Friday, 7 October 2011

Once you pop you just can't stop...QE2

As the famous advert goes, so does the UK QE programme. before QE was even started in the UK we Capitalists said that it is a very hard drug to give up. Once your start, you can't stop.

We estimated it would get to £300 billion when the first tranche was announced and here we are at £275 billion and counting.

Hands up who thinks this will be the last amount?

Andrew Sentance has it right too today. The biggest problem in the Coutnry is the lack of consumer demand, this is being hammered by inflation at 4.5%  - who has the money to get by anymore? I certainly don't have anything to spare for luxuries and I am sure that is no different to anyone else.

Even by the Bank of England's own analysis, last time QE added above 1% to inflation, so this bout will add at least 0.5% to an inflation rate already set to go over 5% before the year end. This is many ways is some quite staggering risk taking by the Bank of England.

Clearly to me they must be expecting a major Euro bust to think that the UK needs such radical treatment - would it really be the end of the world to have the economy flatline again for a quarter or two?

From a share trading perspective this is good news; but also good news for the holders of Gold. So for that us investors should be a little happy.

On the other hand in the long-term unwinding these positions is going to be very fraught and deflationary - just as the economy recovers? Well into the recovery? Sometime in the 2020's? Who knows what the side effects are either?

30 comments:

Michael Fowke said...

"I certainly don't have anything to spare for luxuries and I am sure that is no different to anyone else."

Well, I bought myself a Mars Bar today.

Electro-Kevin said...

Mervyn King was worried that jobs and homes might be lost and that this is more important than pensioners and savers.

That depends if you're a pensioner. The silent suffering.

Anonymous said...

@ MF - "Well, I bought myself a Mars Bar today."

There are some who may remember the Mars Bar as a measure of inflation (circa 1980's)

http://specials.ft.com/nicocolchester/FT3XZDJSEIC.html

Michael Fowke said...

Dylan Thomas mentioned Mars Bars in his letters of the 1930s. I wonder how much they cost during the Great Depression.

Blue Eyes said...

Depends on whether you are worried about the money supply collapsing or not. Inflation is 5% now, but what about forward indicators? How long does it take for QE to have an inflationary effect?

The Bank also said that QE1 added 1% to real GDP which means without it we would already be back in recession.

What's the use in stable prices if nobody is producing or consuming anything?

Life is pretty harsh for a lot of people including those on decent incomes, but it may be that life would be a hell of a lot worse if we had an even tighter monetary policy.

Does nobody worry about a Japan style depressing combined with a liquidity trap?

Are should my generation shut and and get on with living in penury to keep up the living standards of the baby boomers?

Let's face it, inflation hawks, there was a massive transfer of wealth from "the future" to those who got rich during the last thirty years. That future is now upon us.

Blue Eyes said...

* Why do some people insist that there is some God-given right for people who have stopped creating wealth to keep getting richer every year?

Blue Eyes said...

Apologies for typos..!

Budgie said...

Errrk, I remember when Mars Bars were 6d - that's 2.5p to you young whippersnappers. How much are they now?

Where can we find up to date reliable money supply figures so we can judge QE2 properly?

Bill Quango MP said...

Wasn't a Mars Bar the unit of measure for the AV referendum?

If you wanted one you put it top of the list..but if you didn't you put it down as your second choice. Then you got a twix..or a Snickers..how did this go again?

Timbo614 said...

Mars bars? AV? I think that was me ... and everyone really wanted a Flying Saucer!

According to recent research by me (one google item) a Mars bar was 7d in 1970 (3P) Current Tesco Price 49P
Computing to a 7.25% Compound inflation rate over 40 years. They still weigh the same provided you buy a single not a multi-pack.

Anonymous said...

"consumer demand, this is being hammered by inflation at 4.5%"

This makes f-all sense. If demand was pushing up prices, you can't say demand is being "hammered" by inflation.

Clearly it is not, though; the inflation is supply-side (VAT and commodities). To the extent that QE will push up demand, it will *aid* consumers.

You can say QE has no effect. Or you can say it increases demand. But that should aid consumers, if you agree (as you should) there is a demand problem.

dearieme said...

"I certainly don't have anything to spare for luxuries": we bought a bottle of gin last week. On the other hand, we've eaten the cats.

Anonymous said...

absurd.

There is not a demand problem.
The problem is simply that we're are not as wealthy as we pretend to be.
We can't demand as we would if we earn £500 a week when we only earn £300 a week.

The problem isn't a lack of demand its a lack of wealth to create that demand with.


Printing money will do nothing but cause inflation in the long run, and trick some people into making malinvestments along the way.

It amazes me to read some otherwise clever people trying to suggest that the solution to this disaster is to countfeit our own currency and put the difference into the hands of the very people most responsible for losing money..

Blue Eyes said...

The way I see it is that QE is designed to aid the depression/getting used to a much lower standard of living by avoiding a nasty downward price spiral which further depresses demand AND makes it harder for everyone to pay off debts.

