'Academics and their mad theories are to blame for the financial crisis''

Summarised as

-prevailing academic orthodoxy is a blind alley
-diverse intellectual approaches are required
- and questions why Bankers and Politicians hold beliefs that in hindsight are ludicrous ie 'madmen in authority'

Worth a read and the Times link is below

https://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article5663091.ece

(required reading for the MPC zero percent ardents)

BOTTOM LINE: BANKS AREN'T CHARITIES

"Mervyn King said that the Bank purchases of assets under the new Asset Purchase Facility would be "unconventional unconventional policies", as distinct from the more "conventional" QE."

I get it. Things are complicated - especially monetary policy things. Central bankers, of all people, have to be precise.

But it's odd that two former teachers, previously known for their crystal clarity, should decide now is the time to be wilfully complex."

Why is it odd?

Though 'urged' to pass the cuts on, why would they risk lending given that a) intertest rates are so low and b) they've lost the opportunity to dump risky assets (loans) through the smoke and mirrors of securitization/CDS's etc? Wasn't that the key to the jig in the past? Now shareholders (e.g. pension funds) will be wanting to know that their dividends are not based on such suspect processes won't they? Isn't that why Barclay's, RBS and Lloyds-TSB share prices nose-dived to under a pound? The banks said before Xmas that they are not charities. They're not!

I'm afraid the jig is up. It's time to look long and hard (and one's PC self-censor will demand a bit of pain endurance here I promise) at Liberal-Democracies' demographics instead of all the verbal spin.

Try it, it's good for the soul.

Interesting piece - but have not the banks have been practising their own form of 'QE without cash' for some time - creating value, hiding it within derivatives and trading this internationally 'off balance sheet' - this is partly what has got us into i.e exacerbated the current UK economic crisis?

The problem as I see it as the govt has jumped overboard with the bank bail outs and borrowed so much that its hands are tied and a further and significant QE policy would depress sterling into free fall with further UK debt and it is difficult to see how QE could on balance have as much short term impact as the recent VAT cut (I think the VAT cut is good as will reduce inflation for this year), without upsetting the UK finances with some negative consequences in the medium and long term.

All QE does/wiil do as talked about (indirectly) the govt is put more money bank into the banks with nothing helping the real UK economy.

QE also requires a competent government to administer it and do imaginative things like printing food coupons and energy coupons to produce cash savings and pay the private suppliers with treasury bonds in exchange for corporate bonds and spread the risk short/medium and long term between private and public. Then get the pension funds to buy more corporate bonds? This would put more cash into the economy to spend/invest on infrastruture/green industry to produce more agricultural goods and home produced energy so that things balance out over a traditional investment period.

We could go for resource backed QE whereby you ring fence some of the benefits of QE into green sinking fund invetsments as intended to pay back the longer term deficit in the economy.

In the meantime, the banks need leaning on heavily to get them into shape - bonuses are 'peanuts' compared what is going wrong here and can still get much worse and be prolonged - if the government take some real action now instead of dithering - things might start to improve.

Rememeber Harold Wilson's - 'the pound in your pocket is still worth the same' and what happened there? Avoiding inflation is the real problem and a rush to a buoyant economy will lead to more misery down the line.

Believe it or not - I don't think that QE that gives more 'money' to the banks is a good idea. - QE needs direct business investment requiring competence, strategy, policy and be communicated to and have the moral support of the taxpayer - I think that it needs competent strategic direct green UK business investment, in order to work - a finger on the pulse/ a great business mind - so ask the successful green UK business bosses what to do and not a bankster or fat cat.

Please look before you leap Mr Darling - any fool can shuffle money and bonds and argue we'll be better off some time in the future - it's where the investment is placed now that finally matters. So decide correctly which sectors of the UK economy need money to get going again - and smash the banks/ the rest up to pay for it so that it all fits!

That's the real problem - the govt does not know and cannot decide what to do other than borrow and give more and more money to the banks. The UK banks (or a single UK national bank) need(s) to be subservient to the UK economy - money is simply money - it does not matter which UK bank you get it from so long as you get it and the banks are/is run properly and serving the UK economy properly. This can also all be achieved without any bonus paid in my view.

#45:

Failure of unconventional liquidity measures could produce a failure of the monetary system (hyperinflationary by definition), necessitating a revaluation of sterling and possibly leading to failure of existing political systems. If the market calls our bluff, the currency would crash, interest rates would reach for 20% and our access to capital markets would be gone. It would be Iceland all over again, but with too many people for the EU to save.

On the other hand, natural unwinding of bad debt would mean a deflationary depression a decade in length resulting in a 30% contraction in GDP from last year's peak. I'll take it.

Attempting to prevent depression means risking collapse.

#53 Thanks.

That explanation was in-line with my assumptions but I am begining to feel more and more confused with what is happening 'on the ground':

- BoE cuts rate and yet the £ strengthens (comparatively)

- Obama has his rescue plan shorn of $150bn social spending

- Obama plan now focuses on tax cuts yet it expects more will be saved than spent.

- Analysts predict US banks need a further $100bn on top of the 2nd portion of TARP

- Sarkosys French rescue plan seems to be getting nowhere.

This depression is now taking on a life of its own that defies any individual initiatives.

- ECB refuse to cut rates despite the perilous state of Spain, Ireland, Greece, etc.

