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What, Exactly, Is Quantitative Easing


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Is there anyone here who can explain, clearly and accurately, what, exactly, Quantitive Easing is.

I hear people say it is the government 'printing money'. I hear others say it isn't. I hear some say it will have to be 'paid back'. Who to?

Please, no flip one line answers or smart-alec comments.

I'm sure I'm not the only person who doesn't really understand the mechanics of it.

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Is there anyone here who can explain, clearly and accurately, what, exactly, Quantitive Easing is.

I hear people say it is the government 'printing money'. I hear others say it isn't. I hear some say it will have to be 'paid back'. Who to?

Please, no flip one line answers or smart-alec comments.

I'm sure I'm not the only person who doesn't really understand the mechanics of it.

The BoE buys govt. bonds from private dealers, using money it has just created from nothing for that very purpose.

The BoE now has a vault full of govt. bonds, and there is a load more money swilling round the economy than there was before.

At some point down the line the BoE is meant to sell the bonds, recieving payment from dealers in £ sterling. Then the BoE is meant to "destroy" this money so we are back where we started.

1. How convenient that the UK government bond market is looking better than predicted - there seems to be more demand for bonds than everyone thought!

2. Hands up who thinks the bonds will really be sold back into the market for the full amount paid for them, and the proceeds destroyed by the BoE.

Some good analysis at http://www.cynicuseconomicus.blogspot.com

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The term quantitative easing describes an extreme form of monetary policy used to stimulate an economy where interest rates are either at, or close to, zero. Normally, a central bank stimulates the economy indirectly by lowering interest rates but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing.

In practical terms, the central bank purchases financial assets (mostly short-term), including government paper and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing). This process is called open market operations. The creation of this new money is supposed to seed the increase in the overall money supply through deposit multiplication by encouraging lending by these institutions and reducing the cost of borrowing, thereby stimulating the economy.[1] However, there is a risk that banks will still refuse to lend despite the increase in their deposits, and in a worst case scenario, possibly lead to hyperinflation.[1]

Quantitative easing is sometimes described as 'printing money', although the central bank actually creates it electronically 'out of nothing' by increasing the credit in its own bank account.

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

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From the future

Yours and mine to be precise

The magic of FRB in extremis

QE isn't nearly as inflationary as you think. The banks have swapped assets which are classed "as good as cash" by Basle capital requirement rules, for actual cash. It doesn't expand the balance sheet by some magical FRB multiplier. It's just £175Bn on top of the broad money supply.

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QE isn't nearly as inflationary as you think. The banks have swapped assets which are classed "as good as cash" by Basle capital requirement rules, for actual cash. It doesn't expand the balance sheet by some magical FRB multiplier. It's just £175Bn on top of the broad money supply.

The guy already said printy printy.

"Just" £175bn. :o

For now.

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Guest Steve Cook

QE isn't nearly as inflationary as you think. The banks have swapped assets which are classed "as good as cash" by Basle capital requirement rules, for actual cash. It doesn't expand the balance sheet by some magical FRB multiplier. It's just £175Bn on top of the broad money supply.

The global economy has contracted. I am not talking about the global money supply here. I am talking about the real stuff. Resources and the work that is done with them. Money is merely the ultimate abstract representation of those resources and the work that is done with them. Given the above, even if the money supply were to remain constant in this massively contracted economic environment, it would be significantly relatively inflationary.

Debt-default, faster debt-repayment and reduced take-up of debt may be seen as a form of organic self-regulation of the global FIAT money supply whereby it is brought back into equilibrium with the reduced economic requirement for it.

Holding it constant would be bad enough. Instead, it has been increased.

QE (in the current environment) isn't nearly as non-inflationary as you think.

Edited by Steve Cook
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Is there anyone here who can explain, clearly and accurately, what, exactly, Quantitive Easing is.