Note that for the first few YEARS of depression in Japan the old folks were quite happy to see prices falling because their savings were safely tucked up in cash at the post office. Talk about "I'm alright Jack"!

Positive inflation is necessary (but insufficient) to "rebalance" the economy away from perpetual trade and investment deficit.

We can do it the hard way or the utterly horrible way, and it seems remarkably blunt for people who are sitting pretty at the top end of the wealth scale to be saying "screw you" to everyone else.

Anonymous said...

Whats more, most consumer products are manufactured in the far-east.
Higher demand for foreign products does not increase Britains wealth, we are spending our last savings (and getting into debt) to employ foreign workers while our own 'workers' sit on their hands. (or are employed in make work programs)

Its absolute madness.

This is completely different from the demand stimulus Keynes was talking about when Britain was the workshop of the world and the demand stimulus went straight into effectively subsidising our own factories.

Anonymous said...

What do you mean, who is saying screw you, BE?

It seems to me at the moment those people who have been sensible and under spent, lived wthin their means, saved money. Are being screwed over to funnel money to those with huge debts, and the vastly overpaid bankers and political class.

Electro-Kevin said...

Back to Mars Bars if I may.

When they reach £10 per unit perhaps the new advertising slogan should be: A Mars a day makes you work, work, work !

andrew said...

1
"* Why do some people insist that there is some God-given right for people who have stopped creating wealth to keep getting richer every year?"

This is an inevitable side effect of any system where you can exchange something you did not make for something else

2
"Let's face it, inflation hawks, there was a massive transfer of wealth from "the future" to those who got rich during the last thirty years. That future is now upon us.

Abolutely

(a) For whatever reason, that nice non-contributory DB pension that many of my slightly older colleagues have been accruing does not exist for all practical purposes for people my generation.
It has been noted that companies like BA are pension schemes with a small attached business.

(b) The growth in house prices has also served that generation rather well.
Anyone who bought a house before '85 has done rather well

(c) The growth in Equity prices between the 60s to early '00s has benefited their savings.

(d) Govt debt was ~50% of gdp in the 70s. Basically we have spent ~30% of gdp on ... not paying taxes?

(a) (b) and (d) are a direct intra-generational monetary shift (c) is debatable

Electro-Kevin said...

Definitely so, Andrew.

My father (an ex PC) and an uncle (an ex window dresser for Littlewoods) live like kings having retired early on good pensions, property booms and inheritance.

It is not unusual to find 'Baby Boomers' of fairly low achievement or rank (having taken no risks in life)living to standards way beyond our wildest expectations of retirement.

They didn't put this much into it.

So where is all the money coming from ?

Having said that - many pensioners are utterly brassic. In fact they are the only people who can truly be described as living in poverty in Britain today.

andrew said...

@ek

The trouble was/is that until the 60's poor people were sort of expected to work until they could not and then be looked after their families and then die.
A good number of pension schemes back then paid a lump sum to people who were paid weekly and a pension to people who were paid monthly.
It takes a very long time to get away from the underlying attitude that professional people should have a nice pension and working people should settle under a bush and quietly die.
If you worked in Government, or a large company, this is one of the big unnoticed social advances in the last 30 years, but not everyone benefited so there is still a lot of pensioner poverty - and we are moving backwards on this now.

I do not think anyone objects to someone getting double another persons pension if they are paid twice as much (or contributed twice as much), but -

Why do MPs and Judges get a much better quality of pension than Dustbin Men and Hospital Porters?

Jan said...

I don't think there is any intention to "unwind" the QE; sadly it's just an extreme can-kicking exercise well into the future.

CityUnslicker said...

Of course there is a demand problem. People have no money so there is no demand, inflation is pushing up prices, further reducing spending power and therefore demand.

Doing something to push up inflation in the hope of also sparking demand is very risky and perhaps ignores the lesson of the last two years; which is that consumer spending is not going to spike and get us out of this situation.

Simpler to admit the truth and face another large devaluation. Monetizing the current QE would be a radical step to achieve this, otherwise best case is 3 years of current zero growth and high inflation which will cut real debt by up to 20% as long as the govt controls spending.

Anonymous said...

Come on man this is nuts.

You all talk as if all demand were equal, but surely there is a big difference between demanding British made products from British workers, and demanding more foreign products on top of our already massive trade deficit.

I know in theory there is no difference to our globalist friends, but the reality is we are not on a level playing field and some countries are working to their own interest, not in the interest of the 'global' enconomy.


I don't believe in protectionism, I am just saying demanding more of what are foreign made products therefore draining the wealth of this country further is not the solution, rather its the problem.
I wouldn't try to stop this if I was in government, because I believe in freedom.
But I sure as hell wouldn't try to perpetuate it.

The market is giving us a signal, and at the moment we are trying to ignore the message.

If printing money tricks people into going out and buying things they can't really afford, that is just going to make the situation worse not better.