For 10 years the economy of the world has been a game of cheat's poker. The west is cheating by playing for markers it was not intending to pay out on and the east was cheating by manipulating the rules. In the case of OPEC by operating a cartel, in the case of China by intellectual property theft, currency manipulation and protecting its own market while accessing ours. Both sides were vaguely aware the other side was cheating but were not too worried because they thought they were coming out ahead.

Now the west has been stopped from issuing dodgy IOU's but the east has not yet concended it needs to stop running cartels and manipulating markets.

The solution is not for the west to work for 10 years to pay back the debt while losing ground militarily and economically. A world dominated by the US is much more pleasant for the UK and EU than one dominated by China.

Rather than following the money how about getting back to the fundamentals of an economy.

For an economy to work people have to work and produce things. Alternatively you can generate wealth from natural resources such as North Sea Oil.

Over the last decade, rather than actually producing anything useful this country has borrowed and lived off N Sea oil.

This created a kind of pyrmaid scheme whereby a lucky few (bankers) got extremely rich.

When the pyramid collapses everyone else is left holding the mess. However, rather than getting back to the basics again this government seems intent on pretending the pyrmaid can somehow be kept standing.

Worse still, they are allowing the bankers to stay in business and even, incredibly, continue to pay bonuses.

Incidentally, they could easily stop the bonuses and reclaim money paid by simply dissolving the banks and setting up new ones with the existing shareholders/staff. When every staff member signed a new contract there would be a clause requiring them to pay back last year's bonus and reducing their salary to a reasonable level.

Stephanise and excellent post however this "false war" over quantitative easing won't help us at least not in the short term.

The government has been hiding their real intentions for too long and no one now trusts the government or the Bank of England or anything they say.

Simply put this is what has happened. The UK had a boom that went on for too long and was allowed to get out of control. Much of this boom was based on borrowed money from banks and other orrganisations much of this money recently came from abroad.

When the boom turns to bust much of this money goes back abroad and the foreign investors sell Sterling and buy their own currency. This is one of many reasons why sterling has fallen so much.

The economy shrinks due to this reduction in available credit so the government seeks to try to revive it by reducing interest rates. This helps force sterling even lower. This further weakens confidence.

The problem is that even with low interest rates the banks have no money to lend and people aren't prepared to borrow because they fear for their jobs so don't want to spend.

So the government seeks to put more money into the system but because it doesn't want to cause panic it does this on the quiet. The problem with this is that as people don't know about it it doesn't cause them the change their actions.

Those with money to spend are still more worried about losing their jobs than deflation. Until people feel more secure they won't be buying houses or new cars or pretty much any other big purchase.

Quantitative easing or printing money, whichever weasel words the politicians use to disguise what they are doing I am sure that it will inevitably lead to hyperinflation. We seem to be in a phoney recession at the moment, with many people (mainly the social climbers who borrowed too much during the boom) much better off. Many people's mortgages have gone down by hundreds of pounds a month. The government is toadying up to those who 'tapped into their equity' during the boom in order to feed a life of luxury which they could not in reality afford. Now that interest rates are practically zero, I would urge those with savings to take their money out of the banks and put it in a safe. Let the country go to the dogs, I say. The politicians have absolutely no moral compass and Britain will not be a country worth living in until there has been a good and thorough clean out and a return to fairness and decency.

Dollar hegemony has to end. The petrodollar has to go. By this I mean it is inevitable. We have to plan for a completely new global economy, but this cannot happen until things get bad enough everywhere for these loudmouthed egotists who call themselves leaders to finally have an incentive to get together and start solving some problems.

#54 foredeckdave:

Those events make some sense.

Sterling naturally strengthens as sterling-denominated debt is repaid or defaulted, because debt repayment and default both mop up debt-money. Look at the rally in the dollar index as an example, as commercial real estate and Alt-A followed subprime into default, and those individuals and companies able to reduce their increasingly expensive dollar-denominated debt load did so. A sterling rally is just a matter of time, as events such as the coming crash of the BTL and managed property bubbles destroy more money than the government could ever hope to pump past the doors of the banks. Once arrears crystalise into defaults, sterling will become relatively more scarce and valuable. This makes sterling debts more expensive in other currencies and sets up a positive feedback loop as overseas borrowers try to pay it off.

Cash then becomes king, as there are fewer buyers on credit competing for purchase of every item. Thus credit deflation creates price deflation, and causes the purchasing power of cash to rise. The market shrinks, and it shrinks faster and deeper for credit-sensitive items such as flats, cars and other durable goods.

However, there is a tug of war. This natural deflationary process on one side, and government money-pumping on the other. Should they spark a crisis of confidence in sterling and gilts by backing too much debt with the Treasury complex to remain credible (especially foreign currency denominated debt), the game is up and the market calls time, recognising this debasement in prices. Then we get to revisit Black Wednesday for a year or a few in Poll Tax-like fashion.

So in return for the pain of deflation, we will enjoy a stronger pound. There will not be enough money for all, but what money there is, will buy a lot. Alternatively, we could see Brown and Darling destroy it by forcing the Bank of England to open the valve too wide. With such inclusion, everybody becomes a winner of nothing.

We are watching nothing less than two competing visions of the future play out. The unindebted becoming a relatively moneyed elite amidst depression, or the egalitarian poverty that comes with currency debasement.

The stuff going on with stimulus should now make sense also. There is only so much demand in the credit markets for the sovereign debt of over-extended countries. Push supply too far, and the buyers disappear, forcing prices down and yields up, and interest rates with them, destroying all borrowers, credit-worthy or not. Social spending is not a business plan. It does not repay the debt. So there can be no emphasis on it, if one wishes to borrow. In fact, buyers of government debt will want to see promises of spending cuts to feel confident their loans will be repaid. And monetary union creates so many more losers when these compromises have to be made.

