I see today, to quote from just one news source,
"The Bank's Monetary Policy Committee (MPC) voted to increase the quantitative easing (QE) programme - effectively printing more cash - from £275 billion to £325 billion despite the risks it poses to the country's inflation rate. "
I understand that if there's more of anything about then its worth is devalued. But does this mean there are literally physically more fivers in circulation? And even if there are, I don't see how they get out there? It's not like I get a bundle of them in the post, or my salary goes up, or anything.
Without resorting to long techy explanations, what does this actually mean? Bear in mind my most astute financial observation was when at the age of tiny I discovered to my horror that decimalisation meant only ten goes on the penny machines for two bob instead of twenty four, so be gentle.
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The Bank of England's explanation:
Hope this helps
"This policy of asset purchases is often known as 'Quantitative Easing'. It does not involve printing more banknotes. Furthermore, the asset purchase programme is not about giving money to banks. Rather, the policy is designed to circumvent the banking system. The Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies. These investors typically do not want to hold on to this money, because it yields a low return. So they tend to use it to purchase other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages the issuance of new equities and bonds."
"Gilts" are government issued bonds
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>>
>> The Bank of England's explanation:
>> These investors typically do not want to hold on to this
>> money, because it yields a low return. So they tend to use it to purchase
>> other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages
the issuance of new equities and bonds."
>>
Sounds nonsense to me.
These investors currently hold long term gilts yielding low returns. So the nice BofE buys their poor investments so that they can go and buy better investments that pay more.
Why does that lower long-term borrowing costs?
If they really wanted to inject more money into the economy with immediate effect the best method would be to tip wads of notes out of helicopters flying over sink housing estates. The recipients would not save (= waste) any of it, but would immediately go out and spend it.
Last edited by: Cliff Pope on Thu 9 Feb 12 at 14:47
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"Why does that lower long-term borrowing costs?"
Supply and demand. The more demand there is for bonds the lower the interest rate. i.e. borrowing cost are lowered. Lower borrowing cost stimulates the economy by allowing businesses to expand.
The trick is not to overdo it and create rampant inflation. In the present recessionary climate the BoE thinks this unlikely.
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>> "Gilts" are government issued bonds
They are also virgin lady pigs!
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I don't think there is a simple explanation. Here's what Wikipedia says. tinyurl.com/yqfagb
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Print more money ∴ more money chasing the same amount of goods = inflation?
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>> Print more money ∴ more money chasing the same amount of goods = inflation?
Crankcase wants to know how the money gets into circulation. I do as well.
Last edited by: L'escargot on Thu 9 Feb 12 at 14:44
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Lumme. The bit I understood most from the Wikipedia article was this bit, halfway down.
量的金融緩和
But yes, if the BOE buys rubbish bonds in order to let everyone else spend the money given to them on better ones, what happens to the rubbish bonds? Do they somehow get to be less rubbish and can be sold on to someone else in later years, or is the gamble that eventually the economy will be so much healthier nobody will care about them as they are now an insignificant fraction?
I fear that trying to put "running a national economy" in the same terms as "running a household economy" is so simplistic it might not be understandable in those terms at all, in which case I have some learnin' to do.
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>> so simplistic it might not be understandable in those terms
>> at all, in which case I have some learnin' to do.
>>
The con trick being perpetrated is the assumption that those in charge do understand and that lesser people like us don't.
No one understands. It is simply something new to try. Everyone has borrowed so much that individuals and countries are now resistant to any known antibiotic, so we might as well try some quack alternative medicine.
If it works Mervyn King will get a peerage. If it doesn't, he will have his knighthood taken away.
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>> Lumme. The bit I understood most from the Wikipedia article was this bit, halfway down.
>> 量的金融緩和
It may translate from Chinese as "Amount of financial ease", but I now have inscrutable ads at the bottom of my browser...
Lovely.
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>> It may translate from Chinese as "Amount of financial ease", but I now have inscrutable
>> ads at the bottom of my browser...
>>
>> Lovely.
Sorry. Lucky I didn't launch into an anecdote about a sagger-maker's bottom knocker then.
Oh.
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QE:
“There is £100 and 100 loaves of bread costing £1 each. QE creates another £100. Each loaf now costs £2.”
