Wednesday 1 June 2022

Where now for Quantitative Easing and the Bank of England?

Many moons ago, I wrote an article, amongst the first in the UK in 2008/9 about the thought of the UK trying to loosen monetary policy via quantitative easing. It was something new to these islands and soon enough the Bank of England took it up. 

By expanding the balance sheet of the Bank, and therefore the Government for who m it is an independent subsidiary, lots of cash could be freed to replace the capital destroyed by the losses of the Financial Crash. This prevented deflation in the main and allowed the economy to recover. 

A known side effect, was to create the concept of "free money" for politicians to spend. When QE was put in place, the Micawberish George Osbourne was Chancellor. For all his faults, he was not going to go for this spending surge. 

Why is it free money? Well, the bank issues bonds, but also buys them back from the banks, allowing the banks to make a profit. It also then pays itself interest on its own bonds, sometimes also there is a capital profit if bonds rise in value. The money paid to the banks gets lent into the economy and so increases money supply - M4 as it is known technically. 

Now, in 2022, we have a big mess. After Covid hit, lots of money was used to pay furlough and the cost of the vaccines and general failures of the time. This money was borrowed via bonds and other instruments. This pushed huge amounts of cash into the economy, to stop it from collapsing under the burden of lockdowns. 

After the lockdowns we are now left with a situation of far too much money in the economy (which did not collapse, hooray), with little to spend it on as production is so hit by the pandemic dislocations and now the commodity price spike (which was coming whether war with Ukraine or not, as Mr Drew has repeatedly explained). 

The net effect of this is huge inflation, massive by modern day standards. The Government has responded by deciding to tax more (which does nothing to reduce inflation, the money is all spent again by the Government and more borrowed anyway) and spend more. The Bank of England is raising interest rates to try and cool demand - but demand is way up after the pandemic and external costs of energy and food are not controlled Bank of England interest rate rises.

So for now, too little is being done and although money supply has dropped back to the historic level, there is nothing to compensate for the 2020 splurge to 6x the normal rate. Inflation will be with us a while. 

In the meantime, direct Bank of England interest rate rises clobber borrowers and debtors - long used to ultra low rates. a 2% increase becomes a 200% increase in repayments when your base rate was 1%. Let alone moving rates up to say 5%. It will bugger the economy if they try it, they know this, so won't do it and will let inflation rip as a result, impoverishing us all. 

Which is why I am so perplexed at the refusal to just sell some bonds that they own, it will likely raise money for the Government, reduce the balance sheet and start to withdraw excess capital from the market that is no longer needed. It will have the same impact as raising interest rates, but hit the financial sector harder and consumer sector less. 

It would also unwind the position we are in now, where lots of MP's, stupider than ever as they are these days, see QE as a way to fund all their future spending fantasies that they need to win votes. After all, QE has not bankrupted the County in 12 years of operation and has allowed about an extra half a year of GDP spending during that time. 

Of course this is wrong, but not unwinding QE in 2015 onwards, as the economy returned to normal, we left far too much monetary stimulus in the economy so that when Covid hit it has proved a key cause of the rapid rise in inflation. QE, useful during a monetary crisis of 2008, is really bad during a fiscal crisis like 2022 because it is so inflationary just as Government needs to have an expansionary fiscal policy. 

None of this is rocket science r very difficult to understand, so I am at a loss as to why the Bank of England and the Treasury won't start fixing such obvious problems. 

17 comments:

Elby the Beserk said...

"The Government has responded by deciding to tax more (which does nothing to reduce inflation, the money is all spent again by the Government and more borrowed anyway) and spend more."

Tax and Spend. Isn't that the core policy of another party?

Caeser Hēméra said...

I would suggest you've answered your own question with this:

"It will have the same impact as raising interest rates, but hit the financial sector harder and consumer sector less"

Hitting the public at large is seen as less problematic.

Anonymous said...

Does *Modern Monetary Theory* help? Or is this the final nail in its coffin?