This crisis has a life of its own alright. The deflationary spiral versus the world's governments' attempts to cheat it. As time goes on, it will become more and more important for journalists to make the distinction between the effects of the crisis and the effects of state intervention. They will compete in their fury.

My story is a long one. It began in 1963 - 46 years ago when I graduated in Chemical Engineering with honours. My class of about 20 found that work was almost impossible to find. After 6 months of trying I left the UK for a while and found work easy to get in South Africa.
Since then I've learnt that the manufacturing industry in UK plc has continued to decline. My learning and experience has taught me that I could help UK plc, but when I returned in 1985 and after more than 600 job applications, I was turned down for all of the possible jobs in operations/ marketing or general management.
The economic crisis has highlighted the problems of the UK - too much reliance on the "Financial Services" sector or should I say "Cloud Cuckoo Land". Now. the problem is UK plc has a negligible dynamic Mfg sector, and there are no brains to run what there is. This coulped with the huge industries of TAX AVOIDANCE and TRUST Creation means there are also a lot of parasites who live off a dying carcas.
One day, I hope the tide will turn, and Engineers will be regarded as not only useful, but indispensible folk who have had to seek alternative careers like I did.

This is all very jolly reading but the fact remains that there is apparently plenty of credit in the system available to individuals. We personally are fed up of turning it down, and the number of approaches tell me they cant find a home for the debt they want to shift.

In fact I am suspicious that there shortly will be more debt, sorry credit, available than is wanted, if we are not there already. Well, two caveats. Wanted by those who are cautious, ie survivors. And wanted by those who the lenders think will repay them, ie track record.

You can play swings and roundabouts as much as you want there is not the demand on the street.

The whole thing is a fantasy of tricking people into buying stuff they mainly dont need and which is scrapped and sent to landfill whilst it still is functional to be replace by the lastest wizzbang.

There are not many things essential on a short term basis. Lets take food, it is a basic need. There are a couple of percent of the population work on the land. Even if you double it that is still small numbers. So lets look at hardware. How many domestic products or houses need replacing on a emergency basis in the next couple of years. So many people can sit tight. You can go right throught the system and edit accordingly, including healthcare, whatever is said to the contary.

The whole economy has been built on a feeding frenzy and the spendaholics have been culled along with their debt. They have to go bust or spend the next 10 years paying off debt. So demand has to drop. The private sector has to shrink and then the public sector has to shrink slightly later. What is so difficult to understand about this.

This whole QE, or otherwise, game is one vast experiment to try and pump up the volume when the simple fact is that the demand is not there.

The people who are left with the money to spend are not the types who enjoy thinking that money is something you throw around and everything which is being done just makes them sit tighter. They dont like bank bailouts, they dont like bank bonuses when there are no profits, if offends them. It worries them. That is starting to come through in the polls. And believe me the polls will get worse on this issue.

They do not believe HMG or the Treasury or the FSA or BoE know what they are doing so they sit tighter. For example, someone said to us they were due to spend, this year, money they had save, about 8 to 10 K, but not now. It can wait for a year or even two.

This is not a credit problem, it is demand problem, and demand is not going to return in hurry because it was a false demand, not sustainable. You only had to look on ebay last year and the year before to know things were unhinged. People scrapping 10K granite kitchens 2 years old because they had bought the house and didnt like pink granite, wanted grey. Rip it out and sell it for 50 quid. I could sit all night and give examples.

The economy is not going to react they way the authorities want it to because they simply do not understand the mentality of those who can spend.

The economy is people, not some sort of economic fish who swim in shoals. I know some of these people, the old school types, the survivor types, because we deal with them. If you offer them the goods on a trust basis they say no, I have to save and I will come back shortly. Some send payment for you to hold on their own payment plan to make sure it is saved. Again if you say its okay take the goods they are ready, they say no I want to pay before I take the stuff. As a group they are a very slow flywheel to get spinning but they run forever and are trustworthy. They are the opposite of the types who pumped up the bubble with debt. The nillionaires, nil in cash and behave like millionaires, funded by debt.

Do you really think that all this QE stuff is going to influence people like that, which is what you are left with as an economy. I dont.

The key is getting housing going again and they have missed the boat on that and housing now has to fall till 2010. In the meantime over indebted businesses that pushed along oversupply on excessive credit have to downsize quite markedly, and nothing is going to stop it. I cant say QE No, QED, but I would not be surprised if I could say it fairly shortly. It is like putting the burner on full blast to fill a hot air balloon with a rip in it.

There is currently little trust in the system and without trust there is little trade, the two are intertwined.

RE: Post #60

Spot on. Perfect. Fully agreed.

I propose that the banks be fully nationalised, and private debt written off. After all, the credit money is meaningless without the belief that it has long term value. There is no moral hazard if we keep the banks nationalised, limit credit, prevent leveraged speculation, and move to fundamentally new systems.

I commend Stephanie Flanders' for trying to demystify the current financial jargon.[Incidentally it is Americans who created most of these verbal monstrosities and the corresponding trecherous financial instrumens.] However I find the following passage rather perplexing.

"Instead of targeting the interest rate, they accepted a target for the banks' balances with the Bank of Japan, which they attempted to meet by purchasing government securities from the banks, paid for with freshly-minted money.

The more bonds the banks bought, the more cash they built up in teir accounts with the BOJ."

