Boxed in

All this (almost) free and unlimited money certainly is not getting to businesses and individuals in the form of commercial loans or mortgages. Whatever the signs might be for the movers and shakers in the City, in the REAL world credit is still either being withdrawn or prohibitively expensive, unemployment and repossessions are still rising and many companies are on a knife-edge. It's high time the MPC got out of London and started looking around at what's really happening. Above all, it needs to tell the banks in no uncertain terms to start lending at reasonable terms again NOW instead of "repairing their balance sheets" (a.k.a. taking the mickey with blatant profiteering) Caledonian Comment

Rule 1. When in a hole stop digging - pity the Bank hasn't yet stopped digging!!!!

Stephanie wrote:

"Thanks to QE we do not really know what the "risk-free" rate of interest is over any length of time into the future. All the city knows is that money is (almost) free and there's an (almost) unlimited supply of it."

Sorry Stephanie, you know that this is not true and we are living in an absurd aberration of an economy.. The economy is totally out of control and the regualtors have abrogated all responsibility, and any sense that their education and experience gave them.

We do know what a 'risk free' rate of interest is (as many sensible commentators have said) and that is 5 to 6 percent. The idiocy of these banking fools is that they have once again been taken in by a ridiculous analogous argument to the 'affordability' argument for income multiple of mortgages - what they are doing is absolute madness and can only lead to the complete breakdown of society and the total destruction of money. Money is not 'FREE' - for if it were assets would be free too, and why work - just thieve.

Stephanie (or anybody else) - do you really believe that free money is a rational way to run an economy?

It is somewhat amazing that all these educated folks don't understand the way the economy works. It is not a top down system, it is a bottom up system. We have made everyone whole except the people who actually drive the system, the consumer and small business. The political desires to have big companies create many jobs is great for the media and the specific area of location but that is not the national economy. One has to laugh at this foolishness and how they do not understand the economics of a household. It must be that governments/banking and big business/media are so intertwined that they are in a delusional state and believe what they tell each other and are very confused when their passing of money back and forth amoung themsevles does not boost the economy. The serfs don't matter until the food runs out at the castle or weakness invites invasion. If people don't have money to spend and feel insure in their employment the economy will not move forward. Giving money to banks and buying currency is thinking that riding two dead horses give you a better chance of winning the race.

I have been an investor in UK corporate bonds for several years and it has always appeared odd that so few bonds are issued for private investor consumption by UK corporates. Ready buyers now include the UK government so why is the demand not tempting corporations to exploit this market as opposed to being held to ransom by banks?

"The justification was three-fold. First, by boosting demand for government bonds, you lower the interest rate on that debt, and since that (risk-free) rate sets the floor for rates across the board, you should lower the cost of borrowing for firms and households as well."


...so we take it that when the QE machine stops - the rates on the high street will rise - just like 1989

"But the final, and most telling, reason was that there simply wasn't enough British corporate debt out there to buy. The Bank would have swallowed up the entire market in a matter of weeks."

Not true Stephanie - there was plenty of corporate debt (banks) but the Government already took all of that in - you mean non-financial corporate debt.

I am sure you are also aware that many corporations are shunning issuing corporate debt and are re-financing through equity rights issues off the back of the new stock market QE bubble.

"Until now, the commercial banks have been able to say, with some justice, that the lack of lending is due as much to low demand from firms themselves as to insufficient supply by banks."

That's because borrowers are much more savvy than they used to be - they know what's coming down the line, higher interest rates, higher taxes and public spending cuts - all of which will hurt the SME's. They (like me) are taking this opportunity to pay down as much debt as possible - it's called "battoning down the hatches - a storm is coming"

"Thanks to QE we do not really know what the "risk-free" rate of interest is over any length of time into the future. All the city knows is that money is (almost) free and there's an (almost) unlimited supply of it."

Maybe this is the end Stephanie - a world where money is free to borrow and there is an unlimited supply - no longer are we held to ransom by those who have ammassed it in the past. Normally this is on a national scale and therefore won't last long - but now we're on the international scale and it might just go on forever.

Could this be the end of debt in all forms? - are we heading for utopia by mistake?

...now that would make me laugh...

Stephanie, I still have difficulty seeing QE as anything but printing money (A la Mugabe) or debasing the coinage (A la Henry VIII). I would be grateful if you could explain in a future post why this is not so.

In the meantime, with all this printed money enabling our government to live fabulously beyind its means, I await the inflation which surely has to be inevitable. I confidently expect the RPI to be positive by the time December's figures are posted in two month's time.

How long before the £10 coin and the £100 note?

I note that the UK treasury issues gilts via the Debt Management office, only to have the Bank of England buy them back.

Why one would ask is this the case, why can’t the treasury borrow directly from the Bank of England?

Well oddly enough the Maastricht Treaty Article 104(1) forbids this, the purpose being to prevent debt happy governments causing inflation in the Euro Zone.

Given that so far the Bank of England has spent £173 billion buying gilts and only £2 billion buying commercial paper, it is now abundantly clear that Quantitative Easing is a method of funding Government without officially breaking the rules.

When Quantitative Easing pauses, (I say pauses as opposed to stops, because if it has been done once it can be done again), how will the government fund its debt?

I find it difficult to believe that any investor would buy fixed interest Government debt, predominantly because there is a significant risk in the Bank of England watering down the real value of such an investment by more quantitative easing.

But of all the things that have surprised me the most, is why the above has not been voiced by the various economic and political commentators.

Can a conspiracy of silence on this issue, actually convince institutional investors that all is still well in the world of funding government debt?

2. At 3:59pm on 05 Nov 2009, John_from_Hendon wrote:

"Money is not 'FREE' - for if it were assets would be free too, and why work - just thieve."

See my earlier post - maybe Proudhon was right all along. Although I don't know why you would need to thieve if money is free - it's free, whoopee!
Maybe I'll be a little down as I have money in the bank - but I'm up for a change, and a real one this time, not from red to blue. The best things in life are already free so maybe money can join them.

Anarchy rules!