------------------

Simpler to admit the truth yes.
But why should the losses of private banks be dumped onto the public?

If the banks need to be nationalised so be it, but if that happens, the banks should be treated as bankrupt and the likes of Fred Goodwin should lose his pension etc etc.
And some of them put on trial.

I blame politicans more than bankers btw, but even so we can't keep paying millions to the biggest failures in the history of this country.

Laban said...

Labour, 2008. QE1 announced. Mervyn King says there won’t be inflation because of the ‘output gap’ – all those factories running two shifts when they could be running three. BoE Pension Fund moves all its assets into inflation-proofed bonds.

Sterling devalues by getting on for 30% (and the printed money goes into share and commodity prices). This raises inflation dramatically, because most of what we consume, especially commodities, is imported – those factories were non-existent divisions on the BoE map board. Wages are static, because mass immigration means it’s a buyers market for labour.

With prices rising and wages static, the only way to keep household consumption up is to send the wife out to work or spend on credit. But the wife’s been at work since 1989 – it was the only way you could afford the mortgage – and who’s going to increase their personal debts in this economic climate ?

So consumption falls. Working people are getting poorer at around 5% a year. There’s a small increase in manufacturing for export, but the balance of payments is still massively negative. Retailers suffer, the economy flat-lines.

OMG. The economy is not recovering! Inexplicable!

Conservative, 2011. QE2 announced. King, abandoning reality completely, says it’s because his magic crystal ball says inflation is going to fall dramatically. Sterling devalues (it’s dropped 10c against the dollar in a couple of days). This raises inflation again, because most of what we consume, especially commodities, is imported.

Wages are still static, because mass immigration is still at near-record levels despite the crisis.

So consumption falls again, as it must.

OMG. The economy is not recovering! Inexplicable! Time for QE3!

Rinse and repeat until UK real wages are at Chinese levels and pensioners are self-immolating in Parliament Square. Where's Fernand Bonnier de La Chapelle when we need him ?

hovis said...

cant believe Sentanec is right about much given he's have raised rates and had ita ll crashing down by now - and ifandwhen it comes the crash will affect the middle and the aspirant - the groups who are catalysts for ugly and bloody change throughout history.

Ryan said...

Mervyn King is DOING THE RIGHT THING!

We have more debt in the system than we have cash to pay off the debt. The systems is COMPLETELY BROKEN! Winge about that all you like (it's Gordon's fault anyway), but now we have to fix it. Mervyn is printing the money to pay off half the debt over the next 5 years. Maybe he will print all of it, who knows?

Got a mortgage? Good, it will look like peanuts in 5 years time as your wages rise roughly in line with inflation and the capital on your mortgage stays static.

Got savings? Well this time that nice man Mr King came on the telly to tell you he was printing cash (usually its politicians that do it and they like to keep things quiet). So he's warned you to get out of cash and into anything else that can't be printed. You're own fault if you keep your savings in cash in the bank.

Considering that a third of GDP has been injected into the economy the inflation caused has been pretty small - but that's because the debt bubble itself caused the inflation in respect of house prices already and we're just swapping the debt for cash. Oh and it helps that the £ is the third reserve currency of the globe.

Those bond prices at half the rate of inflation tell their own story. You may not like it but the markets are loving it. The UK has a plan. It may be a pretty shit situation but at least our plan makes us look wiser than the Germans.

Mervyn's a top man - he's bitten the bullet and is monetizing the debt just like every European country will be forced to do eventually. You may not like it but its far better than doing f*ck all. Remember he's only fixing a problem already caused by Labour with the only tool that's left.

Anonymous said...

"Mervyn is printing the money to pay off half the debt over the next 5 years."

Yes, but the point is, the wealth he is taking by counterfeiting is being taken from one group of people, different from the group of people who have the debts.

We are talking about a massive wealth transfer here.
The government has no right to do it.

The system is broken, the solution is for those people who made bad loans to lose their money, or at least some of it.

Anonymous said...

"inflation is pushing up prices, further reducing spending power and therefore demand"

"inflation" is a general rise in the price level. You are saying "rising prices are pushing up prices" <- which makes f-all sense, sorry.

IF QE raises demand AND this only leads to higher prices, not higher output, we have massive supply-side issues. Unemployment should hold down wage rises until we get full employment.

Supply-side problems (VAT, oil shortages, regulation, lack of competition) cannot be fixed by monetary policy and to the extent they cause inflation, we are fucked unless the govt does something.

Anonymous said...

""inflation" is a general rise in the price level."

by one strange modern definition yes.

The old definition, 'inflation' was an expansion of the monetary base.

Expanding the money supply does cause rising prices.

Anonymous said...

You are loony, other Anon. The sentence:

"consumer demand, this is being hammered by inflation"

makes even less sense if you substitute "inflation" for "an increase in the size of the monetary base".

The size of the monetary base tripled in 2009. Was that a "300% inflation rate", which was "hammering demand"?