In the above passage,it is difficult to make out who the buyers and sellers are and what they are exchanging.To add to the difficulty,the word 'they' used in the first senrence,though plural, seems to designate the singular entity Bank of Japan.Apparently it is Bank of Japan which bought with newly printed money securities from commercial banks to infuse cash into the banking system.This is [or one variant of]quantitative easing. But immediately in the next sentence,the reference is to comercial buying bonds from unspecified sources.[Incidentally this reference is unrelated to the earlier formulation.] This will add to their balances with BOJ only if they make purchases from it.But this appears to be the reverse of QE. My intention is not to quibble;but the concept of QE and its modus operandi need made cleare for general public understanding.

I commend Stephanie Flanders' for trying to demystify the current financial jargon.[Incidentally it is Americans who created most of these verbal monstrosities and the corresponding trecherous financial instrumens.] However I find the following passage rather perplexing.

"Instead of targeting the interest rate, they accepted a target for the banks' balances with the Bank of Japan, which they attempted to meet by purchasing government securities from the banks, paid for with freshly-minted money.

The more bonds the banks bought, the more cash they built up in teir accounts with the BOJ."

In the above passage,it is difficult to make out who the buyers and sellers are and what they are exchanging.To add to the difficulty,the word 'they' used in the first senrence,though plural, seems to designate the singular entity Bank of Japan.Apparently it is Bank of Japan which bought with newly printed money securities from commercial banks to infuse cash into the banking system.This is [or one variant of]quantitative easing. But immediately in the next sentence,the reference is to comercial buying bonds from unspecified sources.[Incidentally this reference is unrelated to the earlier formulation.] This will add to their balances with BOJ only if they make purchases from it.But this appears to be the reverse of QE. My intention is not to quibble;but the concept of QE and its modus operandi need tto be made clearer for general public understanding.

#63. FrankSz wrote:

I propose that the banks be fully nationalised, and private debt written off.

So, have I got this right? - you are proposing that the imprudent over-borrowed and the fraudulent overvalues of assets offered as security become free from debt and own that which they could never have afforded whilst the prudent savers are punished.

Are you really saying that this is a way to run a society? Or were you being ironic and I missed it?

Why shouldnt the BoE create electronic money just as it now creates banknotes? Why instead should commercial banks have that privilege?

QE should be seen as the first step towards a monetary reform in which central banks create or extinguish money, but commercial banks do not. they become financial intermediaries.

There has to be the pain of tax revenue in the future exceeding govmt expenditure, so that surplus money could be extinguished, but you would end up with a more stable system in which the govmt can control the money supply much better.

see for example JamesRobertson.com (google it)

RE #66

Over borrowed or over lent?
Morality has nothing to do with this, it is a question of pragmatic choice between 3 options:
a) Depression and a perpetuation of the same failed leaders and institutions, with wealth concentrated in their hands
b) Hyperinflation, war, death
c) Debt write off

With due respect, the game is over, the current system has reached its threshold - it cannot keep supplying new credit to pay off existing debt for ever. This is the treadmill we've been running - a simple game of people working to pay off debt using money that is essentially new and higher levels of debt. It has got to the point where the total public and private debt overwhelms GDP. So there is no option d) where we can expect a return to the way things have been since the 70s.

Ishkandar[blog No 35] is so right about the mistaken belief in economic perpetual motion machine.Economics studies the choices involved in allocating scarce resources for attaining a society's limitless needs.Our desires are endless but Nature unfortunately is niggardly. But the finacial system is being operated even at present on the premise that resources are limitless.If capital is scarce,how can rate of interest [even Bank of England rate or central bank rates in general] be zero? This implies that capital, one of the three factors of production--land and labour are the other two--is like a free good [say air or water]. This way of expressing a basic idea of Economices may seem naive and artless.But it shows the extent to which fundemental economic principles have been abandoned.Apart from the short term measures now underway,a global economic restructuring may be necesary.

"66. At 09:44am on 08 Feb 2009, John_from_Hendon wrote:

So, have I got this right? - you are proposing that the imprudent over-borrowed and the fraudulent overvalues of assets offered as security become free from debt and own that which they could never have afforded whilst the prudent savers are punished.

Are you really saying that this is a way to run a society? Or were you being ironic and I missed it?"

John. That is how our monetary system works. This is the 300 year old system you were defending the other day.

Those who take out large amounts of credit, benefit the most from the inflation they create. Those who work hard, are "prudent" and save, simply see their savings and salaries becoming worthless. Our money is fundamentally built on fraud. From the top down, the society you see around you is the result of that.

#68. FrankSz wrote:

"Over borrowed or over lent?"

Morality has nothing to do with this, it is a question of pragmatic choice between 3 options:
a) Depression and a perpetuation of the same failed leaders and institutions, with wealth concentrated in their hands
b) Hyperinflation, war, death
c) Debt write off


I agree that "the game is over" - but all of your solutions perpetuate the problem rather than solve it. We need to return to an environment where money is again valuable and none of your solutions offer this.

I think that the way that option c could only possibly be countenanced if if it is accompanied by all secured assets being also Nationalised through the mechanism of bankruptcy.

That is anyone wishing to have their loan written off should also be deprived of the asset on which the loan was secured.

I believe that a far more responsible option is to raise interest rates - allow the (historically) imprudent to go bankrupt and have their assets sold for what they can get. Any of the other options are not viable solutions.