Puzzled, Peterborough

dearieme said...

"George Osbourne was Chancellor."

His surname has suffered a bit of inflation there.

Jan said...

Srry CU but your explanation of QE is not quite right. The BOE creates the money for the bonds which are issued by the Treasury. The bank buys the bonds with the created money and so the governmant has the cash which the BOE paid for the bonds. Then the government can go on a spending spree.

The coupons (interest) on the bonds goes to the BOE as they now own them and they generously give it back to the government after their own expenses (such as their RPI-linked pensions). So the government gets even more to spend. But if the government want to raise even more cash they either have to extract it from the population via taxes or ask the Treasury to issue more bonds.

There's a limit to the number of bonds they can issue as there have to be willing buyers. The BOE can't buy them all by creating even more pounds. If there are too many pounds in circulation the value of the currency would drop. If it drops too much we would be liable for even more inflation as our imports become more and more expensive.

Sobers said...

"A known side effect, was to create the concept of "free money" for politicians to spend."

Which is why QE should never have been allowed in the first place. Politicians cannot be trusted to self police themselves with a printing press.

Incidentally, where exactly is the BoE in all this? Why did they agree to more QE over Covid? Why didn't they say 'Sorry, this isn't a financial crash, printing money to spend on keeping everyone at home to avoid the sniffles is not within our remit. If you want hundreds of billions to spend, go and borrow it on the open markets'? Doesn't what happened with the Covid QE round just prove that Central Banks are independent in name only? The politicians said 'Jump!' and they all said 'How high?'. Where was their statutory duty to maintain the price level in the economy then?

Anonymous said...

Why are you blaming the nominally independent BofE and Treasury.

The First Lord of the Treasury is out there spaffing the cash like it was his. £150 to £1200 for households for energy bills. Why not give it as loan or grant to insulate rather than prop up the share price of energy companies.

He does love buying his friendships and votes.

E-K said...

Sobers @ 1.56

Without QE the population would have been far more pragmatic about the sniffles too. They would have demanded lockdown ended earlier - and the mask mandate.

The same stupid fuckers who went out walking in their Katherine Kitson hats, smiled and waved "This is how we BRITISH do a pandemic" as I drove past them seem to expect their airlines to be able to be switched on and off like a light bulb.

Now the bills are coming in and they are lethal. Not just in terms of suicide but in terms of health.

I have little sympathy.




dustybloke said...

Princess Nut-Nut doesn’t do economics! It’s for tradespeople donchaknow!

So Bunter is following the policies of rumpy’s hero Blair. Shaft the country good and proper while keeping the champers flowing and the rictus grin in place.

Sobers said...

"I have little sympathy."

Me neither. I didn't take the experimental gene therapy, sorry 'safe and effective' vaccine, caught covid (just like all the people who did take the vax), survived (4 days of a sore throat, ooh how life threatening) and now have a solid natural immunity to it. While all the vaxxed have f*cked their immune systems, and face catching it time after time, and playing blood clot Russian roulette if they keep taking the jabs. Anyone who believes politicians and the Deep State deserves everything they get.

Elby the Beserk said...

Sobers said...
"I have little sympathy."

Me neither. I didn't take the experimental gene therapy, sorry 'safe and effective' vaccine, caught covid (just like all the people who did take the vax)
10:26 pm
============================

Lils and I say Aye to that. Indeed, when Lils was in hospital in February. some unknown nurse turned up, apparently having had access to her medical records, and asked her

"Would you like the vaccination?"

Lils: "No thanks, I'm dying already..."

That shut nurse up.

Bodily autonomy is THE core human right. Without it, the state can do what the hell it want so to us. As we are now witnessing.

Anonymous said...

Sobers: "Anyone who believes politicians and the Deep State deserves everything they get."

Anyone to takes medial advie from a politician in preference to that of his GP ( althought the government oddly, made GPs unavaliable during the scamdemic ) deserves what they get.