P.s. it's not true when you're in a hole stop digging, if you keep digging long enough you'll reach Australia who have beaches and sunshine and jobs apparently!

so this is it then, why do they keep telling lies about lending to small business, this is blatantly not true. All this has elucidated is that they are focusing on the big companies and the big banks, everyone and everything else is the casualty, they are not Churchhill making the decision to leave the wounded behind at Dunkirk.
And dress it up anyway you like the value of the pound in my pocket HAS gone down, because things are dearer fuel had crept up 10 pence a litre in the last month alone, and so much for the energy companies who were coining it in before all this happened being brought into line, the bills are getting dearer,
the think its all over, it is now, they are trying to avoid panic by telling us the truth that due to the banks the country is now bust, because it is much worse than what we were led to believe by the fraud carried out on a global scale

Good post by writingsonthewall.

You Asked "Could this be the end of debt in all forms? - are we heading for utopia by mistake?" If all the debt disappears so does all the money in circulation. Debt isn't going anywhere.

The printing of money today just creates inflation in the economy. It cannot do otherwise. Interest rates will have to rise and the result will be further carnage. Quantative easing as they call it at best simply postpones reckoning and at worst means we are in for far harder times ahead.

Money is slowly losing its modernist clothes - credit has become debt, QE has replaced prudence. The Bank is demonstrating the blindness of an expert when authority replaces knowledge. What world of money will emerge from this? Perhaps one that looks beyond institutional and industrialised forms of capitalism to provide stability and security.

The bottom up view is one where value will remain locked away until our confidence in each other is restored, not our confidence in a single institutional form (ie. banks).

Just as the conventions of mass production and consumption are being challenged by more locally connected, organic forms so our conventions of money are increasingly being challenged by the new economic avant garde - and with it perhaps the creation of a more sustainable and individually accountable system of money.

Quantitative Easing is a handy way for our wholly owned Bank of England to lend money to British taxpayers. Mervyn buys UK Government Bonds in the market with his invented money. Our Bank then collects interest on our own bonds that it owns, from the Treasury. Our Bank then registers that interest as profit in the Bank. Merve the swerve than pays that profit back to the Treasury. Which cancels out the interest charges. So miniscule-cost borrowing!
Moreover, the Bonds that are now owned by our own Bank of England are assets belonging to our Bank. Which assets add up to most of the so-called debt that's been incurred buying up shares in British Banks.
Large chunks of those Banks are now destined to be sold to private investors over the next four years, and probably for well in excess of what we, in effect, "paid" for them.
It's a sort of three card trick where we, the British taxpayers, take bank shares from investors and then sell them back to them. And all the while simply paying interest on them to the Bank of England, which we wholly own ourselves.
So maybe a debt. But not as we know it!

Stephanie.
Maybe I am being a little naive, but can you tell me what would possibly compel the banks to loan money to Joe Public, considering the fact that they getting 1/2% money from the BOE (public money)then turning it into gilts and walking away with 4+ points with Zero risk.
The only QE that is taking place is to the banks bottom line and insuring that our government has an unlimited slush fund to keep on borrowing against. The result leaves the British public up the proverb ale creek in a barbed wire canoe, while the government and the banks stand on dry land shouting encouragement.

Dear Stephanie
Hope you don't mind but it appears to me that those in charge have little idea on how to run the economy, if they did this silly need to bail out the banks would have been prevented. May I suggest running the UK economy like your own personal financial affairs? A few rules:
1. Pay all bills within 30 days (this happens on the continent; they have come out of recession before us)
2. Write a cheque that bounces and you may go to jail (as in Australia)
3. Pay off you debt as quickly as you can (this government seems unable to control its own debt)
4. Watch your finances and change your bank if you don't get decent value (our government should be forcing interbank lending via LIBOR at low rates)
5. Don't put all your eggs in one basket (as the UK seems to have done, not much manufacturing - just service industries and finance)
6. Don't be greedy (don't wish for a bigger car/house/bank balance - be like the folks on, say, Vanuatu!)
I could go on ...

I wish I knew how to create money ... apart from the old fashioned way of working like a dog to create something that someone else wants, that is.

If BoE can spread the word amongst the UK's small companies, we'll be the richest country in the world in no time flat.

One can't help notice the number of advertisements (from different companies) inviting people to sell their unwanted gold jewellery.

What a pity Gordon sold most of our reserves at the wrong time at the wrong price!

As the Bank of England is reduced to a policy of 'Print-and-Spend', splashing money around like there's no tomorrow, perhaps now would be a good time to think about REAL investments for the future - you know, something for a rainy day?

Steph

I am getting as worried now as much as when no one could see the crash coming but some off us could.

What Government and the power that be including the Journo's can't see
is, waiting to see the signs of recovery before we stop printing money is a blind stupidity.

For the economy to turn the corner the ordinary punter will have to have confidence in their situation.

They will then go out and start making purchases.


So you want me to go out and spend?

My first thought is how safe is my job?

If I have my job how much will I be left with after the Labour hand has been dipped into my pocket for the extra to pay of this Mother of all debts?

You can't answer that question.
The Government won't answer that question because they want it to come to light on the Tory watch.

We are being asked to make important investment decisions with a massive piece of the necessary information being kept from us for political reasons.

So will I invest in something that could seriously threaten my financial situation without knowing how much extra tax I am going to be forced to pay for Labour incompetence?

No

Due to the massive mess we are in and the fact no one will tell us how much it is going to cost us. We will not spend so the country will not grow as it should.
They will keep printing because we are not showing signs of coming out of recession and round it will go.

WE NEED HONESTY IN HOW MUCH IT IS GOING TO COST US AND OVER WHAT TIME PERIOD.

Only then can we make our spending plans for the future.

You and all of the other opinion former should be relentless in getting the answers to these questions.

People will not spend until they know it is safe to do so.

As long as you allow Labour to get away with not spelling out the cost then picture will remain incomplete and we will not spend.

To sum it up before I spend any more money in your restaurant can I see the bill please so I know if I can afford it?

The BOE can buy my debts if it wants.


writingsonthewall

P.s. it's not true when you're in a hole stop digging, if you keep digging long enough you'll reach Australia who have beaches and sunshine and jobs apparently!

The only problem re digging to Australia is, things get a LOT hotter the deeper you go, and meltdown occurs before you actually get there.

So long as the international debt rating agencies don't see a problem with the level of QE and the countries growing debt burden, there will be little downside to QE. The problem will come when the B of E has to unwind the practice.