#55
No doubt OPEC as a cartel manipulates oil prices.But it seems that commodity market speculators particularly hedge funds are also responsible.And so are the host of 'analysts' spread all over the globe with their predictions about impending oil shortages. The returns on savings got linked to three kinds of speculation: on stock markets,on commodity markets and on foreign exchange markets.It is as though people have aggregated their savings and entrusted them to gamblers in the hope of earning spectacular returns.In any society the bulk of the retirees need to have state- sponsored funds which assure safe.moderate and steady interest income.Alternatively, banks need to pay at least modest interest on long term deposits.The aged should not be forced to put their savings [for want of alternatives] into inherently risky funds.It is absurd to believe that computer-generated programmes [which incidentally are too mathematical and abastract for common understanding] can help the fund managers in totally avoiding financial risks arising from market place.For the free markets lack the stability of parameters and predictability of physical and mechanical systems.

#70. true-liberal wrote:

"John. That is how our monetary system works. This is the 300 year old system you were defending the other day.

Those who take out large amounts of credit, benefit the most from the inflation they create. Those who work hard, are "prudent" and save, simply see their savings and salaries becoming worthless. Our money is fundamentally built on fraud. From the top down, the society you see around you is the result of that."

No, I was not defending the 315 year old system in its current perversion. I agree it has been broken by the inaction or with the full knowledge and complicity of the regualtors.

The whole creation of fake money through synthetic financial instruments is very new and a corrosive perversion of the system that has been permitted by the ignorant, complicit or corrupt system of regulation in the last decade.

The seeds of destruction are in the Originate and Distribute model and are inherent to it. Observe its structure in for example in (see figure 2) [Unsuitable/Broken URL removed by Moderator] on the Treasury's G20 web site.

Re #71

Well not really. I did mention in the original post that there would be no risk of moral hazard because credit would be permanently restricted, a new economic system would be put in place, and banks would play a much more minor role.

I do not see why those who have received loans for property under the current paradigm should suffer a blanket punishment. The banks have done nothing to deserve the property they loaned - the money they issue for it is simply nothing more than a new entry in a computer database, almost entirely created from nothing. The masses who are cajoled into this insane ratrace were acting in good faith. Tit was the proponents of the monetary system who were acting out of greed and a desire for social control.

In any case, I do not entirely agree that the value of money must necessarily be restored. I am not entirely sure if even a measure of value or incentive is necessary. The problem with economics of distribution of scarce resources is that they are self-perpetuating and introduce artificial scarcity.

Just look at the media companies for examples. Why is it that in a world of new communications technology where films and music and other arts can be distributed for practically no cost do we find media companies running to courts to have teenage filesharers imprisoned. Which is better? A world of digital media laws and artificially inflated costs for the sake of preservation of an economy that relies on money, or a world where everyone can access entertainment at virtually no cost?

What is better, investment in solar and geothermal energy so that energy is so abundant that the price of it drops to zero, or a society that insists that a minority hold the key to a few gas and nuclear power stations while everyone slaves their existence away in search of heat and light?

I must admit that there will always be some need for quantifying human motivation, but I would prefer to see an economy that deals with absolutes: man-minutes, kilojoules, and so on, rather than an economy that seeks to harness human motivation by introducing scarcity and thwarting technology.

Our bubble economy resembles a scaled down version of that of the USA. I think we need to start to listen to people like Peter Schiff who does have a clue about economic unliked the followers of Keynesian mumbo-jumbo.

Get a taste of his medicine here:

https://tinyurl.com/br54u7

Placing credit creation exclusively into government hands would be far too dangerous. It would be the death of democracy. Nationalisation is not the answer. Winding down failed banks in accordance with existing practices would be preferable, with new mutuals setting up to replace whatever gap in the market then exists. There is plenty of capital willing to become the deposit base of new mutual institutions. It would be deflationary in the short to medium term, but it would not risk the sacrifice of the currency or make the government kingmaker over all private enterprise.

The hard bit has already been done by the bankers.
They have sucessfully squandered all the money and have gotten away with huge bonuses.
They are not stupid, they are rich.
Gov. prints more money, easy.
Taxpayers pay.
It's that simple.

I was going to have a pop at FrankSz and then I followed that link by soundmoney to Peter Schiff. Now I'm going to have a pop at both of them!

Frank first, purely because his post was first. Paying off personal indebtedness penalises all those who have not been profligate. What are you proposing to do for all those people who paid-off their mortgages and credit cards, put money in deposit accounts and didn't live the spend now life? Already savers are hurting. if you then take a pay-off action you will totally alienate a vital section of the general public. This would have the opposite effect of the one that you wish and re-inflate the bubble.

Soundmoney. There is some strength in Schiff's argument. I too feel that Obama's plans will fail to stabilise or re-structure the US economy. (to hear 'experts' predicting an end to the unemployment in the second half is frightening in its stupidity). However, the social implications of Schiff's hands-off approach are maybe even more frightening. If the USA lurches to the far right the World is in serious political/military trouble.

Keynesian theory may be many things but it is no more "mumbo-jumbo" than Milt. Friedman's Monetry Theory.

#74. FrankSz wrote:

"I do not entirely agree that the value of money must necessarily be restored"

There needs to be confidence in the idea of 'money'. That is why it must be restored, or we need to scarp sterling and start with another currency. (Clearly a non-starter!)

Zero and negative interest rates fundamentally damage the idea of money and the value of all assets and financial exchanges.

Civilisation without money is something I do not think anyone wants.