The BoE's Q2 Quarterly Bulletin had an article on Quantitative Easing (378K PDF). We may argue about the motives behind the policy, but this document explains the mechanics well IMO.

I'm still expecting the Bank to up the purchases by another £25bn (although I think they'll then quit, at least for a while). I've been viewing this through the lens of the gilts market, the rationale being that turning the QE tap off too abruptly may unsettle that market and return us quickly to the situation in the first quarter of this year where we had a number of very poor gilt auctions (including a failed one).

However, I'm in the minority and most analysts are expecting the BoE to call it a day and stop at £175bn. In case you missed it, Simon Ward of Henderson New Star makes a persuasive economic case as to why the BoE should end the policy:

Here's the opening paragraph, and the final one:

The recent slide in sterling began on the day the Bank of England announced a £50 billion expansion of its quantitative easing programme. The timing is unlikely to be coincidental. The Bank’s gilt-buying may be creating excess liquidity in the economy, helping to explain surging asset prices as well as the fall in the pound.

[...]

Calls for a further extension of gilt-buying in November based on weak broad money trends are misguided. It would be unfortunate if officials, having ignored the monetary dimension while the bubble inflated, now place overreliance on broad money numbers when a range of other evidence indicates loose policy. A further monetary boost would risk creating another boom-bust in asset prices and the economy. With sterling already on the ropes, it could also precipitate a full-scale currency crisis.

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I'm still expecting the Bank to up the purchases by another £25bn (although I think they'll then quit, at least for a while). I've been viewing this through the lens of the gilts market, the rationale being that turning the QE tap off too abruptly may unsettle that market and return us quickly to the situation in the first quarter of this year where we had a number of very poor gilt auctions (including a failed one).

I'm not so confident that they will stop , in that printing is almost as perfect as inflation for 'raising money' (and it causes inflation too which means you get robbed twice) , ie Gordo can print 200bn ie take a slice out of everybody's pockets with people barely noticing.

And when prices go up its always the seller of the product who is to blame rather than the trashing of the currency.

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Guest UK Debt Slave

[b]Is there anyone here who can explain, clearly and accurately, what, exactly, Quantitive Easing is.[/b]

I hear people say it is the government 'printing money'. I hear others say it isn't. I hear some say it will have to be 'paid back'. Who to?

Please, no flip one line answers or smart-alec comments.

I'm sure I'm not the only person who doesn't really understand the mechanics of it.

Oh! That's simple

It's

THEFT!!

Voila! Easy!

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Just explaining - the inflationist view is that the money multiplier means QE potentially creates trillions of extra broad money, which is a red herring. £175Bn is alot of money, but it's less than 10% of the money supply.

ten percent schmen percent.

before the year is out we'll all be needing wheelbarrows to carry the bales of cash we'll need to walk to our local newsagent to buy a paper.

or at least that's what daddy bear told me...

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There are two distinct cases of QE - when the seller of the Gilt is a bank, and when it is not.

The first case is the more straightforward - the bank swaps one asset (Gilt) for another (new M0 in its BoE account). The bank's capacity to lend into the economy is not affected (under Basel), it is its capacity/liquidity for inter-bank lending that is increased.

In the second case the (non-bank) seller of the Gilts acquires regular bank-credit money to spend into the general economy. The Gilt seller's bank takes on this liability (new M4) and is compensated by the BoE with equal new M0 (as in case 1). Thus the bank's balance sheet is expanded with equal and opposite asset and liability. M0 and M4 are both increased (M4 is technically increased twice because it contains M0?) and the process is inflationary.

I have read that such non-bank Gilt sellers are tending to buy corporate bonds with the proceeds.

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The BoE buys govt. bonds from private dealers, using money it has just created from nothing for that very purpose.

The BoE now has a vault full of govt. bonds, and there is a load more money swilling round the economy than there was before.

At some point down the line the BoE is meant to sell the bonds, recieving payment from dealers in £ sterling. Then the BoE is meant to "destroy" this money so we are back where we started.