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Absolutely
What gets my goat is the cheek of the the chancellor charging 'income tax' on savings, despite pretty well all savings returning less than inflation.
So, 'added decrement tax' is now a reality.
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Nice article in the Torygraph about the effects of QE.
tinyurl.com/7dyynla
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I am glad I am not the only one who has difficulty understand this! I get the idea behind it but I still don't really get how it all works.
But then that is why people spend years studying at LSE.
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If an idea is difficult to explain it's because the people explaining it don't understand it either.
The DT is right, the real cause is the world is choking on debt. There is no painless and fair remedy, so we continue to be offered quack solutions like bail-out packages and QE from self-important witch doctors.
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>> The DT is right, the real cause is the world is choking on debt. There
>> is no painless and fair remedy, so we continue to be offered quack solutions like
>> bail-out packages and QE from self-important witch doctors.
Yes. The painful truth may be something like this.
www.bbc.co.uk/news/business-16918000
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Dr Mahathir is comprehensible at least.
'"You refuse to acknowledge you have lost money and therefore you are poor," he says.'
Quite right. The Governement (that's us) is spending 10% more than it gets in. Yet people say pension entitlemnts and welfare benefits cannot be cut. The simple fact is that something should be. Why anybody thinks that just reducing the rate of increase of borrowing for years is acceptable baffles me.
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Not a reply to the original question but it reminded me of this...
Paddy bought a donkey from a farmer for £100. The farmer agreed to deliver the donkey the next day. Next day he drove up and said, 'Sorry son, I have some bad news. The donkey's died.'
Paddy replied, 'Well then just give me my money back. The farmer said, 'Can't do that. I've already spent it.
Paddy said, 'OK, then, just bring me the dead donkey. The farmer asked, 'What are you going to do with him? Paddy said, 'I'm going to raffle him off. The farmer said, 'You can't raffle a dead donkey!
Paddy said, 'Sure I can. Watch me. I just won't tell anybody he's dead.
A month later, the farmer met up with Paddy and asked 'What happened with that dead donkey?
Paddy said, 'I raffled him off. I sold 500 tickets at two pounds a piece and made a profit of £898'
The farmer said, 'Didn't anyone complain? Paddy said, 'Just the guy who won.
So I gave him his two pounds back.
Paddy now works for the Royal Bank of Scotland
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Reminds me of this, that I suspect we may have done before, but for the benefit of newer readers:
Three people enjoy a meal at a Thai restaurant. The waiter brings the bill for £30 so each person pays £10.
Later the chef realises that the bill should have only been £25 so she sends the waiter back to the table with £5. The waiter was not very good at maths and could not figure out how to divide the £5 so he gave each person a £1 and kept £2 for himself.
So....the three people have paid £9 each for the meal.
9x3=27
The waiter kept £2
27+2 = £29
What happened to the other pound?
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>> What happened to the other pound?
>>
Nothing, it's still there.
£10 x 3 = £30
£1 each refund = (£9 x 3) £27
£2 the waiter keeps for himself = £25.
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Supposing debt is the problem.
One way out is just to cancel most of the debt - all types of debt. That of course would have to include all the debt owed to us (i.e. the money we have in the bank, if we are savers). It's been done before.
In 1977 I owed 2 years wages. Had I not increased my mortgage, by 1987 I would have owed about half a years wages even without paying anything off. The other part of the equation is that anyone with the same amount in the bank in 1977 would find it worth about 1/4 as much by 1987.
See comment re QE and the price of bread above.
At the moment we are a way off big inflation because demand is still flat. But cash is a risky home for money at the moment.
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Even seasoned experts disagree about what effect QE will have. Some say it will achieve its aims, some say it will cause inflation, some say it won't do anything. It seems to me to be criminally irresponsible of the BOE to conduct this full scale experiment on that basis.
Perhaps the answer is we should do nothing. Throughout history we have had booms and slumps, good harvests and poor harvests. Sometimes we have never had it so good, now we are going to have a recession. We all put a bit aside during the good times, didn't we? We saved enough seed corn ready for next year?
Is it so important to stave off a recession? Are we talking about a ten-year period of disaster when half the population dies of famine or disease, or just two quarters in sucession of negative economic growth?
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Fair question Cliff. The cure might be as bad as the disease.
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Simple QE explanation? - CGNorwich