#70. true-liberal wrote:

John. That is how our monetary system works. This is the 300 year old system you were defending the other day.

Those who take out large amounts of credit, benefit the most from the inflation they create. Those who work hard, are "prudent" and save, simply see their savings and salaries becoming worthless. Our money is fundamentally built on fraud. From the top down, the society you see around you is the result of that.

Our monetary system was not built on fraud in the previous three centuries - It may have gone astray in the last decade but it worked really quite well for 300 years - because money had a value and assets could be traded in money terms.

(You may like to look at HM Treasury's web side under G20 for a few interesting papers. I appear not be able to give you a full reference - courtesy of the moderators.)

#78

Hi there -
1st savers cannot be hurting in a deflationary situation. The people who 'saved' and 'lost' in this scenario were not saving, they were speculating on assets. They had their money invested, there was a certain risk, and they lost. Savers would have paid off their debts, held cash, held property, held gold, held commodities they themselves could have consumed. In a deflationary situation the value of cash increases.

2nd - these people who got indebted did so often out of necessity, and the others were simply responding to the moral hazards that have emerged as a result of past bailouts every time there has been a downturn before. That is, the excessive spending is a symptom of the crisis, not a cause.

If depression is to be averted then debts need to be written down. I'd rather see the populace's debts written down or off, than the banks'. The banks have to be nationalised. Just watch and wait.

Just thinking out loud.

QE is like BoE going long Gvt bond, short cash.

Credit Easing is like long Corporate bond, short cash.

TARP is like long toxic waste, short cash

Credit Guarantee is short insurance, long fee.

The long bond positions push the yield curve down and long corporates push credit spreads down. Net cash in banks has increased but total cash including BoE hasn't changed (?).

What about capping banks' losses via short call / protection on senior tranche, long cash. Maybe the Credit Derivatives Quants can be re-employed but this time add house prices as an input to the models.

This comment was removed because the moderators found it broke the house rules. Explain.

Dear Stephanie,

I have lived in the USA, and I am used to highly competent journalism. And because I think you are by far the best qualified and most competent economics journalist in Britain, for the first time here, I'll ask from you what I would only expect in the USA.

The question is: are we going to have inflation? When? How much? For how long?

Yes it is possible to construct a few (3?) scenarios, using econometrics. You must have a few good econometrists in Britain. We need 3 charts, with 3 inflationary curves: a best case scenario, a worst case, and the middle one.

Am I asking too much? No. And you know it.

Hard? Maybe, but let the academics do their job. We pay them for it.

Cheers

#81 FrankSz

I think that you are deliberately misinterpreting my question.

Let me give you this scenario. An empty-nest couple who have payed off their mortgage, always paid off their credit cards, have behaved prudently and have saved say £20K which they have deposited in ISAs.

Now how can you suggest that such a couple have speculated on assets? They were not profligate. They did not remortgage continually to fund a lifestyle. They did not max out on credit cards. To suggest that the present level of indebtedness was due to 'necessity' is not defenceable when you examen where the majority of that credit was spent. It was the profligate who were speculating and they have lost!

If a society is to flourish then it must have an understanding of the consequences of its actions and be prepared to accept them. Nobody forced the profligate to buy new cars, replace kitchens and bathrooms every 3 years and have the ubiquitous plasma screen in every room, etc. etc. If you wish to see a continuance of this silly behaviour then go right ahead and pay off the debts - they will soon be back at the same level 'cause daddy will pay it off!

Finally, you are far too late. We cannot stop this depression it is here and it will get much much worse.

"QE is like going long Gvt bond" - only in the same sense as stretching a piece of elastic. If the bond and currency markets freak out, it's all over faster than anyone can react. There will be little or no warning and we will not know until it has happened.

If you are a creditor to the government or have a lot of sterling exposure, the last thing you want to hear is reassurances that what they are doing is not strictly speaking printing money. The mere fact a debtor is at pains to make a distinction is a red flag in any situation.

US FEDERAL RESERVE

LITTLE MORE NEEDS TO BE SAID?


https://www.apfn.org/apfn/reserve.htm

Yes, print money. Lots of it. Millions in fact.Scrap pension means testing. Give all pensioners a decent pension that will relieve the indignity of begging for enough money to keep warm, or to eat a decent meal. Fat Cat bankers getting millions in bonuses, while pensioners scrape a living is unacceptable in this day and age. Would the Government listen?. Not on your life!!
The only answer is not to vote for any party at the next general Election. That would put them in a tizzy!!

No. 81 FrankSz wrote:

"Savers cannot be hurting in a deflationary situation."

This is true, but deflation won't last long. Inflation will return very soon, due to the weakness of sterling. Price increases have already been announced by the UK car market and the UK consumer electronics market.

The British government's policy is to devalue sterling, in an attempt to boost exports and cause imported inflation. Inflation will then devalue the outstanding household and business debt.

The flaw in this policy is that falling demand within the world economy means British exporters have less customers to sell to, and high unemployment around the world means more bad debts. Lack of demand and high unemployment means British household earnings and British corporate earnings won't keep pace with the imported inflation. Savers will lose out, as the interest on their savings will be less than the rate of consumer price inflation.

This comment was removed because the moderators found it broke the house rules. Explain.

#83

Laura - sorry - finger trouble with the previous post. V good questions but the answers will be hard to find. My own feeling is that , given recent and shortly to come growth in the money supply, we can anticipate RPI of at an annual rate of15-20% by end 2010, if something resembling confidence returns and sterling remains roughly where it is. A headache for the next government but good for my mortgage.

