TELEGRAPH 3.6.09
The Bank of England's medicine is not working
Posted By: Edmund Conway
Anyone who really believes the credit crisis is over; that the bull
market is back and that we are effectively back to the races may be
in for a shock. Yes, an unprecedented amount of monetary and fiscal
medicine has been thrown at the economy. Yes, economic growth may
have passed its nadir. But real signs of recovery? No, the medicine
is not working yet. Starting with quantitative easing.
QE - the process in which the Bank of England effectively prints
money and pumps it directly into the economy - was always going to be
a tough one to pull off. The Japanese tried it in the 1990s and any
evidence of success is hardly conclusive. And the earliest signs from
the UK's own experience are hardly any more encouraging.
Today the Bank of England released its mammoth monthly monetary and
financial stats book and a dig beneath the numbers uncovers some
rather alarming facts about the QE programme and its efficacy. The
first is that the so-called leakage of the cash overseas (we first
reported on this last month) is gathering pace.
Simply put, the way the Bank had intended to get the money into the
economy is as follows: it would like to buy as many gilts (government
bonds) as possible off UK pension funds and non-bank investors. With
this cash then burning a hole in their pockets, not to mention
bumping up banks' deposit accounts, the investors should go out and
spend it on equities and corporate debt. The credit crunch should
then abate and, voila, you've got your economic recovery.
Indeed, as the MPC said in the minutes to its March meeting ""The
Committee noted that these asset purchases were likely to be most
effective if they were purchased from the domestic non-bank financial
sector rather than from banks."
However, the Bank's figures reveal that, instead, the biggest net
sellers of gilts have been foreign investors. The Bank bought £13bn
of gilts in March and a stonking £31.5bn in April. Overseas investors
sold £17.9bn in those two months, compared with £8.8bn from the UK
non-bank sector. In other words, the Bank's printed money is going
into the "wrong" bank accounts. Now, although the amount of cash
flowing around the economy will be mechanically boosted by this
printed money, it is far less likely to trigger the domino effect (of
investors heading to the markets) that the Bank had hoped for.
As Michael Saunders of Citigroup says: "The economy seems to be
improving regardless of QE, rather than because of QE."
You may remember also that when QE was first announced the Bank said
it was hoping to increase the amount of cash flowing round the
economy (the broadest measure of which is something called M4.).
Here, too, we have hardly had many encouraging signs yet. M4 levels
in the non-financial side of the economy rose by only 0.1pc in April,
compared with the previous month. The year-on-year growth rate
dropped to a record low of 2.4pc. The long-run average we'd hope this
could come back to is 7-8pc.
It is rather alarming that even after the nuclear button has been
pressed, this key measure of the BoE's success is still deteriorating.
The one crumb of comfort is for those terrified about the impending
threat of Zimbabwe-style hyperinflation: with quantitative easing
still not working prices are hardly likely to get out of control.
[!!! -cs] The Japan-style scenario of sticky deflation still looks
like the larger long-term threat. At least for the time being.
Indeed, the Bank's figures showed that credit to the non-bank private
sector - in other words what we might call the "real economy" -
dropped by 0.1pc in April, the first monthly drop since data began in
1997.
Meanwhile, the level of unused sterling credit facilities for this
section of the economy dropped by 18.4pc in April - the sharpest
annual drop since data began in 1987.
This credit crunch ain't over yet. And more worryingly, the Bank's
drastic efforts may not even be working. Time to hope and pray the QE
programme starts yielding results, and fast
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