Stephanie
What measures would possibly induce the banks to loan money to Joe Public or small business? When you consider the fact that the BOE is throwing a seemingly unlimited amount of new money (Our money) at them for a mere 1/2% interest, which they immediately use to purchase Gilts for which they they receive a risk free and guaranteed 4+ points. The banks are making money with our money with Zero risk, making the government and the banks deliriously happy. Meanwhile Joe Public and small business is up the proverb ale creek in a barbed wire canoe, with government and the banks standing safely on dry land screaming at us the paddle faster.

#8. writingsonthewall wrote:

re Proudhon - property is theft (more or less). Free Assets do not mean they are not still somebody's property! I'd better look it up. Grab my copy of Manuel and Manuel - French Utopias P-J P. essays 'Anarchism and Order - What is property?' put aside for bedtime reading - and anyway did Marx not point out that 'property is theft' is self refuting! The line seems to come from (in translation) 'property is robbery'.

#5 writingsonthewall

''Could this be the end of debt in all forms? - are we heading for utopia by mistake?

...now that would make me laugh...''


What a wonderful thought!

We have the technology and knowledge to do it...just the governance we need to work on it seems.

There is a certain poetry about the idea that the rampent desire for money and the requirement for money to maintain the system gets so out of control that all money becomes... well what it is ...arbitry bits of paper...and atomic level indentations on computer hard drives effectively wiping out all debt.

We could all start again afresh from the leveraged developing world to the couple who went a bit crazy with the credit card which they used as an emotional walking stick during a bad patch.

Think of the human misery that could be eradicated if we printed the whole world out of debt and started again trading on a basis of good governance and tangible goods from a new level playing field without all this damn legacy debt and the mass misery that comes with it.

Keep printing boys.

utopia by mistake... fantastic... no less than the perpetrators of this white collar crime against humanity would deserve.


Nice one writingsonthewall.

Jericoa

"Second, by buying only risk-free public debt [...]"

Public debt risk-free? Well, you might think so based on past performance, and on the fact that the government can just tax more. But as the FSA likes organisations to point out, that's not necessarily a good guide to future returns.

Suppose that the government were to borrow so much that the interest payments alone were bigger than GDP. Then no matter how much the government taxed, there would be no way to repay the debt. So that establishes clearly that there is an upper bound to how much public debt is risk-free. Of course, the real level at which the debt cannot be repaid is much lower because the country's population has to be sheltered, fed, maintained in good health, educated, defended, transported, kept warm, etc. This consumes a huge portion of GDP in itself, meaning that much less is available for repayment of public debt.

But there's another factor. Suppose that the people decide that the government took on vastly more debt than they had a mandate for. Perhaps they might decide that they didn't feel obliged to pay that debt back, particularly if they didn't get any benefit from it because they weren't a shareholder or creditor of an insolvent bank. Perhaps a political party could become very popular by saying that, as a one-off measure due to the excesses of an out-of-control government, it promised to default on, say, 50% of all gilts with a maturity of greater than 5 years issued between 2007 and 2010 (but also promised to repay all future debt in full). After all, parliament is sovereign - it can do that. It would hurt those who lent to the government, but then they were counting on the government imposing punitive taxes on the population to pay the money back, so the electorate might not feel that they deserve too much sympathy. It would probably spike yields for a while, but the nation might still be better off overall.

So in summary, your assertion that public debt is risk-free is wrong on two counts:

(1) The UK might not be able to afford to repay the debt.

(2) The electorate might decide that it's in their interests to vote for a government which promised to default on the debt.

QE by definition is inflation. The impact on prices comes later with a time lag depending on which part of the economy the inflated money hits first.

Check out the Brent crude monthly average actual and forward curve prices

Month, 2008, 2009, annual % change
Aug, 113.03, 72.83, -36%
Sept, 98.13, 68.24, -30%
Oct, 71.87, 73.28, +1.0%
Nov, 52.51, ~80, +52%
Dec, 40.35, ~80, +98%

Gold/silver prices are forward looking and telling us a big message. CPI by early 2010 should be interesting. Be prepared.

I find this article absolutely staggering. I feel truly astonished at how completely upside down these people's thinking is.

Nothing..I repeat nothing..in that article addresses the core problems. Where, or what, if anything, is supposed to be addressing debt DEMAND? Don't they get it? As Ghostofsichuan in #3 mentions - it's bottom up, not top down.

It does not matter how much base money is available, not one iota. It does not matter if the bank of England is buying gilts or buying corporate bonds. Well, actually, it does matter: the corporates would have to be completely insane to be taking on debt in a time like this (hence no available corporate debt)

It's amazing. They've lost themselves in a complex network of interdependent financial artefacts and derivatives, and blinded themselves with mainstream economic thinking.

The solution is completely the opposite direction: TAKE CONTROL OF THE PRIVATE BANKS AND FORCE INTEREST RATES DOWN, WHILE LIMITING THE REDUCTION IN MONTHLY REPAYMENT AMOUNTS ON EXISTING LOANS TO BOTH ACCELERATE DELEVERAGING WHILE INCREASING AVAILABLE CASH, WHICH CAN BECOME THE SUBJECT OF INCREASED INCOME TAXES

Now, anyone got a problem with that?

There is another solution too, but it involves everyone clubbing together and shedding the prevailing institutions:

a) Support and use social lending, cease to use banks
b) Don't pay back any debts and refuse to hand over property

Re: 26

I've got a better idea. Force interest rates up and enforce minimum repayment levels of unsecured debt to ensure repayment within three years. Confiscate and auction all assets where income is insufficient to achieve this. But .. let's be reasonable .. let's give people a year's warning that this will be brought in. And .. ratchet up repayment levels over another year. And .. open soup kitchens.

Stephanie my head hurts. We seem to be creating a virtuous circle of printing money so that Government borrowing can be maintained and the banks can make obscene profits from cheap money. When exactly do we get off this La-La Land playground and get on with the business of addressing the real economic issue, which is that Government spending in Prudenceville is way out of kilter with the ability of the economy to absorb it? Some time soon the Government have to take the medicine to stop us drifting into a Mugabe like utopia, where a cup of C*sta coffee costs a million quid. As to asset bubbles caused by QE the evidence is accumulating. Where I live house prices are back to 2007 levels.

