By Chris Cook
Charlie Bean, the Bank of England's deputy governor for monetary policy, made a speech yesterday entitled “Quantitative easing: An interim report”.
Now here was me thinking that QE was a misguided attempt to get banks lending again. Not a bit of it apparently (my emphasis):
"Fortunately, increased bank lending is not necessary for Quantitative Easing to work. Indeed, it was precisely because the Monetary Policy Committee expected the additional monetary injection not to stimulate bank lending directly at the current juncture, that the Asset Purchase Facility’s purchases were targeted at assets held primarily by the non-bank private sector.
So if the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money. As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds.
Thus not only does the price of gilts rise as a consequence of the Asset Purchase Facility’s initial purchases, but also the prices of a whole spectrum of other assets. That in turn lowers the cost of non-bank finance and encourages increased corporate issuance. Also the rise in asset prices increases wealth and improves balance sheets. In this way, Quantitative Easing helps to work around the blockage created by a banking system that is still undergoing a process of balance sheet repair."
This is quite one of the most extraordinary and cynical admissions I have ever seen.
“...the rise in asset prices increases wealth...”?
Mr Bean conforms precisely to Oscar Wilde's definition of a cynic: he knows the price of everything, and the value of nothing. Have the earnings from these assets gone up? Errr, no. Has the price of these assets been indirectly bid up by credit manufactured out of thin air? Errr, yes! As an exercise in post-rationalisation of a failed policy this really takes some beating.
Firstly, it is an implicit admission by Bean that the original QE policy – which was widely understood to be getting banks to lend - is an abject failure. Anyone who understands the parlous financial position of the average UK individual and business knew it would be, and Bean states that the MPC knew all along, but obviously failed to share this fact with anyone else.
Secondly, he admits not only that there is a bubble in financial assets, but that to create one is the actual intention of the Bank of England – and presumably (?) - the Treasury.
As for ... a banking system that is still undergoing a process of balance sheet repair.....read:
“...pouring in virtually free money to the banking system while allowing Banks to ration credit by price at ludicrously inflated margins and associated costs.”
Maybe it will begin to dawn on someone capable of making decisions that this deficit-based monetary and fiscal system of ours is fundamentally and irretrievably broken, and that only systemic reform can fix it.
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QE is - like bank notes - undated, interest-free (although 0.5% is paid on reserve balances), Bank of England debt.
If the Government cuts back on its expenditure it reduces economic activity, cuts back on tax revenues further, and leads to a deadly spiral to depression. Moreover these cuts actually constitute the very Public sector sackings you refer to in Latvia, which is in any case a very different kettle of fish in view of the amount of their foreign debt, most of it in Euros.
What I would like to see is massive refinancing of public sector and quango debt - particularly PFI debt - into a new generation of Public Equity investment within legal frameworks based upon partnership, rather than trust or company law.
Such a debt/equity swap would free tens of billions in revenue, which would in turn fund hundreds of billions of new capital investment in public infrastructure. This could include massive investment in affordable housing and in renewable energy and energy savings, which is - literally - self funding once complete.
"As it is not very rewarding just to hold it on deposit, they are likely to look to put their money into other assets, including equities and corporate bonds."
Mr Bean's words, not mine.
I think that people are reluctant to sell when they think prices will continue to rise. There is an artificial bubble at the moment, orchestrated by investment banks, and supported by essentially artificial programme trading, generous doses of hype, and a few funds with QE money to spend from gilt sales to the BoE.
At some point the spell will be broken, because the earnings underlying all but a few financial stocks do not begin to justify current price levels.
When that happens - and it could be tomorrow or six months away - you can expect a tidal wave of selling.
The USA spent 250 billions on fighting Terrorism.
The USA lose on average 89 Americans people a year through Terrorism. They spent 5 Billion last year to eradicate this problem. In the USA 500,000 die every year from Coronary heart disease and the US Gov't spent .5 billion to eradicate the problem!!!!!!!
