By Charlie Bean, Deputy Governor at the Bank of England was in Leeds at lunchtime today talking about the impact of quantitative easing. Not everyone’s idea of a lunch-break, I expect, but I was very impressed.
It’s now just over four months since the Government gave the Bank permission to start pursuing Quantitative Easing, which has already pumped £112bn in to the UK economy.
So, is it working? Charlie says yes.
It has helped push down the yield (interest rate) on Government and corporate bonds, so making the cost of raising money cheaper. It has increased cashflow in the economy, so going beyond just impacting the bond markets, and Charlie thinks it is beginning to have an impact on the credit conditions that businesses face – which have improved in the last few months.
But, as Charlie noted, actions taken by the Bank of England should not be looked at in isolation. They are part of a Government strategy to make sure this recession is as short and shallow as possible. As well as record low interest rates and QE, the Government has guaranteed bank lending, re-capitalised the banks, and used fiscal policy to support the economy.
And, unlike Bank of England governor, Charlie welcomed the budget deficits. It ‘makes sense’ to run the deficits we’re doing, Charlie said. Of course, they can’t be maintained in the long run, and that’s why Alistair Darling’s budget explains how the budget returns to balance. But right now they are helping to ensure that families and businesses are not left to fail because of the global recession. That should be welcomed, and it certainly is in places like Leeds West, where often families already struggle to make ends meet.
Charlie ended by saying that the decision on how to close the budget deficit was a political one. Either higher taxes or lower spending could be used, but that is a decision for the electorate. Well said Charlie. There will be a clear choice at the next election – tax generosity for the few with a cut in inheritance tax for the 3,000 richest families combined with deep cuts in public services, including schools and police, from the Tories, or necessary tax increases – like the 50% rate for top earners and a commitment to continue investing in public services for local people from Labour.
The recession is not over, but measures taken by the Government are beginning to bear fruit. Let’s not risk undoing that good work by putting Osborne at the helm of the Treasury.
Rachel Reeves is Labour's Parliamentary candidate for Leeds West. Read Rachel's PPC Profile.
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Gordon has ruled out spending less. Therefore, if he is as honest as he likes to portray himself, you'd think he'd level with the public and spell out the argument for tax increases.
P.S. The 50% tax on top earners won't even scratching the surface of the vast mountain of debt that we have to repay. Companies are also leaving the UK for lower tax countries, which will exacerbate the problem.
If you can't stand by what you write, then don't post it on a blog... simple really.
So did Chazza say that darling had shown how the budget would be balanced? or did you make that up, and bury it in quotes to make it look like it was a credible line, rather than a bare faced lie?
And do you believe that the (costed) removal of inheritance tax will be responsible for all the cuts that will be necessary? Do you really believe that removing that one cut will make it all balance? or are you spinning that line for your masters? and do you really know that cuts are needed to make up for the debts run up during a dozen years of gross financial mismanagement by your lord and master 'brown' and the labour party?
First, re. crowding out corporate borrowing. The BoE is (essentially) lending, not borrowing, so isn't it crowding in borrowing by making it cheaper? Also, even if buying gilts this is being done on secondary mkt so will be paying corporates for them improving their liquidity and encouraging investment in other assets.
Second, when did the Bank 'promise a 67:33 split of corporate to gilt purchases? See for example Tim Besley's speech http://www.bankofengland.co.uk/publications/speeches/2009/speech398.pdf for why that would not be possible.
Third, your comment about stoking up inflation is also at odds with international evidence - Japan would love a bit of inflation but despite QE has not achieved it, so although there is a risk of inflation if QE is not removed in a timely manner, it is certainly not inevitable, and the Bank seem to be giving a lot of attention to how to remove the stimulus - see Spencer Dale's comments on this, or MPC minutes.
Fourth, the evidence does suggest that credit conditions are now easing for businesses and that business confidence is picking up too. Mortgage lending and approvals are also picking up. Spreads are still to wide, but they have fallen from their peak and nominal rates for businesses/households are at historically low levels. But, lending rates bear more relation to longer-rates (one/five year etc) than the overnight rate, reflecting the time frames over which people borrow. Long rates have gone up in recent days and weeks as mkt participants think economy is looking stronger! So, fact rates are going up can be seen as a sign of strength as well.