"Across the global economy, cheap and plentiful money is doing wonders for asset prices. It's also making it easier for governments - especially the British government - to borrow an enormous amount. It's even causing headaches for emerging market governments, as they struggle to cope with shedloads of incoming investor cash."

So, all this make-believe QE money, printed against the collateral of my future taxes, is 'doing wonders' for the casino kids of the markets.

It's making it easier for the un-elected surrender-monkeys of this goverment to sell my country off to the EU while lining their own pockets and pensions at my expense.

What it's not doing is giving me a headache; with not even a pinch of incoming investor cash to get my small business out of the clutches of a bank that doesn't give a flying whotsit if I live or die, as they declare a profit and walk away with a big fat bonus.

The bankers, economists and politicians still haven't got it ......... but maybe soon the real people will take a chance to stand up and make them see the truth.

The End is nigh we don’t have the money the bankers are just putting it into stocks

Doomed

Im really quite disappointed the way the media seems to have just rolled over and accepted QE, this evening on the 6 o clock news the view was put across that the Bank hasn't gone far enough and should have printed 50bn! What about the view that it is monumentally reckless for a change?

We were told at the height of the crisis that the era of cheap money was over, that we should have seen the problems in the housing market / debt levels (even though they were so obvious many ordinary people warned for years), and that we will learn lessons and not let this happen again.

Surprise surprise a year on and we have the powers that be falling over themselves to keep the cost of borrowing at an all time low (what about the end of cheap money?). We have money being printed out of thin air at an alarming rate. We have almost no real banking reforms to prevent another crisis from what I can see, and we have another ridiculous house price boom underway only this time with 0.5% interest rates and 200 billion of QE, why is this happening without any real challenge?

Really what are you supposed to teach your children about money now? Recklessness is the only way to survive in this insane economy.

There is a huge confidence-trick being pulled somewhere.

£1.5T has been frittered away on public sector splurges over the last decade
£500B of personal wealth has been destroyed with pension raids etc.
£200B of QE has magically appeared, 99% of which is used to buy public debt, which is being used to prop-up the busted banked with uncounted liabilities
There's millions idle, but hidden from the dole figures

The the UK was a company, the auditors would be rubbing their eyes in disbelief.

Something very, very peculiar is happening, buying bullion gold really is the only logical response.

Boxed in is a good description. What happens when the bond markets are weaned off the bulk-buying of the BoE? Would gilt prices be subject to downward pressure raising the cost of public borrowing at a time when taxes are going up. If gilt values fall, the value of the Asset Purchase Fund may fall with HM Treasury ( not the Bank of England) bearing the loss on the fund when Bank of England is forced to sell the gilts they have amassed. What then for the pound's value?

Credit crisis? I am going to start issuing loans for repayment in silver.

The investment banks have been making profits by transferring money from one arm of the Government to another. The fact the new money is being laundered back to the Government via the investment banks does not change the economic reality of this process. the Bank of England is financing the Government’s debt needs via printing money in the manner of the Weimar Republic and Zimbabwe...... Someone just appeared on "the World tonight" saying easing is working as the stock market is up 50%.... and he was supposed to be an "expert"!

#22. Jericoa wrote:

"utopia by mistake... fantastic."

If this is the end of debt, it is also the end of credit (one cannot exist without the other). However it is not the end the ownership of assets and liabilities. It is just that the assets and liabilities can no longer be value in monetary terms. It is the death of money. (And without money, the end of the essential underpinning of the vast majority of economic theories!)

This is the cataclysm that the Bank of England is approaching and this is why rates must rise and QE must be reversed. The destruction of money is unthinkable - but a possibility when money becomes worthless - this inevitably leads to an apparent hyperinflation - but as things are demonetised life goes on through barter. (The problem is that those whose wealth is reckoned in monetary valued assets and liabilities find their world turned upside down.) Unless the fools running our country realise this PDQ we ain't seen nothing yet. The are already drinking in the last chance saloon.

So I beg to differ, this is not utopia, this is dystopia! And worse still, dystopia by design (or downright ignorant stupidity!) And make no mistake this is where we are going, to hell in a handcart!

Sorry to be late to comment - been a little busy.

Good to be in the company of intelligent blog comments which is more than can be said for journalists, the government and MPC members.

Definition of QE: 'describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero'. NOTE THE WORD 'EXTREME'.

Of course, if QE is so good in terms of making debt free as Writings (see #5) eloquently commented why haven't we been doing it since we've had a modern economy?

I've already commented numerous times on the 'Governement free debt/interest etc' and its getting boring.

Mmm - what are the unintended consequences - just inflation? or currency devaluation as well? what happens to gilt yields?

Heard Blanchflower on the radio today urging more QE because we're in a global recession. He seems to have forgotten that only the US and UK are actually using QE - so why isn't everybody else - another question being missed by media commentators......

I would suggest that we move immediately to set an inquiry into the negative effects and costs of QE instead of this 'half-baked (so called) expert comment made by Treasury officials and BBC commentators.

Lunatics and asylum come to mind......a dark room is needed right now.....where's my straitjacket?

Stephanie, would you like to conduct a sweepstake on the size of the RPI inflation numer for Dec 2010. I'd like to bid for the ticket that says 6.8%

No 8 "P.s. it's not true when you're in a hole stop digging, if you keep digging long enough you'll reach Australia who have beaches and sunshine and jobs apparently!"

Don't be too sure about that. The Aussie government is taking a very tough stance on illegal immigrants !! If you dig through to Aussieland, they might just set their packs of dingos on you and then where will you be ?? :-)

PS. They *DON'T* tie their kangaroos down, sport !! :-)

#39 ishy

"PS. They *DON'T* tie their kangaroos down, sport !! :-)" Nah Bruce they SHOOT the bu****s!!!

Why are we not begining to try and calculate just how high inflation is going to go once QE is suspended?

No 14 "6. Don't be greedy (don't wish for a bigger car/house/bank balance - be like the folks on, say, Vanuatu!)"

FYI - There are plenty of greedy people on Vanuatu - Home of the Francophone Hedge Funds !! I know cos a mate of mine works there !! And he's not going back to France except for short holidays. Why should he when he can get all the 4Ss he wants - Sun, Sand, Sea and...err...I forgot what the last "S" stands for !! :-)

No 15 "I wish I knew how to create money ... apart from the old fashioned way of working like a dog to create something that someone else wants, that is.