I'm guessing ruining the economy is part of the WEF agenda, the morons think they can just pick up the pieces and put the bits back together, you know, 'build back better'.

I just don't know if Johnson is a willing stooge or an incompetent fool.

Either way, the !Tory party should remove him from his post.

Sobers said...

"Anyone to takes medial advie from a politician in preference to that of his GP ( althought the government oddly, made GPs unavaliable during the scamdemic ) deserves what they get."

You think GPs will give you unbiased advice on the vaccines? How quaint. The entire medical so called profession is a wholly owned subsidiary of Big Pharma nowadays, and of course in the UK is funded by the State to boot. Whose interests do you think they have in mind?

Anonymous said...

Sobers: "You think GPs will give you unbiased advice on the vaccines? How quaint."

No, I don't. In fact it came as no surprise to hear that a GP accquaintance was getting a bonus for every 'vaccinating'.

So, yes, I agree, they have all been bought.

But the point is, there was not even, so far as I can remember a hint that an individual should make a medical consultation before taking a medical intervention. The mass 'vaccination' program was entirely a political matter.

And now out of Australia, we seem to be seeing an elevated death rate among the 'vaccinated'.

I'm afraid, my attitude is, so sad, too bad.

Elby the Beserk said...

Anonymous said...
Sobers: "You think GPs will give you unbiased advice on the vaccines? How quaint."

And now out of Australia, we seem to be seeing an elevated death rate among the 'vaccinated'.

3:59 pm
=========================

And the only people still getting Covid are the multiply vaxxed. Gates and co. I know one unjabbed person who has had Covid in months, and were it not for Covid, it would have been treated as the common cold.

Our "health" system, already in a shocking state has been damaged beyond repair by Covid, and the government. That they now want to hand us over to the Chinese in the form of the WHO tells us all we need to know.

Anonymous said...

"The external costs of food and energy are not controlled (by) Bank of England rate rises." This is not entirely true. Interest rate rises would strengthen sterling, which in turn would make imports, including food and energy, cheaper for us to buy.

Of course, the fact that we have to import energy when we are sitting on more than sufficient amounts of gas, oil and coal is another story.

But a much more important fact is that the only way to cure inflation now is to raise interest rates and to reduce the money supply by stopping QE and "shrinking the balance sheet", as the US is now doing.

This would undoubtedly lead to a downturn in the overall economy, but the alternative of mass inflation is far worse. This is what we had to do in 1979-81. It worked then, and it would work again now.

And as Milton Friedman said at the time: "the longer you leave it to make the cure, the harder the cure is going to have to be."

Interest rates should have started going up last autumn. The Bank's MPC shirked their duty then, and should face up to their duty now.



Anonymous said...

Elby the Beseri: "I know one unjabbed person who has had Covid in months, and were it not for Covid, it would have been treated as the common cold."

So for the second time in four years, I wend down with what I'd call 'influenza', in bed for a week, cough, elevated temperature, extreme fatigue.

The interesting thing to me. I'm unvaxed, likewise my son, my wife, on the other hand is vaxxed and boosted + influenza shot for good measure.

We all went down with it over a three day period, the lad first, then the wife, then me. The interesting thing was, vaxxination status seemed to make no difference, the period of illness was about seven days for each of us.

Technically, it was COVID - lad and wife took PCR test, I said 'fuckit' if they've got +ve test result, what's the point of taking the test myself?

My little anecdotal data point, COVID vaccination status makes no difference to your susceptibility, nor duration or severity of the condition.

Confirming my admittedly pre-existing prejudice, the anti COVID vaccine was a hoax, and a financial gouging operation for 'big pharma'.

By the way, anyone else hear about the arrest of the head of a Spanish pharma company for paying for a false vaccination certificate?

Stephan Bancel, sold $400 million of Moderna stock ( one product ), at the top of the price ramp, anyone who bought at the same time, is now down 80%.