Tuesday, Mar 03, 2009
It has to be effective It's our last chance.
Reuters: Q+A - What does quantitative easing mean?
WILL IT BE EFFECTIVE?
The policy was pursued by Japan at the start of this decade with little success. Still, analysts reckon it will provide a helpful boost to UK activity, although it is difficult to say at this point how quickly it will feed through to the wider economy and how much money will need to be created to have the desired effect of stimulating growth and preventing deflation.
Posted by devo @ 10:51 PM (1153 views) Add Comment
32 Comments
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1. devo said...
So how much money WILL need to be printed to have the desired effect of stimulating growth and preventing deflation?
My answer?
As much as it takes, of course!
2. paul said...
1. It almost certainly won't work as intended - after all, the track record of solving problems with this method is not good at all.
2. It really is Zimbabwean economics - there are quite a few journalists paid to say otherwise right now, but none of them give convincing arguments.
3. The case for using this technique is not proven - (I believe) we are about to find out that CPI inflation (that's the official measure) has just risen. Should it really be necessary to print money because houses are losing value? Because that's the only rationale that appears to be used.
4. Does anyone else get the impression that this is merely sowing the seeds of the next financial crisis (see 1)?
3. devo said...
2. paul said... It almost certainly won't work as intended.
Paul, what do you define as 'intended'?
If my definition 'to prevent a total financial meltdown' is used, it certainly will work..... for a time.
4. enuii said...
Anyway note the word 'helpful', if you are adrift in a small boat in the middle of the atlantic having and oar is helpful but does not solve your predicament! The amount of quantitative vaseline available will pale into insignificance when offered up to the gaping hole it is intended to lubricate and may in the long term cause more money to slide into the economic hole that is New Labour UK.
The law of unintended consequences also springs to mind, never mind the gentle beat of a butterflies wing this will end up being like the proverbial bull in a china shop.
5. devo said...
@enuii
The imagery of your first paragraph has caused me to shift uncomfortably in my seat. Perhaps I have an overactive imagination.
6. enuii said...
devo@5, I couldn't help myself once I'd thought up the term 'quantative vaseline' as a metaphor for the more duller term used by so called economists.
7. devo said...
Perhaps 'being shafted' could be used as a generic term.
8. paul said...
The intended outcome is to restabilize the economy. It almost certainly won't do this.
9. devo said...
8. paul said... The intended outcome is to restabilize the economy. It almost certainly won't do this
Isn't the economy already relatively stable on the receding tide of a global downturn?
10. inflation is eating my savings said...
I'm not sure one can call the Japan thing a total failure. They are still a big nation of shoppers- it is perhaps the narrow view to say it failed completely.
The problem is, you cannot do the control experiment- what will happen if there is no QE? My low level knowledge tells me that this was one of the things that the powers that be were slow to do in the 30s, which made the depression worse. If QE stop things going bust right left and centre, surely this mitigates negativity, and the knock-on effects may be in the positive direction, however mildly.
So the cash enters the system how? Public works, bank lending, both?
11. mark wadsworth said...
IIEMS, money enters the system via the BoE overpaying for existing assets and lending money directly to businesses and banks.
My analogy is like this:
... the credit bubble's collapse has left an enormous vacuum that is sucking up money as fast as it can, like a black hole in space, after which the money ceases to exist, like light that enters a black hole. People are all hanging on to cash as tightly as they can, or paying off their mortgages faster, rather than spending (with the inevitable results). QE (or indeed QV) is spraying out all these coins and notes which are just coming straight off the printing press and straight into the black hole. The only people who can hang on to the lovely notes flying around are the people who had no debts to start off with and so do not need to feed the black hole.
I also second everything that Paul said above.
12. devo said...
2. paul said... Should it really be necessary to print money because houses are losing value? Because that's the only rationale that appears to be used.
No Paul, that's the only rationale that's been stated. The true rationale is to prevent a sudden and shocking financial collapse, of the type that was narrowly averted in Autumn 2008.
13. sold out said...
Is it possible that some of this QE money will be used by Northern Rock to start offering 90% morgages again.
If they do then it could kick off more (limited)activity in the housing market.
This re-newed activity will of course be in a mega buyers market and therefore assist in an acceleration of the fall in house prices,maybe??
But can we trust Zanu-Labour with a policy of QE?
14. troy said...
The global financial system, built on endless supplies of cheap money, rampant speculation, fraud, greed, and delusion is terminally ill and will not be coaxed into remission by stimulus packages nor restored to health by government buyouts and bailouts
The Greatest Depression Under Way http://www.thetruthseeker.co.uk/article.asp?ID=10278
Gerald Celente – Economicrot March 3, 2009
Expect massive bank failures, runs on banks, and bank holidays. Even if deposits are FDIC insured, quick access to money is by no means assured. At minimum, have reserves on hand for emergencies.
15. bellwether said...
Can we have a ban on people mentioning Zimbabwe. I know some here equate it with insight but it's a lazy cliche and devoid of content.
