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How Does Qe Work?

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Guest UK Debt Slave

Is it added to the national debt, is it debt free (don't be silly!) or is it a loan at a special interest rate?

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Guest UK Debt Slave
It is purely a "concept"

Fu-ck me- I'm Injin! :unsure:

:lol::lol::lol:

I'm curious about this because of the total failure of the gov and the BoE to explain how it works

I'm not surprised in the least of course but I still haven't read an explanation of how it works

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It remains unproven AFAIK. But it seems to be more a case of, give the rich a bit more time to dump their unwieldly assets than a long term economic solution to be honest. Draw it out. That's the policy, and righfully so what with an election coming up and all. Mind you, after the election, I doubt the terminology will be used again. A bit like "credit crunch". They hoped that would prevent the word "recession" from materialising, and in a way, it was quite succesful, the R word was put off for a good few months whilst people experimented with the term "credit crunch" and got used to it. Call me a cynic, but I don't particularly like the "blue sky thinking" mentality of trying to disguise things which are intrinsically bad, by giving them an alternative and supposedly catchy nomen. The processes which are underway are not different to how they played out for the previous instantiations throughout the past as far back as written history permits. Renaming the processes does not and cannot make them work any differently, and only possibly serve to conceal the true meaning of the process, which could amount to deception. But like I say, I'm a cynic.

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Guest KingCharles1st
:lol::lol::lol:

I'm curious about this because of the total failure of the gov and the BoE to explain how it works

I'm not surprised in the least of course but I still haven't read an explanation of how it works

Peston will be back from his hols soon, so he's sure to pop on and give you a few pointers.

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Guest Barebear
It remains unproven AFAIK. But it seems to be more a case of, give the rich a bit more time to dump their unwieldly assets than a long term economic solution to be honest. Draw it out. That's the policy, and righfully so what with an election coming up and all. Mind you, after the election, I doubt the terminology will be used again. A bit like "credit crunch". They hoped that would prevent the word "recession" from materialising, and in a way, it was quite succesful, the R word was put off for a good few months whilst people experimented with the term "credit crunch" and got used to it. Call me a cynic, but I don't particularly like the "blue sky thinking" mentality of trying to disguise things which are intrinsically bad, by giving them an alternative and supposedly catchy nomen. The processes which are underway are not different to how they played out for the previous instantiations throughout the past as far back as written history permits. Renaming the processes does not and cannot make them work any differently, and only possibly serve to conceal the true meaning of the process, which could amount to deception. But like I say, I'm a cynic.

Yeh so basically its a stalling process which enables owners not to be repo'ed,finance houses not to panickand call debts in,companies not to go under and so on,with the view that in the meantime taxes can be collected from a greater in numbers workforce than there would of been if they'd just let everyone go bust.

I suppose because of that the money is already being paid back through taxes collected and benefits not being paid out albeit it might take generations.

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Is it added to the national debt, is it debt free (don't be silly!) or is it a loan at a special interest rate?

It's not explained AFAIK, the new department spends the money buying up privately held government debt and corporate debt

but they can't talk about the reasoning or any details.

Edited by three pint princess

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Is it added to the national debt, is it debt free (don't be silly!) or is it a loan at a special interest rate?

A private sector person works hard to earn money. Meanwhile a legion of lesbian outreach workers, diversity officers and town planners are printing money and paying themselves a fortune for their questionable talents. All fine as long as the private sector suckers don't wise up.

Meanwhile, across town, a Gilt auction takes place. Poor chinese sweat-shop workers pool the meagre wages from their toil so that they can buy UK government bonds. On the other side of the room, behind a curtain, you can just hear the swish shwoomf of the printer over the stifled laughter of another bureaucrat. All fine as long as the Chinese don't wise up.

So, either the Chinese and the private sector are robbed blind, or it doesn't work and a bond strike / emigration of the private sector causes state failure.

I'm hoping for state failure, but they're not called the Sheeple for nothing...

