Britannia Radio

Contemplating this article I mused on my approach to it!  But then Dennis Cooper who has studied the figures on QE much more closely than I, made his comments and they are so interesting that  I am indebted to him for :-----

“I tend to agree with the headline, but not with the conclusion towards the end that "so far, quantitative easing has not worked".

 

Conway still loyally refuses to acknowledge the real "plain truth", which is that the primary objective of QE has always been to make sure the government wouldn't run out of money to pay its bills. If that had happened, there would have been severe economic and also electoral consequences.

 

But by creating £120 billion of new money to buy, and then sequester or quarantine, previously issued gilts - ie taking roughly one sixth of all the gilts in issue out of the hands of private investors and so out of circulation - the Bank has helped the Treasury to borrow about £64 billion by selling new gilts to private investors who might otherwise have gone on strike.

 

Whatever has happened to the other £56 billion - whether it's gone abroad, or it's on deposit, or it's been used to buy other assets, or it's been lent to borrowers in the UK - is of secondary importance, compared to the imperative, primary, task of making sure that the government didn't run out of money, and in that respect QE has worked exactly as intended.”

However, the main stated intention of QE was to soak up illiquid commercial paper but in fact a mere 2.4% of all the money poured out has gone to this end 

So QE has worked - for the government but not for Britain.  Since it piles up debts which future generations must pay off it should not continue.  For if if one is in a debt hole, stop digging.    Conway or Reece - whichever - is wrong.  

Christina

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28.7.09

The UK economy is still too sick to throw away its QE prescription

Officially the Bank of England's quantitative easing programme still has at least another week and a bit to run, although to judge from the behaviour of the gilt markets and the comments of economists, you'd be forgiven for thinking the bold move is all but over.

 

[The Telegraph cannot make up its mind WHO the author of this is.  ONLINE it says Edmund Conway but in the paper it is credited to Damian Reece and is in City Comment !!!   Though  it is consistent with Conway’s stance on QE. ] 

Gilt yields have risen ever further in recent weeks after the MPC minutes revealed a growing debate within the Bank about the grand monetary experiment, with the committee voting unanimously not to extend the scheme to the maximum £150bn in July.

The Bank of England has spent the vast majority of the £125bn it has assigned to buying a small number of corporate bonds and a large number of government ones.

As Charlie Bean, deputy governor of the Bank, has said repeatedly on his tour of the UK to explain the unusual monetary medicine, it may take as many as nine months to show its full effects. But so far the results have hardly been encouraging. The fact is that the vast majority of this money is being funnelled into banks' reserves – the cash they keep with the Bank of England – and is not finding its way out again.

According to data from the British Bankers' Association, the level of reserves held by major banks rose to £110bn in June, compared with £27bn before quantitative easing began. Indeed, a full 3pc of total banks' assets are now sitting in reserves – a proportion not seen since comparable records began in 1987.

What is alarming is that something very similar happened in Japan, when it experimented with quantitative easing. The Bank of Japan poured cash into the system but it was merely soaked up by the zombified banks, where those who managed them were too scared of losses, under-capitalisation and the threat of collapse to do anything other than put it under the figurative mattress.

It is still relatively early days, but the plain truth is that so far, quantitative easing has not worked: it has not lessened the credit crunch, as we can see from the row over bank lending rates; it has not stimulated the economy – that was done by the cuts in interest rates over the past year and the cut in VAT.

However, those who argue that these are good reasons simply to cancel the whole imbroglio are wrong. It was thanks in no small part to quantitative easing that sterling depreciated so dramatically over the past six months, something that has bolstered at least some sectors of the economy. Moreover, the fact that we are so far tracing Japan's experiences would suggest (given they underdid the cash infusion) that more, rather than less, quantitative easing is still needed.  [This is the argument through the ages of a losing gambler - “One more throw of the dice to win it all back” -cs] 

The credit crunch is far from over. Until it is, it would be unwise to rule out any more quantitative easing.