Monday, 25 July 2011

Cable calls for more Quantitative Easing

As the UK economy has only slowly recovered from the recession, it is no surprise that there. Are now more calls for money printing. We said here that QE was going to get to over £300 billion once the programme was started and remain of that view.

The really bad part to this news though is that with more QE the UK is going to get stuck in a permanent recession just like Japan. For if the UK is to stick to it's word this is going Tobermory £300 billion of stimulus to take out of the economy one day which will limit any growth potential.

Also of course we have interest rates at 0.5% and one day these are going to have to rise. Yet the longer we have these record low rates the more debtors get used to it and the less saving gets done by znyone or any business.

These two positions added together will mean the the UK is unlikely to ever recover in a substantial way economically in the forseeable future; instead the best we can hope for is the Japan experience of scelrotic growth with regular recessions.

It is a pretty bad situation with no easy solution, however, digging the whole deeper with more QE is definitely not the answer (note, selfishly as I am invested in the markets more QE will be good for the FTSE so I may be happy at the time when it happens, but that is short-term interest only).

21 comments:

Jim said...

You don't still believe any of the QE money will ever taken back out of the economy do you?

How quaint.

Tony_E said...

The bigest problem for a country that imports such a huge percentage of it raw materials, is that it's currency becomes overly weak in relation to its source nations. It's good for exporters, but only if they source raw materials at home.

I need woods to build guitars, which don't grow naturally in the UK. I source as much as I can at home, but QE round 1 put up prices of fuel/energy and materials so dramatically that as a fledgling area of my business I nearly got out before I'd got started.

I simply cannot pass on the extra costs of another round of pound trashing.

Ralph Musgrave said...

Why on Earth does the £300bn necessarily have to be “taken out of the economy”? If the economy remains sluggish then leave it where it is. If the economy looks like overheating, the take it (or some of it) out. QED.

As to the idea that low interest rates dissuade savers from saving, this flies in the face of the evidence. Japan has for years had low interest rates combined with a high saving rate. And people and the markets are currently falling over themselves to buy US government debt despite the miserable yields on same.

Blue Eyes said...

The reason the economy is so meh at the moment is that everyone is still massively in debt. People are deleveraging all over the shop. Just look at the figures when they are released each month: people are not increasing their borrowings but reducing them.

QE might or might not speed up the process of deleveraging, depending on how the new money is distributed around the economy.

Japan's main problem was that their property and stock-market bubble was much, much larger than ours. Remember when Tokyo was worth more than the entire United States?

Steven_L said...

Have none of them got any better ideas? What do we pay these clowns for?

Budgie said...

Everyone knows, even Ed Balls, that reducing taxes stimulates the economy. Brown strangled our economy with stealth taxes so that our boom looked like normal times (apart from the housing bubble).

After the bust Labour reduced VAT to 15% - to stimulate the economy. Labour are now stating that CMD should lower VAT - to stimulate the economy. Mrs Thatcher lowered taxes - and stimulated the economy.

Corporatist Dave should have closed DfID, sold off the BBC, and not given any money to bail out the euro that Britain always opposed. Then he could have - stimulated the economy.

CityUnslicker said...

Ralph....because if you never withdraw it then it has no credibility and may as well be monetization...which is Zimbabwe economics.

As for savings, the rate has fallen dramatically in the uk, don't quote Japan here; culturally they are a long way from us and save more because there are les public services to rely on. Since the recession all banks have lost deposits and some are offering rates above their own funding level to try attract savers.

You cannot grow and economy on debt alone - we just tried it, it did not work.

CityUnslicker said...

Jim - why is this quaint? What is your view?

CityUnslicker said...

Finally, for all his mistakes, Cameron said some very sensible things todaybon the need to maintain sound finances. We would never have heard this under Labour, who would now be trying to tell everyone the deficit was nothingn to worry about and that the richbcould pay it all off.

Anonymous said...

I think you'll find that the Japanese saving rate began to fall a few years ago.People get no interest on their savings, so they have been eating into them pretty steadily.

Anonymous said...

I have said this before on this site the Euro maybe in big trouble but the GB£ seems to be dragging so that could be that the market has it right (Margret T always said the market was always right), big thing is where has all that QE actually gone, no one seems able to give an give a satisfactory answer, if this country continues to run on an export deficit of such large amounts it will be digging a hole for itself from which it will not be able to get out of. Today we will hear what the economy is doing, bearing in mind that it revised over the following month, judging by the lack of a smirk on Osborne's face, it does not appear very good.

Budgie said...

Anon said: "Margret T always said the market was always right".

Do you have a problem with that? "The market" is simply a collective name for people buying and selling as they wish. Show me a "market" that has "failed" and I will show you a market that has been rigged by politicians (and hence is not actually a market).

Jim said...

@cityunslicker: my view is that QE was money printing by the back door, and the authorities have no intention of ever withdrawing the cash injected into the economy. The idea they 'could' reverse QE was just a fig leaf. Not going to happen. They won't even raise interest rates from 0.5%, despite inflation being double the stated target, and looks like staying there. What chance of them extracting a few hundred billion out of the economy instead?

formertory said...

Is QE "money" "in the economy"?

Electro-Kevin said...

Interesting question ... and name, Former...

Of Cable's question, isn't the most interesting thing about it not whether he's right or wrong but the fact that he's asking the question ?

Is QE working ? Will more of it make it work ?

Jan said...

I agree with Jim. Maybe initially everyone thinks they will take the QE out of the economy later on but when reality dawns that it's impossible without tanking everything they decide to leave well alone. It's the ultimate can kicking exercise so that future generations have to deal with the problem.

A bit like the student loans scenario when the new bright-eyed graduate becomes resigned to a lifetime of lack-lustre jobs and the yoke of the debt to repay except that under current rules this gets written off after 30 years.

Anonymous said...

I do agree with everyone really that it is hard to see how they withdraw QE from the market, hence my post.

And yes this is massive can kicking. However it is going to hang like a sword of damocles over the UK for perhaps the rest of this decade, destroying any chance of real recovery. At least the PM sees this, I doubt we would have had QE under the Tories to such an extent.
CU

Botogol said...

interest rates aren't really 0.5%, not in the sense that individuals or small businesses can go out and borrow new money at 0.5%

Budgie said...

Just to dismiss QE as 'money printing' does not tell the whole story. The (M4) money supply increase fell off a cliff in 2008. When the money supply contracts, deflation results. The fear was that recession + deflation = depression.

So the prime purpose of QE was to bolster the money supply. Even with QE, the money supply has bumped well below 2% in 2010 and 2011. So I think QE saved us from deflation, ie a 1930s style slump.

The inflation we are currently seeing is primarily the effect of the 30% fall in the value of the pound (the weak pound policy). Later, when the economy recovers, the QE will come out in the wash. We will then get high inflation due to excess money, unless the government of the day severely dampens it down. That means a high bank rate and all its consequences.

Blue Eyes said...

If HMG is clever though, it can absorb the inflationary impact of the new money as the economy recovers by sticking to a tight fiscal position. If the new money gets absorbed by paying off the foreign creditors then we can have "won" by monetising the debt without anyone noticing!

Dick the Prick said...

I believe Cable to be a penis but am swayed by EKs cynical view that the question is more relevant than the answer.