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its very simple.

the goverment issues debt when it needs to spend money, if taxes arent enough to meet spending.

normally these bonds are bought by private investors , businesses or foreign investors.

with QE, the bank of england buys up all the goverment debt. the boe prints this money from nothing essentially just buying up the debt and placing it on its balance sheet (which deosnt need to balance with anything).

instead of the government owing money to investors it now owes the money to the boe.

but... the government doesnt need to pay money back to the boe.

surely that means the govenment is getting money from us, we get money from the boe and so the government doesnt need to pay anything back i hear you say?

indeed it is. the boe is printing money to clear the governments debts.

governments are not allowed by law to print their own money to pay for their debts.

so... the government borrows money off us, then the boe buys this debt from us using money it has created from thin air.

essentially its the same as the government printing money but done indirectly to get round the rules.

the boe can print as much money as it wants, there are no limits, they have nothing to balance. they can keep printing money till the cows come home.

Edited by mfp123

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It doesn't and each time it's been tried has led to hyperinflation and economic collapse. Ofcourse that's been when the fuzzy wuzzies done it (excluding Germany ofcourse), our glorious leaders are better than that honest.

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Is it added to the national debt, is it debt free (don't be silly!) or is it a loan at a special interest rate?

QE printed money is being used almost exclusively to buy government debt (government bonds or 'gilts') from banks and other holders of this debt (ie creditors of the goverment). Think of this much as you'd imagine buying shares in say, BP by placing an order through your broker. You are buying shares that already exist - ie have been issued previously. This is distinct from buying shares in a floatation, where the company looks to raise fresh funds by selling new shares to the market. We call this raising of new funds the primary market, whilst we refer to the subsequent trading on exchanges as the secondary market.

Hence you can see that QE operates in the seconadry gilts market in that it buys gilts already in circulation.

This avoids the embarassing spectacle of the government simply asking the BoE to print it up a big fresh wedge to pay for all the government programmes they can't fund from taxation or other creditors. This would be termed buying in the primary market.

Instead purchases in the secondary market give the illusion that the BoE is somehow recapitalising (injecting money into) the banking system / economy (taking gilts from banks and investors in exchange for readies). However, a large buyer in any market will reduce the supply and therefore allow the supplier to that market to shift more product in that market. Of course in regard to QE, the market is the gilts market, the product is gilts and the supplier is the government.

The net result is that government is able to issue more gilts. Gilts are government debt, hence all this debt appears on the government books as IOUs to be repaid. And yes, the BoE is one (now the biggest) of the creditors, seeing as it now holds this debt.

I suppose you might be wondering how the BoE, ostensibly a "government" institution, can become effectively a creditor to government? Well, it's simply a bank: the government usually uses it to market its debt issues to investors around the world, just like any investment bank might market corporate bonds to client investors. Often an investment bank will underwrite (agree to buy any bonds not taken up by the investors) an issue of debt to ensure the company raises sufficient funds to meet its operational needs. This occurs at the time of bond issuance and involves buying the newly issued bonds. That the BoE is not buying the new issues, but existing bonds is immaterial. The BoE is effectively underwriting government debt issue by reducing supplies of gilts in the secondary market.

Besides, there's nothing that odd about exchanging one form of IOU (gilt) for another - money (BoE debt). So you might also view this as a kind of TARP program, where poor quality assets are exchanged for better quality assets.

The essential aspect to grasp is that government is issuing debt and they need somebody to buy it. Under QE it is effectively the BoE. The more cynical amongst us will say that the BoE have to buy as nobody else will and then who will plug the government funding gap? Taxpayers? ahead of a general election? hardly!

So the upshot is:

1 ) the government can spend more;

2 ) creditors can lend more (this is the way QE is sold - ie as a means to increase bank lending);

I'll let you decide what aspect is uppermost in ministers minds.

And yes, it's nothing more than conjuring.

It's all rather reminiscent of post WW British soldiers paying off their German bank overdraughts with cheques drawn on their own German bank accounts.

