Thursday 5 November 2009

BOE new QE target of £200 billion

That is £25 billion more of printing money in English. Clearly the Bank of England have seen the pre-Budget report which will show how bad UK Government finance are and have acted accordingly.

My hunch is the money printing will track the Government deficit this year; the really hard question is now the Government has this wonder drug (QE= Fiscal Heroin) will it ever be able to wean itself off?


sobers said...

Labour will keep the presses rolling until next May, when they know they are getting the boot. Their one aim has been to stop there being a crisis before that, which would have forced tax rises and spending cuts on a massive scale (which are still needed of course). This would have impacted their client state and voter base. It would have wiped them out electorally, third place behind then Lib Dems probably. And most likely finished them as a party of government.

They have put survival of the Labour Party above national interest, and that in my mind is treasonable.

Old BE said...

What's the alternative?

CityUnslicker said...

BE - well interesting that they have given up lowering interest rates, there is another quarter point that could be done.

They could reduce the BOE base rate to negative to force banks to lend.

Money supply is about velocity as well as amount. yes the amount is dropping but so is velocity - BOE as usual targeting the wrong thing.

If this is the last QE then I will be OK with it. I just think Sobers is right and for some time have noticed the 'drug' trend with it.

if US can stop QE and so does everyone except us the markets will hammer UK mercilessly and rightly so.

Mucker said...

Are the BoE only buying government bonds to keep yields down and therefore the interest payable on the government borrowing low? In the US I understood that they bought corporate bonds. The money gets out into the corporate sector presumably in the US but stays in the public sector in the UK?

The press analysis seems patchy on this. (As is mine probably)

Old BE said...

I thought the reason the base rate is not reduced is so that the banks which entered into "base minus X" mortgage deals don't have to pay borrowers?

Isn't QE ultimately to ease the pain of all these debts and to stave off a negative inflation spiral? If so, what's the alternative?

Isn't the risk of underdoing QE actually worse than the risk of overdoing it a bit?

Demetrius said...

The two could be related. It seems that London is the illegal drug making capital of the world. There is a huge amount of money slushing about in this market. So the Bank of England has to provide it. All the profits and much else we go off shore to the traders accounts. You and I will be paying. Our politicians will be taking their commissions.

Mark Wadsworth said...

What Mucker says.

Our QE is unique in that it is largely a paper-shuffling exercise between two branches of HM Treasury. Perhaps it is used to mask the effects of money-printing (i.e. govt borrowing) but it is not, in itself, money printing or additional govt. borrowing.

What is even more insane is lobbing the banks another £40 billion in the vague hope they'll lend it to businesses (actually, the govt is hoping they'll use it to reinflate the house price bubble).

Why not just cut out the middlement and reduce taxes on business by £40 billion? Or make a start by scrapping Employer's NIC (the dynamic cost of which would be a fraction of the £50 billion or so that it currently raises)?

CityUnslicker said...

Mucker only UK gilts as you say. promise was corporate bonds but none were purchased

CityUnslicker said...

BE - overdoing QE leaves us with a huge forward problem. Also, the longer we do it, the more addictive it becomes.

Mark - I don't subscribe to you paper shuffling exercise thing. These gilts bought will need to be sold to the real market one day. Debt is real. The pain stored up is real.

Mark Wadsworth said...

CU, sure, there'll have to be negative QE, but they've already got that one taped.

Don't you remember the FSA's cunning plan to force banks to "hold top quality liquid assets" in future, i.e. to use up their electronic cash at BoE (the proceeds from selling gilts) to buy up, er, gilts again?

A bit like pension funds have to hold a lot of gilts. That's the good thing about these creatures of legislation, you can make 'em buy up govt. bonds with private people's money.

Mucker said...

Thanks for the info folks, interesting article from Flanders concluding with this:

"We will wait and see - and so will the MPC. But in the meantime, many economists who supported the QE policy are left feeling a bit queasy that so much is being rested on an asset with such an uncertain relationship to the broader economy.

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.

We talk about it being hard to spot the impact of the Bank's policy (and that of other central banks). But in a sense, that's crackers. You can see the impact of easy monetary policy everywhere.

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. "

like the bit "especially the British government"

CityUnslicker said...

MW maybe - but then who will buy the new gilt issues.
To paraphrase Bevan their mouths will be stuffed with gilts.

Imagine what that will do to the equity will be horrible. I can;t see that as a nice ending, hence my wory as to whether QE will ever really stop.

James Higham said...

Deeper and deeper in the mire. Alternative? Change of government tomorrow - true conservative coalition.

Weekend Yachtsman said...

James, we're getting a change of government on 1st December.

After that date, the government is in Brussels.

Anonymous said...

Of the £175B to date, £173B has gone to gilts.

QE tracks broons lunacy

BofE says little demand from corp bonds.
I say BofE lacks imagination.

£25B will probably not be the end, broons lunacy is infinite. Scorched earth is definite.

There is no return from this point.

Anonymous said...

This is the S&P, arguably more international than the Footsie

This is the S&P deflated by the Euro.

And this is the S&P deflated by Gold

Now that puts the "recovery" into perspective.

Against Gold, the only true currency, the graphs show the true intent of the money printers.

Once the capping shackles are removed....

It doesn't need much more price appreciation from gold to completely wipe out the equity markets "recovery".
Thus money printing is seen for what it is, a currency devaluation in order to pay debt.

Absent manipulation, the eventual devaluation of £ required to obtain a sustainable UK economy in an un-manipulated world will be the inverse of the eventual £ value of gold.

Central banks are now net purchasers of gold bullion.
Central banks can "print money" to buy gold!

BofE must buy broons debt!

Hang broon.