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RajD

Some Thoughts On Quantitative Easing

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I distinctly recall that before QE began, it was being portrayed in the media as a way of injecting money into small and medium-sized businesses that were struggling to acquire funds in the capital markets, while little mention was given at the time to the purchasing of gilts. Here are just two articles before QE began:

http://www.timesonline.co.uk/tol/money/inv...icle5579518.ece

Investors were last week given a powerful signal to buy corporate bonds when the Bank of England said it intended to buy billions of pounds worth of British company debt.

Fund managers said the Bank’s announcement of a £50 billion fund to buy company assets — including high-grade corporate bonds — would prop up a sector that has been hampered by fears of defaults as the recession deepens.

http://www.independent.co.uk/news/business...ts-1452399.html

The Bank of England will start buying up corporate bonds within weeks to unblock capital markets and free banks' balance sheets so that they can lend to support the economy, Mervyn King, the Bank's Governor, said last night.

The BOE has recently released a 'QE for dummies' pamphlet here:

http://www.bankofengland.co.uk/monetarypol...qe-pamphlet.pdf

On page 10 it states:

Direct injections of money into the economy, primarily by buying gilts,

can have a number of effects. The sellers of the assets have more money

so may go out and spend it. That will help to boost growth. Or they may

buy other assets instead, such as shares or company bonds. That will push

up the prices of those assets, making the people who own them, either

directly or through their pension funds, better off. So they may go out and

spend more. And higher asset prices mean lower yields, which brings down

the cost of borrowing for businesses and households. That should provide

a further boost to spending.

But institutional investors selling gilts may re-invest that money to overseas debt or top quality bonds from larger companies. Surely the more direct method of injecting money into the economy to help small/medium sized businesses would be to buy their corporate bonds directly.

The BOE's own web site states:

The Chancellor has authorised the Asset Purchase Facility to purchase up to £150 billion of assets. In recognition of the importance of supporting the flow of corporate credit, up to £50 billion of that figure can be used to purchase private sector assets. The timing and scale of asset purchases are for the MPC to decide. At its March meeting, the MPC decided that the Bank should buy £75 billion of assets in total. It is likely that most of this sum will be spent on gilts bought in the secondary market. Subsequently, the Committee decided at its meeting in May to finance a further £50 billion of asset purchases through the creation of central bank reserves. This would bring total asset purchases to be financed in this way to £125 billion. Most of this sum will be spent on gilts bought in the secondary market. The latest figure for asset purchases is available on the Asset Purchase Facility page in the Markets area of the website.

http://www.bankofengland.co.uk/monetarypolicy/qe/amount.htm

So I thought I'd investigate the total amount spent on corporate bonds vs gilts since QE was launched. The figures are:

Gilts £113,873mn

Commercial Paper £1,804mn

Corporate Bonds £900mn

http://www.bankofengland.co.uk/markets/apf/results.htm

So, of the £50 billion that the BOE could have directly injected into businesses, it has thus far injected only £3 billion! Clearly, the pursuance of QE has been to support the gilts market and not to inject money into the economy to support businesses, which is how it has been portrayed.

Edited by RajD

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Guest Daddy Bear
I distinctly recall that before QE began, it was being portrayed in the media as a way of injecting money into small and medium-sized businesses that were struggling to acquire funds in the capital markets, while little mention was given at the time to the purchasing of gilts. Here are just two articles before QE began:

http://www.timesonline.co.uk/tol/money/inv...icle5579518.ece

http://www.independent.co.uk/news/business...ts-1452399.html

The BOE has recently released a 'QE for dummies' pamphlet here:

http://www.bankofengland.co.uk/monetarypol...qe-pamphlet.pdf

On page 10 it states:

But institutional investors selling gilts may re-invest that money to overseas debt or top quality bonds from larger companies. Surely the more direct method of injecting money into the economy to help small/medium sized businesses would be to buy their corporate bonds directly.

The BOE's own web site states:

http://www.bankofengland.co.uk/monetarypolicy/qe/amount.htm

So I thought I'd investigate the total amount spent on corporate bonds vs gilts since QE was launched. The figures are:

Gilts £113,873mn

Commercial Paper £1,804mn

Corporate Bonds £900mn

http://www.bankofengland.co.uk/markets/apf/results.htm

So, of the £50 billion that the BOE could have directly injected into businesses, it has thus far injected only £3 billion! Clearly, the pursuance of QE has been to support the gilts market and not to inject money into the economy to support businesses, which is how it has been portrayed.

Clearly, the pursuance of QE has been to support the gilts market

got it in one............. :D

Edited by Daddy Bear

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Corporate bonds are sadly not liquid enough for the BoE to have bought them in large size - their corporate bond program has indeed been a failure.

I believe that there is another issue here, that of fear that the level of spare capacity and credit contraction in the economy would lead to deflation, which is a huge bugbear for central banks as it is far more persistent and corrosive than inflation. Part of the reasoning therefore will have been to keep inflation ticking along by increasing the money supply.

However I definitely agree that whatever the spin of the program, the actual effect has been to support the gilt market and assist the DMO in selling a record amount of gilt issuance. You might well stop and ask yourself where gilt yields would be had the BoE not bought £125bio of gilts over just 5 months.

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