Edited by Sledgehead

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Is it added to the national debt, is it debt free (don't be silly!) or is it a loan at a special interest rate?

QE doesn't stricty add to national debt, unless it is being used to buy government gilts.

Which it is. (indirectly)

So as far as I can tell it is a vehicle to facilitate government borrowing at a time when there would otherwise simply not be enough demand.

It is also being used to buy devalued assets from banks to help improve their balance sheets.

Over all it is just huge monetary inflation to counteract the debt that we would otherwise be unable to service.. not to be confused with price inflation.

Does that help?

Edit to add: see above.. much more comprehensive breakdown

Edited by libspero

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Quite a good explanation here:

http://en.wikipedia.org/wiki/Quantitative_easing

Basically the BoE is buying up the dud toxic assets from the banks, and paying for it with ... errr nothing.

The relieves pressure on the banks using open market operations.

The hope is that they will lend to home owners and small businesses etc The reality is they are blowing various bubbles on the stock market and in commodities to enrich themselves in order to pay large bonuses for a small elite.

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Basically the BoE is buying up the dud toxic assets from the banks,

Actually its being used almost exclusively to buy gilts ... okay, somebody is gonna say something like "just wait til we get hyperinflation, then there will be no difference!"

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QE printed money is being used almost exclusively to buy government debt (government bonds or 'gilts') from banks and other holders of this debt (ie creditors of the goverment). Think of this much as you'd imagine buying shares in say, BP by placing an order through your broker. You are buying shares that already exist - ie have been issued previously. This is distinct from buying shares in a floatation, where the company looks to raise fresh funds by selling new shares to the market. We call this raising of new funds the primary market, whilst we refer to the subsequent trading on exchanges as the secondary market.

Hence you can see that QE operates in the seconadry gilts market in that it buys gilts already in circulation.

This avoids the embarassing spectacle of the government simply asking the BoE to print it up a big fresh wedge to pay for all the government programmes they can't fund from taxation or other creditors. This would be termed buying in the primary market.

Instead purchases in the secondary market give the illusion that the BoE is somehow recapitalising (injecting money into) the banking system / economy (taking gilts from banks and investors in exchange for readies). However, a large buyer in any market will reduce the supply and therefore allow the supplier to that market to shift more product in that market. Of course in regard to QE, the market is the gilts market, the product is gilts and the supplier is the government.

The net result is that government is able to issue more gilts. Gilts are government debt, hence all this debt appears on the government books as IOUs to be repaid. And yes, the BoE is one (now the biggest) of the creditors, seeing as it now holds this debt.

I suppose you might be wondering how the BoE, ostensibly a "government" institution, can become effectively a creditor to government? Well, it's simply a bank: the government usually uses it to market its debt issues to investors around the world, just like any investment bank might market corporate bonds to client investors. Often an investment bank will underwrite (agree to buy any bonds not taken up by the investors) an issue of debt to ensure the company raises sufficient funds to meet its operational needs. This occurs at the time of bond issuance and involves buying the newly issued bonds. That the BoE is not buying the new issues, but existing bonds is immaterial. The BoE is effectively underwriting government debt issue by reducing supplies of gilts in the secondary market.

Besides, there's nothing that odd about exchanging one form of IOU (gilt) for another - money (BoE debt). So you might also view this as a kind of TARP program, where poor quality assets are exchanged for better quality assets.

The essential aspect to grasp is that government is issuing debt and they need somebody to buy it. Under QE it is effectively the BoE. The more cynical amongst us will say that the BoE have to buy as nobody else will and then who will plug the government funding gap? Taxpayers? ahead of a general election? hardly!

So the upshot is:

1 ) the government can spend more;

2 ) creditors can lend more (this is the way QE is sold - ie as a means to increase bank lending);

I'll let you decide what aspect is uppermost in ministers minds.

And yes, it's nothing more than conjuring.