If BoE can spread the word amongst the UK's small companies, we'll be the richest country in the world in no time flat."

No problem !! Just ask Robert Mugabe !! He knows all about this !!

No 16 "As the Bank of England is reduced to a policy of 'Print-and-Spend', splashing money around like there's no tomorrow, perhaps now would be a good time to think about REAL investments for the future - you know, something for a rainy day?"

Yeah, buy RMB !! They are appreciating significantly against the quid !! Or should that be the quid is depreciating significantly against the RMB !!

No 19 "So long as the international debt rating agencies don't see a problem with the level of QE and the countries growing debt burden, there will be little downside to QE. The problem will come when the B of E has to unwind the practice."

The rating agencies are no longer "flavour of the month" !! International investors are keeping a very gimlet eye on the level of British debt and are discounting the quid accordingly. They are also *NOT* buying Gilts !!

No 23 "Suppose that the government were to borrow so much that the interest payments alone were bigger than GDP. Then no matter how much the government taxed, there would be no way to repay the debt. So that establishes clearly that there is an upper bound to how much public debt is risk-free. Of course, the real level at which the debt cannot be repaid is much lower because the country's population has to be sheltered, fed, maintained in good health, educated, defended, transported, kept warm, etc. This consumes a huge portion of GDP in itself, meaning that much less is available for repayment of public debt."

Isn't that the economic gospel according to Robert Mugabe ?? Perhaps "lessons have been learnt" by G. Brown esq. from R. Mugabe esq. !! Farming in Atlantis looks better and better by the day !!

No 25 "Now, anyone got a problem with that?"

Yes, can you get your caps-lock key fixed soon ?? :-)

No 27 "I've got a better idea. Force interest rates up and enforce minimum repayment levels of unsecured debt to ensure repayment within three years. Confiscate and auction all assets where income is insufficient to achieve this. But .. let's be reasonable .. let's give people a year's warning that this will be brought in. And .. ratchet up repayment levels over another year. And .. open soup kitchens."

Oh dear. it's all so complicated. In the old days, it was so much easier. They just took the last government out and shot them, after having a bit of fun torturing them, of course !!

No 31 "We were told at the height of the crisis that the era of cheap money was over, that we should have seen the problems in the housing market / debt levels (even though they were so obvious many ordinary people warned for years), and that we will learn lessons and not let this happen again."

And you actually believed them ?? Hahahaha !!

No 33 "What then for the pound's value?"

Somewhere between the cess-pit and the sewage farm !!

No 37 "He seems to have forgotten that only the US and UK are actually using QE - so why isn't everybody else..."

Because they are too busy digging themselves out of the recession !! (See why them and not us)

No 40 FDD "Why are we not begining to try and calculate just how high inflation is going to go once QE is suspended?"

The last time the manure met the rotating object, inflation reached 15%, but that was when we still had gold reserves !! I'd say it'll be much higher !! Any bets on lower ??

#38 - If QE was being applied so that the money actually cascaded down into the wider economy you might well be right about inflation in the future. But if the banks continue to hoard it and don't increase lending, we'll have stagnation without inflation. Caledonian Comment

QE=Bonkers

Here's an uncomplicated economics management problem that next doors cat explained to me.
Money supply is growing. That growth can be measured against GDP as a percentage.
OK puss, i've got that.
That's why GDP is a useful number. If growth in the economy as a percentage, is less than the percentage growth of new money, then inflation will make up the difference.
Wow, puss, you are one smart four paws, everything is really cool then isn't it. Lovely.

Blanchflower: Bank is trying to create inflation
https://www.mrscohen.com/personal/-/news/markets-companies-and-funds/content.aspx?ID=366549

Here is the really interesting little viper inthe grass............ https://seekingalpha.com/article/171622-more-fodder-for-inflation-deflation-debate-higher-gasoline-prices
Of GAS & hot air. https://www.sysopt.com/forum/showthread.php?t=204568
04-26-2008 - https://www.sysopt.com/forum/showpost.php?p=1443658&postcount=9 - https://www.sysopt.com/forum/showthread.php?t=200648&highlight=commodity
We may very well see a significant oil price spike, it was evident from futures trading a while back, the speads being set. This happened before, remember, when your petrol tank became twice as expensive to fill. Traders manipulate markets, they do this with guile, knowledgeand insight, it is the game. The game. Fixed price contracts are such a bore if your living is earnt sitting in the middle between supplier and customer. Mark that to market. This is though good for government revenue - they are on percentage.
lnvariably, people, including your wonderful selves, learn by their mistakes. Putting it politely, as English tend so to do, we ain't perfect. Far from it. The true mark of superior individualism is the ability to make fewer mistakes. This is a proof of intelligence, ability and.............. above all insight. Understanding, grasping the mechanistics of what goes about us or is proposed and attempted.
Ergo........... , mistakes are a fact of life.
You should remember that in the morning when you are lookig in the bathroom mirror and grab the shaving foam instead of deoderant...... Above all, mistakes breed caution. Morons are therefore cautious. l hope you follow. Genius is insight. HE DID WHAT.................. Next time one or other states they have the answer, ask them how hard they worked to find it. ie Ah so says, so we must say he says its so! Then ask what are they after for themselves AND why they should have it.

The point of it all is panic, that confusing, sickening, gut wrenching panic of disaster during which time anyone focused and intent upon their own intent, will wipe the floor. With you!
Welcome to the 21st Century! Long may you profit.

https://www.sysopt.com/forum/showpost.php?p=1485537&postcount=
there may actually be people who worship this data https://files.myopera.com/herosrest/albums/805954/mush.jpg They don't actually really understand it, but it looks good to them.

If inflation is under control (and it may not remain so for much longer), isn't the advantage of buying government bonds that it helps reduce the crippling debt the taxpayer is currently suffering? Surely, this would be a helpful by-product of QE irrespective of the stated aim of pumping money into the economy. Perhaps a devalued currency in the short term may even help support UK exporters. What is there to lose?

Stephanie, the overwhelming view of the people posting comments is that QE is inflationary. For myself, I liken what is going on to the antics of John Law in Paris in the early 1700s. His money printing got the French economy going again and then ruined it with hyper inflation.

