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This Whole Qe Thing Is A Huge Great Smokescreen

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I like this explanation. Any thoughts. ;)

http://www.housepricecrash.co.uk/newsblog/...ected-24286.php

3. mark wadsworth said...

This whole QE thing is a huge great smokescreen for very little. All that happens is the holder of a bond (a bit of paper with a number on in guaranteed by the government) and gets an electronic balance with the Bank of England instead (an electronic bit of paper with a number on it).

The only slight subtle impact is that the BoE is probably overpaying slightly, say by 2% or 3%. So the resulting increase in 'money supply' is about £3 billion or £4 billion, i.e. b-gger all in the grander scheme of things, it's about half as much as one year's overpaid Tax Credits or something.

5. mark wadsworth said...

LP, 'the state' has lots of different branches, like the Treasury, which encompasses The Bank of England and The Debt Management Office.

When they do QE, what happens, in practice is, on Tuesday, The DMO issues (say) £6 billion of gilts, to e.g. Commerical Bank, and on Thursday, The BoE buys up £6 billion of gilts from CB and gives them a credit balance with the BoE instead. (I have a friend who emails me the figures every couple of weeks, it's usually around £6 billion)

So on Monday, CB has £6 billion in deposits, with the Bank of England, let's say. On Tuesday it withdraws that money and gives to the DMO in exchange for a bit of paper saying "Government bond, redeemable 2019, interest 5%, payable semi-annually". CB then hangs on the bit of paper for two days. On Thursday, CB bank takes the piece of paper to the BoE and sells it to the BoE for £6 billion, and the BoE credits CB bank with £6 billion.

So by Friday, the bank is more or less in the same position as it was on Monday, give or take two days interest, minus transaction costs plus a small profit on the deal (as the BoE is overpaying slightly.

The BoE (left hand corridor of HM Treasury) has a computer than registers that it owes CB £6 billion (which is exactly the position as it was on Monday). BoE also has a bit of paper saying that the DMO owes it £6 billion.

Meanwhile, the boys and girls at the DMO are sitting in the right hand corridor and their computer tells them that they owe the BoE £6 billion.

But BoE and DMO are like two 'subsidiaries' of HM Treasury, which is in turn part of the State, they owe each other the £6 billion, which conveniently nets off to nil.

It's like you withdrawing £100 from your bank account with The Halifax and paying it into your wife's savings account with Lloyds. She feels richer, you feel poorer but taking your household as one economic unit, your overall wealth has not changed one bit. The overall wealth of the Lloyds Banking Group (incorporating Lloyds and the Halifax) has not changed one bit either.

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All of this is true, but what you are forgetting is that the Treasury is financing Govt spending with the money it raises from the market. Normally, this money would have been extracted from the economy by taxation and duties. As revenues have fallen the process means that this money is effectivly printed by the BoE instead.

Therefore, £125Bn of Govt spending is being financed by newly printed money.

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The missing link may be that the state as a whole is replacing reduced Velocity with new money. My hesitant opinion is that increases in capital adequacy requirements will mean that at least some of the reduction in velocity will be permanent.

This rests on my growing perception that FRB does not create new money of any type, but rather the perception of new money that increases the velocity of existing money. One might call this "para-money".

Anyway, I'm still struggling to work this into a workable model. If anyone cares you can find some of my previous musings on the off topic FRB thread.

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All of this is true, but what you are forgetting is that the Treasury is financing Govt spending with the money it raises from the market. Normally, this money would have been extracted from the economy by taxation and duties. As revenues have fallen the process means that this money is effectivly printed by the BoE instead.

Therefore, £125Bn of Govt spending is being financed by newly printed money.

Yes, spot on Timm. That is what happens.

I dont understand the charade of getting a commercial bank to buy the bonds for a couple of days. It would be simpler just to credit the DMO with the new cash directly.

Still adds up to pretty much the same thing though.

Still cant get over the size of this exercise. £125 billion, levered up by the banks means £1 trillion in new credit. And not a hint of inflation, and the pound has been rising on the foreign exchanges.

It really does underline to me the seriousness of this crisis, and that at least we have some people in the Treasury and the Bank of England who are prepared to be brave and do the right thing. The danger of this policy is of course if expectations suddenly change, and we revert to an inflationary mentality. Then we could have a big inflationary problem to deal with.

But when you have just faced a deflationary spiral in the face, inflation doesnt seem so bad.

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Yes, spot on Timm. That is what happens. I dont understand the charade of getting a commercial bank to buy the bonds for a couple of days. It would be simpler just to credit the DMO with the new cash directly.

The EU prevents that.

Still adds up to pretty much the same thing though. Still cant get over the size of this exercise. £125 billion, levered up by the banks means £1 trillion in new credit. And not a hint of inflation, and the pound has been rising on the foreign exchanges...

My take is that the amount that banks can lend against deposits will be reduced. Thus lending will be more constrained anyway. In fact, new money might be needed to plug the gaps caused by this retrenchment.

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only 2-3% overpaying seems surprising. I thought some of these debts were being auctioned off in the US before QE for something like 5 cents in the dollar, wouldnt think the value would be much different here.

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So on Monday, CB has £6 billion in deposits, with the Bank of England, let's say. On Tuesday it withdraws that money and gives to the DMO in exchange for a bit of paper saying "Government bond, redeemable 2019, interest 5%, payable semi-annually". CB then hangs on the bit of paper for two days. On Thursday, CB bank takes the piece of paper to the BoE and sells it to the BoE for £6 billion, and the BoE credits CB bank with £6 billion.

Why does the money that the commercial bank pays the DMO have to already sit in its account at the BoE? Why can't it bring in funds from elsewhere? Or doesn't that matter?

Peter.

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Any thoughts

This shows how easy it is to trick people with confusing terminology.

Here is the "subtle" effect of 150 billion in quantitative easing. There are around 25 million households in the UK, so £6000 per household. Say 50% of the UK are scroungers of one sort of another, living off the government. If you are in the "sucker", taxpaying half of population then you need to go out and earn an extra £6000 to keep up with the scroungers. Then, if you believe their promises, they plan to reverse the QE later, so that's another £6,000 you have to pay in taxes.

So, on average QE represents around £12,000 or six months indentured labour for each taxpaying household.

Pretty serious, and it's only just beginning...

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This shows how easy it is to trick people with confusing terminology.

Pretty serious, and it's only just beginning...

QE, is, or was, or will be the reason to take us down captain, the ZIRP policy, we had to, so to QE, its just an oppurtunity to allow the GovBank of Nationalisation to RE-Capitalise? Once or soon bank balance sheets can withstand normal rates then QE is gone, and Merv the Perv will say "oh no, inflation is coming lets get rates up to fight it yeh?"

Edited by Panda

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Monopoly money....would become legal tender if enough of us thought it was worth something. ;)

:o You mean it isn't?

but but this nice man told me it was as good as holding an asset!

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:o You mean it isn't?

but but this nice man told me it was as good as holding an asset!

But an asset only has monopoly value. ;)

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