It's all rather reminiscent of post WW British soldiers paying off their German bank overdraughts with cheques drawn on their own German bank accounts.

Good description! This pretty much matches with my understanding of it.

As for the bit I have put in bold, it begs the question why we don't always use QE for this - no interest needs paying.

In reference to another poster, why is creating debt free money against the law? Who does this benefit? Does anyone feel the need to pay bankers interest in exchange for IOUs which we can just as easily create ourselves? The system is daft and is clearly this way because the banking elite want it this way; it is not for our benefit.

We know the dangers of inflation. We know how to target inflation. Why would we ever let it get out of control? What benefit would this be to the economy? Why would a party remain in power who was doing this?

People need to wake up and realise that we can and should create our own money. We don't need private bankers to charge us interest on a promise of future productivity. It is completely nuts and is costing us all tens of billions in tax every year.

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Is it added to the national debt

That's a good question. I don't think it is - but the reasons seem dubious and archaic.

I do know that when the SLS was launched (the precursor to QE) there was quite a lot of hoop jumping to avoid the sums involved being added to gross government debt - which would breech international treaties such as Maastricht, which restricts gross government debt to 60% of GDP. As I remember, it was done by way of the debt issued having a maturity of 9 months - with 3 renewals assured... which kept maturity below a year - and (bizarrely, I thought) out of the statistics.

The question that I think most relevant today is what, exactly, is the national debt - and in what context should it be interpreted? On the surface, there's an intuitive notion that seems valid - but takes no account of anything that should be relevant... for example, what assets does the government own? What non-debt obligations have the government undertaken that result in similar expenditure to paying coupons - but aren't accounted as debts (for example, 'rent-back' on schools and hospitals.)

At the next level, I even question the sense in considering national debt relative to GDP... what relevance has GDP? Of course, I understand (roughly) what GDP comprises - but that's the problem. Why are those things the things that are deemed relevant to manageable government borrowing? Surely it matters if payments within the economy arise for reasons of capital or operating expense? Doesn't it matter who spends? (For example, spending by the fundamentally over-indebted must be included - in spite of effectively assured insolvency and bad debt.) Surely it matters who receives the money that is spent, too... for example, if the beneficiaries are domiciled in tax havens, the activity won't help the government repay its debt.

Not only do I find the statistics claimed to be the national debt to be of spurious relevance, I find GDP - the figure against which comparisons are made - at least as spurious too. In short, we seem to be measuring all the wrong concepts - and that's when we can pin down what the concepts actually are. For example, what honest reason could there be to focus on a balance of payments rather than a balance of trade in the context of domestic policy?

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...breech international treaties such as Maastricht, which restricts gross government debt to 60% of GDP.

Isn't it scheduled to exceed 60% GDP, even by the governments own figures? Will we be thrown out the EU :) ?

Can I repeat, but who actually is ending up with this QE cash? Is it in banks' reserves or is it for state spending ?

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I don't think the money actually ends up with anyone.

Everyone's balance sheet doesn't change, they just swap an asset (gilt) for money.

What changes is the overall ratio of narrow to broad money.

The buying of gilts and other bonds was just the mechanism to get the money into the

system. In itself the choice shouldn't have made too much difference to the price of

particular assets. However, they purchased nearly all gilts at a time the govt were selling

a lot of debt and it's not clear they could have otherwise been sold at low IRs

... and of course, there's no mention of reversing the QE and the impact this could have.

Edited by 57percent

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Yeah!!! But it is costing us (collectively all nations) our freedom as well by not only creating ever-increasing mountains of interest payments, but the political control those interest payments create.

This system will collapse. Until politicians are made to look at debt as THE major problem, we will continue to spiral into depression.

Good description! This pretty much matches with my understanding of it.

As for the bit I have put in bold, it begs the question why we don't always use QE for this - no interest needs paying.

In reference to another poster, why is creating debt free money against the law? Who does this benefit? Does anyone feel the need to pay bankers interest in exchange for IOUs which we can just as easily create ourselves? The system is daft and is clearly this way because the banking elite want it this way; it is not for our benefit.