You are far better educated in economics than any of us. You also appear to support Quantative Easing.

Please can you post an objective analysis to explain why QE is not inflationary.

If the BBC and general press hadnt fallen for the Labour Spin of calling "Printing Money" QE Then perhaps we would view it for what it is. The desperate attempt by a failed Government and a situation more suited to a banana republic. Unfortunately, our "financial press" like the spin just as much as the Government.
QE ! Bah Humbug. It Is simply PRINTING MONEY and we have duped again hook line and sinker.
Fianancial journalists owe it the British public to display and explain things for what they are, not simply pander to the Goivernmenmts cover ups.

#59Adel Helmy

But how about the Perfect Storm - ramapant inflation with a constantly devaluating currency?

QE might just, only just, help the situation if the money goes where it can do some good.

However, pouring it into the Government's coffers to hide their spendthrift ways will only make things worse.

The bank bailouts and QE are creating more debt to fight a debt crisis; doomed to failure.

You can't put a fire out with fire.

Post 38 & 55 I tend to agree with your thoughts. I'm not sure 6.8% is right though.
I fully expect it to be over 4% and maybe up to 5%.
If we add in the following all these will act to push up RPI.
1) The inflationary aspect of QE as more money chases a limited amount of goods.
2) A resurgant household property market (remember it is easier to swing to relatively high growth from a fall) with 5 buyers to every seller if you believe the press today..
3) GBP 1 = EUR 1. This will add 20% to the cost of imports from Europe once people start buying again.
4) The price of crude oil has risen considerably in the past few months and as the effects of the drop in prices from July 2008 to spring this year start to work their way out of the figures this will help push things up.
5) Once we hit spring 2010 the effects of falling mortgage rates from September 08 to March 09 will be out of the system and this won't help keep inflation down anymore.
A nice bit of inflation to reduce government debts and help those with huge credit card debts and mortgages to feel better about themselves.
Stagflation here we come!

#60 Henry_Quimper

QE can be none other than inflationaery. The 'trick' would have been to stop QE and cool the economy by a subtle mixture of interest rates and taxes when the target for QE had been achieved.

If you have faith that either the Bank or the Treasury could either define when QE had reached its optimum target or work in concert to control the inflatioanry pressure then just maybe there will be a positive outcome. History of both august bodies seems to suggest that their ability to do either is at the same level as their ability to make pigs fly!

Henry Quimper said:
" Stephanie, the overwhelming view of the people posting comments is that QE is inflationary."

This is not so is it. The overwhelming view is that the money is simply being hoarded by private banks.

Logically, if the vast majority of money is deposit money that arose from issuance of loans, and if the majority of people are trying to pay down debt (debt deflation), and money that does not make it into circulation cannot be inflationary, and money that does goes into reducing debt, and hence the quantity of money, there can be no inflationary effect.

1. QE and zero interest rates are not a rational long or medium term economic policy.

2. There is a huge risk in short term use of these policies (and we are now past the short term!)

Are we to wait until we have a major bubble burst before action is taken to sack these idiots. So far there are two obvious bubbles of irrational exuberance in two important market that have been directly created by these insane policies - the equity market and the housing market. Both will correct at some point in time.

In the thirties depression these printing money policies were not stated for a couple of years into the depression - we have seen them start far sooner. This distorts the markets and fools us into believing that everything is fine - a deliberately created bubble economy no less!

Without these stupid policies we would have seen a far steeper decline of not 6 or so percent but perhaps ten or more. But we would have been over the problem of the decline by now, and if money was now injected into the economy at the base of the down-swing it might help accelerate the upswing.

Instead we have not seen the vital revaluation of assets that should take place and needs to take place in the economy lessened and delayed- BUT not prevented. This is the absolute folly of these stupid policies. House prices are still more than twice what they need to be and the price of money is nugatory. Equities are for too expensive and the yields are far too low (as a direct consequence of QE etc.)

By the way, why people will not borrow even though the banks have the money and it costs nothing is that borrowers are making a rational decision that assets are overpriced and borrowing money to invest is paying far too high a price.

Also the whole pensions industry is critically endangered (as a direct result of QE etc.) I would not be at all surprised if some pension funds default on paying existing pensioners' annuities.

We must, as matter of immediate priority, cease QE, recover the money so far wasted and put rates up to five the six percent.

We must permit asset prices to fall and then and only then can we start supporting the economy.

Basically The Bank (Mervyn King, the MPC and the Treasury) has moved far too early and this is a critical error of timing. Fire the men and get back to sanity!

#67 - JFH

"So far there are two obvious bubbles of irrational exuberance in two important market that have been directly created by these insane policies - the equity market and the housing market. Both will correct at some point in time."

Ermmm....the housing market is in the process of correcting is it not? The equity market, yes, driven up by institutional speculators, but not actually contributing anything to the real world, true.

"We must, as matter of immediate priority, cease QE, recover the money so far wasted"

What's the rush? This QE doesn't have any effect at all, apart from to underpin bank's balancesheets.


" and put rates up to five the six percent. "

No way! This would just make life a lot harder for Mr.Fred Bloggs on the street (and his wife too)

No 62 FDD "But how about the Perfect Storm - ramapant inflation with a constantly devaluating currency?"

Well, we'll have to subsist on a handful of dried maize a day as they do in Zimbabwe !! :-)

Nobody is explaining the rationale behind assuming that QE is inflationary. There is no reason why it should be.

No 67 "Also the whole pensions industry is critically endangered (as a direct result of QE etc.) I would not be at all surprised if some pension funds default on paying existing pensioners' annuities."

Actually, in some ways, inflation *helps* pension funds in the sense that their income from investment will grow while the pensions paid out will be limited to the numeric amount stated in the pension agreement !! Of course, the pensioner will *NOT* be able to buy as much with his pension as he thought he would but that's the risk of paying into a pension pot !!

This happened in the late 70s and a lot of pensioners were hurt by the 15% inflation until it was brought under control !!

To clarify the points raised above concerning the statements of Pierre-Joseph Proudhon in his work `What is Property'; he actually meant that to use property to exploit the efforts of others was theft. He never applied the word `theft' to personal property. Since he was a skilled artisan, a printer I believe, this is wholly logical with his own social and economic condition. In other words he was opposed to proprietorship not property in itself.

