Monday, 30 November 2009

UK money printing not working

This is the latest analysis from the Bank of England, the money supply M4 measure fell 0.7% in October, month on month. This means that there is less money in the economy than before.

As such it does not bode very well for future growth, whatever the politicians may be saying.


Also it shows that either quantitative easing is not working at all or not working yet. Either way that makes it a dangerous policy as it is potenitally increasing our debts for no reason or is storing up for a huge inflationary boom when it kicks in sometime next year (see my post of last week on predicted interest rates, this is what the banks are thinking).


The solution from the Bank of England though may well be to keep up the quantitative easing binge. in fact as I have said repeatedly I will not be surprised to see the amount of money printed eqaul the UK Government spending deficit for 2009/10 which could come in as high as £225 billion.


At the rate we are going QE is never going to stop, which was one of my underlying fears when it started even thoughI have been supported of limited QE to stop and economic collapse.


On a happier note, the reason the money supply is falling is that people are paying back their debts, total mortgage and unsecured lending is falling. In the long-term a less debt-fuelled economy is going to be a good thing, it is just going to be a very painful journey to get there.

17 comments:

Demetrius said...

Could you sit Gordon on one knee, and Alastair on the other and explain this to them quite simply?

Elby The Beserk said...

Demetrius,

No - rather, bang their heads together VERY HARD, and then lock them up. Brown has inflicted more economic damage to the UK than the boy Hitler did.

Some achievement.

Mark Wadsworth said...

I told you so, I told you so. Our version of QE is just a paper shuffling exercise between commercial banks on one hand and two departments of HM Treasury on the other (Debt Management Office and BoE).

Why did anybody expect anything much - whether good or bad - to come of this?

Bill Quango MP said...

None thought much good would come of the seemingly necessary step of QE.
The worry was how much damage it would do.

If it wasn't an election year would the government have behaved differently knowing it was likely to face the consequences in a year or twos time?

manfromthefuture said...

what you're saying is that we haven't really felt the effect of QE at all. but the "free money" has been created nevertheless. so at some point we'll see the inflationary effect of 200b extra. this could be very nasty.

Budgie said...

The October month by month M4 may have reduced by 0.7% but the annual rate is still up at 11% (up to October, BoE figures). Surely this means QE is 'working' in the sense that it is preventing deflation? It is, of course, storing up inflation as you say.

It is interesting to see that ordinary people are reducing their debt, in contrast to the government which is increasing its own. However we pay for government debt anyway. So our children will have to pay back both the interest and the debt created by the odious Brown which he uses to try to bribe us now. This is what Brown thinks of us.

Stan Wheeler said...

Wouldn't it be better if the QE cash was credited to the ordinary folk's bank account- say £3,000 as an 'one off', it would be better than giving it to bankers!

Anonymous said...

Stan wheeler gets my vote

Blue Eyes said...

Isn't this nationalisation of debt exactly what Japan did?

Lord Lavendon said...

Blue Eyes, how can you nationalise government debt (isn't that a nationalised 'thing' in the first place?).

Also Stan Wheeler might be onto something here, in that if the Old Lady wants to get people to go and spend, why does she not simply bypass the retail banks and put the money directly into the working man/women's hand?

Or if this money is used to pay off debt, then at least it would mean the taxpayer would have less to pay under the government's insurance scheme and the banks might not have to write off so much debt.

Although, doing such a thing is probably not a good idea this side of an election- it might let Brown back in.

Blue Eyes said...

No, I meant the private sector and individuals paying off debt while the government runs it up. That is what happened in Japan and it didn't work so well.

Jambo said...

When you say 'QE isn't working it's kiinda hard to prove because there's no control group where we can see what would happen without QE.

As to it not working out too well for Japan, their economy stagnated, it did not implode as in the US Great depression, so once again it's hard to prove the policy was bad.

Without a doubt the huge debt, huge public sector, spend now pay later consumer culture, expensive wars etc etc etc (basically the whole new labour project) were all HUGE HUGE mistakes.

But when they started QE we were in a position where there really are no good answers, merely a choice of less bad ones, I'm not convinced that stealing from everyone holding pounds (rich people and foreign people) to give to everyone with net debt (the government & poor people). Is the worst thing you could do right now.

CityUnslicker said...

great comments.

I was against a tax credit in the first place because it would reduce the money suply - i.e. people pay off debt. However, now that QE has run its course it would be a better solution than more buying of Government debt.

Japan faced the same situation as us, but there bubble had actually been a lot bigger - so we may repeat there experience or we may not. I think all our QE will result in huge inflation, just not for a little while yet.

Budgie has a great point in that now our kids will have more variety of debt to pay off, great.

MW it is more than shuffling, what do you think has caused the stock market and all other assets to rocket over 50% up? One day these BOE monetised gilts will have to be sold back to the market - probably at a huge loss as the yields will have to be high to compensate for the volume.

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