We know the dangers of inflation. We know how to target inflation. Why would we ever let it get out of control? What benefit would this be to the economy? Why would a party remain in power who was doing this?

People need to wake up and realise that we can and should create our own money. We don't need private bankers to charge us interest on a promise of future productivity. It is completely nuts and is costing us all tens of billions in tax every year.

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Ditto with gdp - surely it is the profitability of output that is important not output itself.

I have had similar misgivings about the balance of trade. If your trade is more profitable than your trading partner's then your ability to service an even greater deficit is surely enhanced?

I'm not sure that 'profitability' is a meaningful concept in the context of a balance of trade... erm, unless - by profitability - you mean the difference between imports and exports. If the Banana-republic exports bananas and imports cars, who is to say if one is more valuable than the other? This question becomes more complex in the context of multiple currencies. With a shared currency, trade can be measured reasonably easily - with free floating currencies, combined with international capital flows, the whole situation becomes a lot more confusing. Naively, I used to be the sort of person who'd expect monetary transfers to balance... but researching securitised debt and foreign financing have dispelled that illusion. The value of currencies now seems to be a combination of perceived threat of default and interest rates... it seems almost entirely detached from ability to repay.

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So, if money is getting printed by the BoE to cover the Governments debt then what's all this talk about black holes in Public Sector Funds?, (politicianspeak for Tax hikes).

Surely the BoE can just print more money to cover all of these so-called deficits? And whilst they're at it, why don't they print more money to cover everyones NI and Income Tax contributions? This would effectively give everyone more disposable income every month, thus stimulate Consumer Spending on the High Street which is what I thought they wanted all along, isn't that why they cut the VAT rate to 15%?

Like that was gonna work! "we need to stimulate consumer spending so we're gonna take 2.5% less off consumers each time they buy something which isn't edible" what a load of B0110x! you don't give somebody more by taking less away if they have nothing to begin with! What a load of fvkin' morons!

But seriously, why don't they just print money to cover all these so-called deficits? People would be at least 25% richer if they abolished Income Tax and NI contributions, thus lessening the public resentment towards these money-grabbing, thick and totally corrupt B@$t@rds whilst stimulating the economy at the same time?

mspL4

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At the moment it's all still govt debt. The gilts sit in the BoE and when QE is reversed the money needs to be repaid to

the BoE and then destroyed.

The problem is that

- it's artificially increasing demand for govt debt, facilitating the madness and keeping the IRs lower

- it's possible they won't reverse the QE and instead monetise the govt debt. As they're already half way

there, it would simply be a matter of destroying the gilts and reducing the govt debt. This would permanently

more than double the narrow money supply and would be very inflationary.

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Is it added to the national debt, is it debt free (don't be silly!) or is it a loan at a special interest rate?

In technical terms, I think it works as follows:

1. BoE agrees a price for something (usually a previously issued government bond) with someone that wants to sell.

2. the seller delivers the bond to the BoE via its normal custodian (usually electronic settlement I would expect but there's probably still some physical paper being moved for older stuff).

3. the BoE credits the account held at the BoE itself of the relevant clearing bank being used by the custodian with the cash and, here's the relevant bit, <b>doesn't debit the government's normal cash account</b> and, instead, debits a special 'QE' account.

4. clearing bank transfers the cash to the bank account of the seller

The QE magic money doesn't form part of the national debt since it doesn't have to be repaid to a third party and doesn't attract interest but is, instead, a special sub-account of the governments normal overdraft facility.

An alternative way of looking at is that the government is simply being granted a huge, interest free, overdraft by the BoE created by crediting one account (the government's) but not debiting anyone else's.

A third way of looking at it is that the government has canceled interest payments on some bonds and made them perpetual at the same time.

A fourth interpretation is that the government stole the money off savers and gave it to borrowers to help them pay off their debts.

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