#89 - Mr Tweedy

"This is true, but deflation won't last long. Inflation will return very soon, due to the weakness of sterling. "

Sterling unfortunately seems to be gaining strength, rather than weakening. This is to be expected as
a) GBP investments refuse rollovers
b) GBP debts clear (decreasing the volume of money)
c) Cash becomes a safer bet than anything else, thus raising demand

A trade imbalance resulting in more imports than exports would decrease the value of the GBP, which amongst other things might explain to some extent why GBP devalued suddenly during December.

In any case, this rate of diminishing strength in GBP, quantitive easing or not, is insufficient to compensate for the decreasing demand for credit, and thus the huge deflationary force on the UK.

The UK needs to rebuild it's manufacturing capacity, invest in technology, and undo the insane policies of the Thatcher-Reagan era that ruined this once respected nation.

#85 - foredeckdave

No I don't think I am. If the investment into the ISA was into some index then that's tough luck. If it's just money, then they'll come out on top. However, at some point they might want to actually take portions of this out as physical cash, as electronic money is only as certain as the government, which now part-owns and subsidises the banks, and is at risk of defaulting itself.

Besides that's only skimming the surface. You draw a distinction between 'good' savers, and the opposite extreme - people blowing their credit card limits and borrowing to the hilt wherever possible. This isn't the typical case - ordinary people with families and mortgages who had no other choice but to get a mortgage are losing their homes, and the real cost of servicing debt is increasing, even if nominal rates remain the same. Why? Because the idiots in charge invested into things they didn't understand in the blind belief that credit expansion could continue forever.

So the choice is let the banks and other creditors seize these properties at steadily diminishing prices, allowing the depression to advance until war and starvation ensues, or relieve the private debt.

Most Western governments seem to be adopting a policy aimed at general preservation of the status quo, at least for the short term, by keeping the banks on life support, while ramping up public spending to supply employment. The funds for this public spending are basically coming from government debt sales to the banks, who pay for it using the 'quantitive easing' base money, because there is no demand or even willingness to supply new private credit.

#92 FrankSZ

"So the choice is let the banks and other creditors seize these properties at steadily diminishing prices, allowing the depression to advance until war and starvation ensues, or relieve the private debt."

No it's not the only option and is far from being the best.

Let us take mortgages. The 'help' schemes for those in arrears can be improved. What would be wrong with offering more relief by joint equity schemes whereby the householder retains a portion of the property and then pays rent?

As for loans and credit card debt. It is not beyond the wit of the bankers/lawyers and accountants to develop a scheme for paying these off over an extended period - even at a reduced rate.

"ordinary people with families and mortgages who had no other choice but to get a mortgage " This does not explain the profligate spending on non-essentials which took credit card and personal loan debts to such heights. Take away the responsibility for these debts and you will not change behaviour one iota - rather you will start another credit bubble

DEMOCRACY BY FIAT

"In order to control the financial risks associated with such transactions, the Bank is authorised by the Chancellor to purchase only high quality assets, broadly comparable to investment grade."
//
"A minimum short-term credit rating of A-3 / P-3 / F-3 from at least one of Standard & Poor’s, Moody’s and Fitch. Securities with split ratings where one or more rating is below the minimum are not eligible. Securities at the lowest rating that are on negative watch will not be eligible."

Source: Stephanie's link to the BoE Asset Purchase Facility

The BoE will create a subsiduary which will purchase up to 60 billion of 'investment grade' assets (mainly from banks?) which currently have a minimu rating of A-3/P-3/F-3 (at 300bps, 150 for A-2 etc, and 75 for A-1 etc)?

So correct me if I have misread between the lines: - the banks (mainly and other UK major companies) are worried that even their 'investment grade' securitized assets may, in the future, be downgraded, and thus want shot of their risk - so the BoE, (i.e. UK taxpayer) gets saddled with what the banks don't want because it's much easier to spread this future risk across 30 million taxpayers over several years into the future, now that investors in the markets don't want it - I that it?

if so, that really is the socialisation of bad risk is it not, and it's much easier than trusting the markets as the public have no say in it except through MPs, and if they don't get to vote on it, it's to be done by fiat given the mandate some people (who voted) gave to our 'Light-Touch' equalitarians/anarchists running both Houses back in 2005.

Paragraph 14 has an error:' The more bonds the banks bought...' should read: ' The more bonds the BoJ bought...', or 'The more bonds the banks had to sell' say.

No. 92 FrankSz

Thanks for your reply - it's a good and interesting debate.

You are right, the GBP has strengthened a little in the last few days, due to bad economic data from the eurozone and bad employment data from the USA. However, this is likely to be a bear market rally. Even at today's exchange rates, sterling is still 28% down against the euro, and 38% down against the dollar (compared to the historic exchange rates of 1.47 and 2.00).
I don't think sterling is going to make a strong recovery over time.

Some analysts believe British banks have more liabilities denominated in foreign currencies than they have assets. Hence, the value of the banks' net liabilities has increased due to the weakness of sterling. This means they must sell more sterling to pay off the foreign debts. This deleveraging is still ongoing, and has not ended.

Also, many currency hedges run out in the summer of 2009, meaning that importers will then be exposed to the full devaluation of sterling.

When the next wave of economic recession hits the world economy, investors will still seek out the safe haven of US Treasuries, causing sterling to depreciate against the dollar when the FTSE falls to the next resistance level during the summer of 2009.