With regard to foredeckdave's Perfect Storm in Message 62 one can only remark that he succintly describes the position in which the Weimar Republic placed itself in the Twenties.

Once again one is reminded that during the Nineties we saw the death of State Socialism, now perhaps we are seeing the death of Social Democracy. Rather than suggesting that Marx was right as WOTW would like us to think in his economics agenda, I would suggest that this proves Marx was wrong in his political agenda. Perhaps we are returning to an older, less scientific radicalism which allows the views of the libertarian Proudhon to be expressed.

At the present time we have the British state and its nominees in the City hanging the real value adding economy out to dry in the cold winds of recession. If this policy does not end forthwith then we are dealing with the very stuff of revolution: our economy is being stood on its head as a matter of public policy. This is the Bedlam Economics of vested interests defending the desert they call peace!

Yet there is nothing on the political horizon to suggest any difference will be forthcoming.

No 59 "If inflation is under control (and it may not remain so for much longer), isn't the advantage of buying government bonds that it helps reduce the crippling debt the taxpayer is currently suffering?"

Err...exactly how does taking non-existent money out of one pocket and putting it into the other help the government debt ?? Please enlighten me !!

"Perhaps a devalued currency in the short term may even help support UK exporters."

Err...what percentage of UK's balance of trade come from exports of locally manufactured goods ?? And how much more of that devalued currency will we have to pay for the latest incarnation of IPod or IPhone or computer ??

No 64 "Stagflation here we come!"

Stagflation only occurs when there is sufficient home-grown assets to back up the economy. When there is an over-hanging burden of toxic "assets" whose value, or lack thereof, is yet to be determined, it'll be inflation all the way. If we are VERY, VERY lucky, we may not slip into hyperinflation !!

If we are not so lucky, then it's - Zimbabwe, here we come !!

Perhaps relatives, friends and charitable persons abroad might send food parcels to Britain then !!

On the subject of National debt. I once sat one desk away from a chap who was trying to sell off Peruvian debt - we were running down a bank, closed by the BofE. My bank, and others, lent this money on the belief that countries do not go bankrupt - we did not get much, if anything for the Peruvian debt. I do wonder if the belief today is that G8 countries do not go bankrupt. If it is, don't believe it.

No 72 "To clarify the points raised above concerning the statements of Pierre-Joseph Proudhon in his work `What is Property'; he actually meant that to use property to exploit the efforts of others was theft. He never applied the word `theft' to personal property. Since he was a skilled artisan, a printer I believe, this is wholly logical with his own social and economic condition. In other words he was opposed to proprietorship not property in itself."

Misquotation is not new !! Thousands of preachers have thundered - "Money is the root of all Evil" - when nowhere in the Bible says that !! What is actually said is - "*THE LOVE OF* Money is the root of all Evil" !! Rather apt for this blog, isn't it !! :-)

Take heed, all ye bankers and receipients of massive bonuses !!

#68. FrankSz wrote:

"Ermmm....the housing market is in the process of correcting is it not? The equity market, yes, driven up by institutional speculators, but not actually contributing anything to the real world, true."

Glad you ashed that: I disagree, the housing market is absolutely at too high a multiple of earnings and thus has more to fall, but QE and free money are stopping this correction from happening indeed house prices are now going up.

On the question of equities not be part of real life - so your pension is not real life - tell that to a Church of England priest whose fund is only in equities! Annuity rates are still higher than the interest rates and yields at current levels and the pension providers are gambling on a return to rational rate levels of 5 to 6 percent PDQ.

"What's the rush? This QE doesn't have any effect at all, apart from to underpin bank's balancesheets."

I disagree QE effect so far is to reflate the equity markets and drive down yields to irrationally low levels. Money is piling into equities for the lack of anywhere else to go - that is a bubble!

"" and put rates up to five the six percent. "
No way! This would just make life a lot harder for Mr.Fred Bloggs on the street (and his wife too)"

Sorry but the state of the economy is such that the fallout will inevitably hit the man and woman in the street - it is not of question of whether it is a question of when. It is my analysis that the QE and interest rate cuts were a year (or more) too early and we have not yet had the downturn!

#71. ishkandar wrote:

"inflation *helps* pension funds"

Provided that they are well funded and are not already over committed to paying annuities they no longer have the funds to pay!

#70. FrankSz wrote:

"Nobody is explaining the rationale behind assuming that QE is inflationary. There is no reason why it should be."

QE is inflating asset prices (House Prices and Equities) or havne't you noticed.

Stephanie, you seem to have a bit more grasp of reality than your colleague Mr Peston and will recognise that for all the posturing going on by economists the simple truth is that the British Government has now resorted to printing it's own deficit.

98.9% of the "QE" (how easily we slip to using euphemisms like this, and "Downturn") has gone to that purpose, and what's the bet on the next £25bn? With the last price signal gone the State will even further reduce the productivity of its spend, leading the country further into ruin.

The UK won't go down because of the technical effects of £200bn of Printy Printy, but because psychoogically the State has crossed a line and once crossed they'll find it easier and easier to carry on, especially if Labour win the election.

So, the Market would have fallen but was propped up by QE.

Hmm, okay, how does this help the British economy create wealth for the medium to long term ?

We need manufacturing Jobs and products to export !

Hey ho.

Somebody tried to explain to me the Elastic band theory of Stock market expansion, I didn't quite understand it, but the upshot was to keep out of the Market whilst it is over priced (such as now).

Wish I had listened to him years ago !

Anyone want any old B&B Shares ? (Framed as talking point)

What's to say ?

Stock market bubble with no profits ala 2000-20001 with the dot com boom.

Low interest rates, money being printed via QE and house prices rising again.

Economy lagging behind all competitors.

End result is obviously inflation and then higher interest rates, then we actually get the reset button pressed but in the process all that has actually happened is UK debt has bubbled probably twice over.

Higher interest rates will be forced by external economies regardless of what happens in the UK.

We are doomed.

Credit Card interest rates at 16%, Building Society interest rates at 1 or 2 %... Both of these figures show a measure of the risk that either people with cards will default or people's investments won't get great returns with any slack from either being mopped up by banker's bonuses.