16. Crunchy said...
Kindergarden economics, right up Gordon and Alistairs street. With a business one has to sort out route problems before just pumping more money in.
People have to ask themselves... Why are they printing fiat money that the taxpayer will have to repay with sweat money, yes real money.
The debt based economy constantly requires money growth.and they do not create the interest.
As I have said before UK is eating itself from within to preserve a system that will only end in complete collapse at some point, but hey, if you can just print money and get suckers to pay it back with real money you have a new economy.
If this was not so true this would be funny.
17. inbreda said...
"13. sold out said...
Is it possible that some of this QE money will be used by Northern Rock to start offering 90% morgages again."
possibly - but then 125% mortgages seemed ok when house prices were going up in value. It didn't seem like instant nequity, it seemed like an investment and a loan that the investment would repay. Free money basically. In a falling market peoples attitudes are very different. A 100%+ mortgage previously involved no "risk". Even a 90% mortgage will require a deposit of some sort (not many people have money for a deposit, and even less people want to lose that money by buying a depreciating asset).
So I find it highly unlikely that much activity will be generated. Perhaps people with mortgages at other banks that are now not offering the same LTVs will move to NR, but I doubt very much if it will encourage FTBs into the market.
18. sold out said...
bellwether said
"Can we have a ban on people mentioning Zimbabwe. I know some here equate it with insight but it's a lazy cliche and devoid of content."
you just said Zimbabwe yourself.Damn so did i.
Thats it we are both banned.
19. bellwether said...
It will be impossible to reinflate the housing bubble without a complete debasement of currency which is possible but which would also destroy the UK internationally - for good.
If you are assuming this why not just go the full hog and assume a complete structural breakdown of society or a world war. They are as likely and close to the same thing.
It actually p!sses me off that people have glibly posted this sh!te as if it is a matter of fact. If your life is geared to meltdown, if everything you do is predicated on that assumption then fine; post what you like, you've earned it. Otherwise a bit of effort and rigour please.
20. bellwether said...
Sold out - too true!
21. mark wadsworth said...
OK, in future we'll refer to The Former Southern Rhodesia.
22. hpwatcher said...
How long before they are printing, so as to get money to pay the Police, NHS and all other public sector workers...including the 10 million unemployed?
23. Chburke said...
Actually the analogy with Zimbabwe is quite accurate (I have some insight, half my family were white farmers there before being thrown out by Mugabe)
Lack of government respect for property rights, politicalisation of the civil service, empahises on presentation and grand principles rather than action topped off with a lack of understanding of basic cause and effect especially in economics.
I won't go on......
24. stillthinking said...
The problem with QE is that usually inflation is because demand exceeds supply and so producers lift their prices, and the reason why demand is high is because the amount of money available has increased, for example by taking on debt or even some demographic change. But QE attempts to force inflation (which represents healthy demand) by convincingly debasing the currency itself. Not the same as a rush of expenditure from savers against a fixed level of production.
The risk is that we won't have demand led inflation, we will just have inflation.
25. davecrash said...
hpwatcher@21 Your dead right. Once Gordon Brown gets his hands on the printing machine he won't be able to resist the urge to keep on using it to fund his spend spend spend policies. He will be saying come the general election next year 'Even at the hieght of a global financial crisis (that started in america) we have increase spending on education by 10%, health by 20%, there are 25% more police on the street etc', all the usual bull5hit that wins elections (only for once it will all be true).
26. bellwether said...
Mark you are one of the poster I find most difficult to place. Interesting to read and informed but often involved in threads that are themselves quite reactionary. I suspect you wouldn't describe yourself as apolitical. Is that right?
27. bellwether said...
To pick up on 22, I think the premise behind QE is that demand can be stimulated and inflation created that way. This doesn't work however because demand is a hugely psychological and once the situation is deflationary the psychology has irrevocably changed. People are hoarding and will do so until they feel safe, which will not happen for a long long time.
28. Dbc Reed said...
Quantitative easing seems to have worked quite well in 1932 when the National Government bought gilts to recapitalise banks and then set off a prodigious building boom (all those semis along the A3). Of course there was a lot of cheap land near London then.Either the Guv has to wait till land prices bottom out or threaten a Land Value Tax now to bring the drop on quickly.
29. mark wadsworth said...
@ Bellwether, I am not overtly political. I deal in facts, commonsense and logic. Any deductions and conclusions which flow therefrom may appear to be "political", that is a different topic.
30. james stephenson said...
bellwether,
as you find Zimbabwe so irritating, can we still use 'Wehrmacht'?
31. James Stephenson said...
Rising interest rates, rocketing unemployment, rising inflation.
They are either here already or coming soon - and the combination will be extremely painful.
Remember Yosser Hughes?
32. bellwether said...
Cheers Mark, dealing in facts, commonsense and logic is a fair if impossible objective.
Sorry about the questions but I'm interested in whether you are political because it helps me evaluate opinions. I tend to find that the contentedly disillusioned, having less assumptions, tend to be more accurate than the disillusioned but determined ie political.
Incidentally notice you have a blog. Will have a look at it.