QE will aim to by-pass the banks, to avoid the money supply getting stuck in banks' capital reserves. Hence, the government sells gilts to the BoE and the government then spends the "money" on stimulus packages. However, selling gilts to the BoE is just the State selling assets to itself - ie, it is printing money. Also, the BoE is buying corporate bonds as well. All this will cause an increase in the money supply when there is no corresponding increase in economic activity, which will cause sterling to depreciate.

Regarding the euro, sterling is unlikely to gain much strength. The ECB has higher interest rates than the BoE, and it's unlikely the ECB will engage in the risky practice of QE, given the inherent conservatism of the Bundesbank. Investors may then prefer the euro to the pound, as the euro will be more stable than sterling, as Britain's problems are greater than the eurozone's, even after allowing for the economic problems of the smaller european states, and Germany's fall in output.

Britain can't easily benefit from a weak currency, as we have no-one to export to, given that world demand for everything is falling. So, no-one will be buying large amounts of sterling to pay for British exports. Britain's car industry is foreign owned; so it's profits have shrunk when translated back into the parent company's home currency; plus no-one wants to buy cars. Banking and insurance used to be a good export for Britain but this industry is rather on the back foot at present. North Sea oil is not what it used to be either.
Britain must develop new export opportunities based around green technology, but this will take years rather than months.

For the time being, we import too many necessities. Even large parts of our energy and utilities sectors are foreign owned.

Correction #94 - 50 billion, not 60 billion.

#93 foredeckdave

Now it is I who begins to suspect that my point is being intentionally misunderstood.

a) How would there be a danger of moral hazard in a post-crisis environment where easy credit was simply not made available?
b) Why do you assume that it the borrowers' behaviour that need regulating and not the lenders?
c) How would in a deflationary environment prolonging the payment period actually cause anything other than increased costs to the borrowers? The nominal rate would have to be negative.
d) If the situation was inflationary and a reduced rate and prolonged repayment period was organised, how does that differ from a debt write down, and why not go the whole hog and write the damn thing off? What difference would it make? The banks merely create money from nothing, expect you to work your whole life for it, only to get paid in money that originated as someone else's debt. You must be able to see that this cycle has to stop, and when it does, the banks should stop with it.

People seem to think by adopting the right policies we can 'get back on track'. We can't. As long as money is synonymous with debt issued by private banks according to ridiculous reserve multipliers, we are riding a dangerous feedback loop where as long as there is optimism there is more and more debt being issued to pay off the previously issued debt. Eventually it gets to a point where the system breaks, and this is where we are at. Year by year the behaviour of the population must by necessity get more frivolous, with the support and encouragement of the banks. The banks have to make borrowing more and more attractive. It is built into the system.

The next step can only involve much more sophisticated regulation, to the point where banks are actually or effectively under government control (local, regional or global, who knows). The quantity of money would have to be determined more centrally. Something the equivalent of gold, though probably not gold, (something determined by a global authority?) could be its basis.

#96 Mr Tweedy

Possibly. I must admit I am not clear at all on what the GBP exchange rates might do. I would comment on this though:
"All this will cause an increase in the money supply when there is no corresponding increase in economic activity, which will cause sterling to depreciate"

I think the concept of 'money supply' needs elaborating on. I don't see how money that is not in circulation can affect demand for or supply of money. There seems to be both a lack of willingness to get money (ie incur debt) and a lack of willingness to supply money (ie extend loans). This is why I do not see QE actually having any effect in this situation. The BoE buying corporate bonds would in this case have the opposite effect as QE, ie accelerated deflation - companies would use additional funds to pay debts off faster, decreasing the banks incentive to lend even more.

No. 98 FrankSz

I agree with you that there is little real demand for borrowing or spending at the moment.

However, to counter this, the BoE could buy bonds directly from British companies. Bonds are borrowing, they are debt vehicles. Trouble is, well run companies are tending to pay off their debts; which tends to leave only financially weak companies wishing to increase borrowing, the sort of companies our banks do not want to lend to. If the BoE buys gilts direct from the government, it would give the government cash, which it would then spend by awarding contracts to the private sector (to build aircraft carriers, for instance).

I think these policies are weak, as they are just ways of "printing money", which will put downward pressure on sterling. They are attempts to increase the amount of money in circulation, as the BoE tries to lend direct to the government and direct to the private sector. I believe a better policy is for governments, households and companies to concentrate on paying off their debts. Only when the debts are paid off or written off, can the economy trully start to recover.

#99 MrTweedy

I do not think that purchasing corporate bonds would put downward pressure on Sterling under these conditions.

Giving company X money would mean that company X would take opportunity to clear debt, under pressure of reduced expected demand, while continuing to pay its staff and suppliers. These in turn would try to clear their debts. A theoretical maximum reduction in money supply would therefore be the amount of money injected by BoE times the reserve multiplier. That I think is a reduction in money supply about 9 times the injected money. Base money injection seems to merely accelerate the prevailing trend, be it inflationary or deflationary.

Further, paying debts down is precisely what deflation is about. The total amount of private credit money in the system is of course much greater than the base, so in order for those debts to be paid off, the amounts of base money injected would have to be much greater than what Western governments are currently proposing.

The Western governments naturally don't want to simply wipe out the banks and employment in general by making enormous multi tens of trillion donations , so what they are doing is employing people to work for their debt write downs by investing in big public spending projects.

If the private sector were to focus on debt reduction, what would be the source of money for the debt reductions? Ultimately, one method or another, I maintain the government has to write off the debt, no matter how strong the guise.