We need the 10p tax rate back to give some cash to the poorer people in society, or a modern day Robin Hood giving out cash NOT QE for the City folk and expensive Government services, pensions etc.

I have £12k 'spare' [I will still have a crisis fund] and my outstanding mortgage is £12k which I am paying interest on at 2.75%.

Based on all the above should I pay off my mortgage tomorrow or not?

The fact remains that many people appear to be paid for doing something which adds no value to process. That many people get paid for doing things which are several times removed from providing an actual product or measurable service.

Under stress the whole fantasy economy developed in the last few decades is just a house of cards and can fall. If you are not adding value, if you are not near the action of actually providing something, then a job can go overnight. This is what is in process. Things with no stress tested foundations are an experiment when the stress comes along. How many activities current in the economy have ever been stress tested.

The tide is going out, it doesnt matter how much is pumped in to try and raise levels. It is wholely nonsensical to talk about jumping a gap which still remains the image talked about. The situation is one essentially of denial I am afraid. This is back to the underlying activity that has been in place for decades - Manufacturing steadily slipping away. Poor strategic thinking, short term profit taking. The roots of this malaise are back witrh the start of the use of housing market manipulation some 40 years ago which provided easy profits and suckered any entire population.

It doesnt matter how much local 'growth' is generated if the tide is still going out. This situation is the result of decades of steady destruction, it is not going to go away in a matter of quarters so my suggestion is - get used to it.

A few less fantasy jobs in the public sector would help, undercover litter police, riverbank health and safety inspectors, street football managers. The idea that the solution to a miniority problem is the overbearing surveillance of all, everybody in the population. Perhaps into the mix should be added economists who influence policy but consistently get it wrong. How many of these economists are genuinely independent. All part of the same dislocation from reality. A virtual empire. You wouldnt dream of these sort of activities if you were on a desert island facing survival. You can by all means decry the desert island scenario and say it is in extremis, but it is no less extremis than the pairs of undercover litter police driving around in brand new cars in brand new uniforms following dogs back home however long it takes.

So keep pumping the money to the banks, job nearly done, money nearly gone. Because one thing is for sure thats the only point it will stop, when the money has gone. It is just a floatation device dwarfed by the real problem. Every effort is being made to defer facing reality, but I am afraid it is most unlikely to acheive that objective. Sooner or later the majority will have to face the fact that they have had a lifestyle propped up on profit taking and things are due to be somewhat bumpy.

As all developed countries are acting concertedly in trying to prop up the scenery things will not move forward will they. All that is achieved is a bizarre status quo and collective deferment. The whole culture has to change and values reset. Does anybody think this is likely to be fun for those who have previously won in an artifical environment, that they will quietly go into that night. That they will not try to throw a double six and get out of jail free. That they will not try and sit on the community chest.

Glanafon - an excellent summary of the position.

Like I once asked on this blog - if I drop enough litter in the supermarket car park that it creates a job for someone is that good for the economy or bad.

Nearly all our Fantasy Economy is based on dealing with other people's litter - the problem is that there are less and less people in the car park to drop the litter in the first place.

10. At 4:56pm on 05 Nov 2009, Joe King

....but doesn't economic theory dictate that commodities in abundance have no value (like air)?

At this rate there will be notes everywhere and they will become worthless - inflating away all the debt of the world, only possible because all countries are printing money this time.

(let me dream for a while - I was enjoying it)

I think rising house prices are a myth.

As someone who has been thinking about re-entering the housing market I still see falling prices. Look at Land Registry data rather than vested interest PR and see the number of houses listed on rightmove that haven't sold and the number re-listed with lower prices to get a better idea of what is really happening.

18. At 5:45pm on 05 Nov 2009, DevilsAdvocate wrote:

Haven't you seen that film where they go through the centre of the earth? - it's a documentary, not fiction - just like Mary Poppins and the run on the bank!

This afternoon I will be buying a spade and proving you all wrong.

85 glanafon

Excellent comment, well written.

22. At 5:59pm on 05 Nov 2009, Jericoa

After reading your post I realise I am not mad (or that there are two of us who are, which means we're a cult / religion / society, not an individual madman).

I'm fully behing QE now - lets rip those presses into full gear and flood the world with sterling.

Hurrah!

I echo the words of comment 60. Given the current volume of quantitative easing what is the estimated increase in inflation (RPI and CPI) that can be expected and by when?

" I think rising house prices are a myth."

Of course it's a myth.

I'd like to see a graph somewhere showing absolute number of house purchases and the price distribution by month.

Better would be some graphs of M4

LIKE THIS ONE: https://www.marketoracle.co.uk/Article8004.html

62. At 09:01am on 06 Nov 2009, foredeckdave wrote:

"But how about the Perfect Storm - ramapant inflation with a constantly devaluating currency?"


...that will go nicely with the 'strong financial headwinds' and the 'steady course' the UK is steering from it's 'well positioned' place in the sea of nautical Ed Balls.

63. At 09:04am on 06 Nov 2009, bill wrote:

"You can't put a fire out with fire"

....or rather you can't put out a fire by dousing it in petrol...

66. At 09:14am on 06 Nov 2009, FrankSz


....but where do you think the stock market bubble came from - is that not inflationary?

72. At 10:08am on 06 Nov 2009, stanilic wrote:

"Once again one is reminded that during the Nineties we saw the death of State Socialism, now perhaps we are seeing the death of Social Democracy. Rather than suggesting that Marx was right as WOTW would like us to think in his economics agenda,"

Sorry - was I wrong? - is this how Capitalism is supposed to work?

Writingsonthewall - do you have a job?

#96

No,
a) deflation/inflation refers to rises and falls in the general price of goods,services or in other words the value of money. A blip in the stock markets does not say much about this.
b) What stock market bubble? There was a blip 2 weeks ago and the DJ is back down again.
c) The QE money that banks/institutions held onto went briefly into some stocks/commodities, but unemployment, deleveraging and money deceleration continue. The money is concentrating into the balance sheets of the banks and the government, while the capillaries of the economy contract and wither.

97 WOTW

You are a true Marxist: you take a partial quotation out of context and then criticise it.

I was trying to convey the concept that Marx's political analysis was wrong whilst his economic critique of capitalism has some validity. I am at fault for failing to make the point clearly.