We have had one Goverment assisted Terrorist Attack in the UK which killed less than a 100 and now we are spending more money on stopping so called Terrorism than we do on educating our own population or health.
Go and watch the programme on www.the zeitgeistmovement.com and wake up to the evils of all of our Gov'ts and Politicians, Stop believing the lies and propoganda foisted on us.
They say the USA will not be able to pay the interest on its debts witin 10 years, when that happens the whole world will see that the recent crash is just a blip on the way to a crash that will consume us all.
We need to reconfigure the economy so that it is based directly upon the value of productive assets, and productive individuals.
I believe that is possible.
When the cost to produce a product increases the seller has to increase the price, which produces more Inflation.
Its a con foisted on us by the Worlds Central Banks.
I don't think that credit which stays locked up in assets is inflationary. But QE used in that respect - to replace private credit - does act against deflation, which in a debt-based economy is Public Enemy Number One.
On the other hand, credit/money that gets lent or spent - Zimbabwe style - into circulation is indeed potentially inflationary.
But investment flows, and hence exchange rates, are based upon the perception of investors, and from that point of view, QE could have an effect.
Inflation is essentially a statistic and during the Blair years shop prices were often said to be falling by financial pundits with statistical inflation caused by things like council tax.
If wages or another cost goes up then that is "inflationary", or it is if the entrepreneur wishes to keep the same level of profit.
But if an entrepreneur puts up his prices further above his costs because supply and demand is such that he can then the increased profit is not inflationary?
Bollocks. Of course it is.
It just doesn't fit the dominant narrative to say so.
The other thing that concerns me, is a number of people who seem to understand QE and its effects better than me, suggest we're going to have a bit of rampant inflation because of it.
I think that most people (I classify economists as a subset) fail to appreciate the crucial difference between:
(a) the credit = money necessary for the circulation of goods and services, and the creation of productive assets; and
(b) the credit = money tied up in productive assets, particularly the mortgage loans which constitute well over half the money ever created - but which is not in circulation.
"suggest we're going to have a bit of rampant inflation because of it."
In order to directly cause inflation, money must be spent or lent into circulation. Neither is likely, the former for mistaken ideological (common to New Labour, Liberals and Tories) reasons, and the latter because there simply are not enough creditworthy people, projects or enterprises around to whom to lend.
Inflation may indirectly be caused by a collapse of sterling, and a rise in import prices. The upside of a collapse in sterling is that our exports (such as they are) become more competitive.
We bailed out the bank and bankers , Its clear that we can not go back to crazy lending i think the has more to do with relinance on the city and banks .
How will printing money help? What are the risks? and is it the right policy?
ricki
QE is a bit like a transfusion given to a patient bleeding internally whose visible, external wounds have been addressed.
No conventional economist - such as Gordon Brown's advisers - knows how to operate to stop the internal bleeding, and Cameron, with a bunch of Austrian School and assorted headbanger/voodoo economists champing at the bit behind him, is essentially proposing to apply leeches to bleed the patient better.
So yes, printing money is necessary to avoid depression. The risk is that overseas investors pull the plug on UK assets and the pound collapses, leading to price inflation of those goods/commodities we source from overseas, while stimulating exports.
But I'm glad they didn't. The collapse of Lehman will be seen as the defining moment bringing to an end our current version of capitalism, I think.
As for the UK, I don't think that there was much else that could have been done within current ideology/ political economy.
As for any ideas to remedy this it is clear that the old values still continue and few are looking at a total revamp because I suggest vested interests in the City will not allow them.
If City intermediaries/middlemen such as banks wish to have a future, then it will be as service providers facilitating direct Peer to Peer economic interaction.
The ongoing revolution in the music industry - beginning with Napster - is just beginning to emerge in financial services, and in my view will form the basis of a new, and sustainable, global economic system.
I have a major post on the subject later today or tomorrow, with Alex's permission.
If you can't wait, here it is, hot off the press with the Asia Times adverts etc