Fifth, on fiscal position, it is clear that spending rounds will be tighter, and capital budgets especially are going to be tighter. My point was that their are different ways to face in to the challenge, and that is the electoral choice.
Gilts are the cornerstone of banking mortgage products, am I wrong?
"For this purpose, the Facility was authorised to purchase up to £150 billion of assets, of which up to £50 billion should be used to purchase private sector assets."
Now my maths suggests a 67:33 split, no?
Bank of England Asset Purchase Facility
However, the result has been quite the opposite on the private sector and homeowners (the UK as the dotted green line)
Real Private & Domestic Non-Financial Credit Growth
However, M4 money supply has been deliberately inflated which QE would do.
Broad Money Growth
In terms of inflation, the risk of inflation has already been created I would say. The point of QE from the BoE point of view was to stop CPI heading into a sustained period of deflation. As the inflation outlook is anything but deflationary from a number of economic forecasters including large institutions; what did QE seek to achieve?
With little to no private sector assets purchased, an inflation of M4 money back up to the bad old days and little to no credit take up from the private sector all points to a lot of money sloshing in the system.
I can see only one reason why; stoke up inflation and inflate government debt away.
You mention gilts, the inflation-proof paper of choice. Tell me, why are many of the institutional investors especially pension fund now seeking to place very large sums of money into gilts now? Surely if an economic recovery is only around the corner then gilts would be the last place to put your long term investments?
Certainly looking at any kind of long-term fixed rate; rates are heading into the 6% category even after pricing out risk.
Long term interest rates shifting up are the consequence of a desire to revert back to positive real interest rates as asset deflation MAY been seen as coming to an end. That is not an economic recovery of any sorts, more an end to the recession.
Just quickly...
Firstly, M4 is a broken measure (inflated by non-bank's that behave as banks - SPVs, etc) currently being reformed.
http://duncanseconomicblog.wordpress.com/2009/05/26/bank-of-england-to-reform-monetary-data/
As for:
"The point of QE from the BoE point of view was to stop CPI heading into a sustained period of deflation. As the inflation outlook is anything but deflationary from a number of economic forecasters including large institutions; what did QE seek to achieve?"
China, US, Japan, Eurozone, Thailand, Switzerland, Sweden actually in deflation now. IF QE has convinced forecasters that the threat is inflation -then it's a success. Credibly threatening higher inflation is the best way to beat deflation.
And the rest of my comment?
Whether M4 as a measure is broken or not according to its original design (which is widely based on conjecture), it shows a massive injection of liquidity with no home to go to.
Deflation was a government bogeyman of the government's own creation. Very few economic forecasters saw it as currency devaluation was a mechanism would keep inflation positive due to our trade imbalance by pricing up imports and making exports cheaper.
Perhaps you should also mention that QE has bought almost exclusively government debt when the BoE promised a 67:33 split of government and commercial paper. The result has been to crowd out commercial borrowing. Also, remember why QE was started, the spectre of deflation was all around us; which turned out to be totally bogus. No single country in the world has ever engaged in QE without stoking up unnecessary inflationary pressures; I fear the UK will not buck this trend.
So people on fixed income, pensioners and the unemployed are going to suffer the consequences of this policy.
Look at the price of mortgages as well, the differential of many tracker mortgage is now base + 2%, variable mortgages are base + 2.5% and fixed are running at base + 3.5% at the very least.
That all points to homeowners and businesses being unable to exploit the record low interest rates.
Wait until the QE taps are turned off and then see what happens; a number of notable economic experts are forecasting a second dip, the dreaded 'W' recession.
As for resolving the massive structural part of the deficit (thought to be as much as £90bn A YEAR) then cuts are inevitable. If anyone thinks that the population at large are going to endure huge tax increases without stifling any form of economic recovery; they are totally deluded.
I feel for the fine denizens of Leeds West at being so poorly served.
"There will be a clear choice at the next election blah blah blah blah blah" - try writing stuff other than what you get told to in an email from Thunderbird Central, it won't kill you.