Pretty nicely put but I never knew that in the future there was a govt promise to 'destroy' those new £s?

I'd like to ask the OP - does that make sense to you? If not we have to take it a coupla steps back & maybe start that tiresome discussion about whether currency exists in the first place.

Which of course it doesn't.

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The BoE buys govt. bonds from private dealers, using money it has just created from nothing for that very purpose.

Gah! Should have pointed out, they're buying back the valueless bonds that they themselves sold in the first place as "safe houses" for banking capital.

It's so vacuous.

In fact it's scary & the one thing to come out of this thing is that some of us have got our heads round this weirdly precarious global financial ******. Personally, I've joined an allotment scheme.

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Is there anyone here who can explain, clearly and accurately, what, exactly, Quantitive Easing is.

I hear people say it is the government 'printing money'. I hear others say it isn't. I hear some say it will have to be 'paid back'. Who to?

Please, no flip one line answers or smart-alec comments.

I'm sure I'm not the only person who doesn't really understand the mechanics of it.

Of course

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The global economy has contracted. I am not talking about the global money supply here. I am talking about the real stuff. Resources and the work that is done with them. Money is merely the ultimate abstract representation of those resources and the work that is done with them. Given the above, even if the money supply were to remain constant in this massively contracted economic environment, it would be significantly relatively inflationary.

Debt-default, faster debt-repayment and reduced take-up of debt may be seen as a form of organic self-regulation of the global FIAT money supply whereby it is brought back into equilibrium with the reduced economic requirement for it.

Holding it constant would be bad enough. Instead, it has been increased.

QE (in the current environment) isn't nearly as non-inflationary as you think.

You're absolutely right to point this out, but a recessionary environment is at least dis-inflationary, and at the extreme end is very deflationary. You're ignoring increased default rates and the paying down of debt.

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Guest Steve Cook

You're absolutely right to point this out, but a recessionary environment is at least dis-inflationary, and at the extreme end is very deflationary. You're ignoring increased default rates and the paying down of debt.

This particular recessionary environment we are currently experiencing is massively deflationary because of increased default rates, the paying down of debt and reduced take-up of debt.

It needs to be. No matter how painful in the short term.

The USA suffered massive deflation of the FIAT money supply in the 30s. They partially printed their way out of trouble. They got away with it because of their correct assumption of the possibility of future real-world economic growth that would give all of the new money a new home to go to. Eventually bringing the money supply back into equilibrium with the economic requirement for it.

This time it's very, very different. This time around, there will be no resumed growth. We have hit the limits of this planet's resources, at least in terms of the requirements of a global industrial civilisation of 6.5 billion humans and rising. Printing today is a form of borrowing from tommorow.

There is no tommorow.

The majority of humanity is going to get a lot poorer. All that QE policies will ensure is it that it is a poverty of pockets bulging with pieces of worthless paper.

Edited by Steve Cook
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There are two distinct cases of QE - when the seller of the Gilt is a bank, and when it is not.

The government auctions its guilt, offering say 1%. The banks buy them for cash. They are not happy with not having cash any more, so they take those guilts over to the BoE, who lends against them paying face value, interest free. The net result is the banks have the same cash they started with, plus an interest payment. They can then use that same cash at the next auction allowing them accumulate those interest payments. If they use that cash pool to buy and sell 12x a year they get 12% and still have the cash in hand. This mechanism is why the gilts auctions are always oversubscribed. The banks don't want to, and will not, hold the gilts, they offload them to the BoE. Alas we, the general public, are not allowed to play in this game. It is restricted to banks only.

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This particular recessionary environment we are currently experiencing is massively deflationary because of increased default rates, the paying down of debt and reduced take-up of debt.

It needs to be. No matter how painful in the short term.

The USA suffered massive deflation of the FIAT money supply in the 30s. They partially printed their way out of trouble. They got away with it because of their correct assumption of the possibility of future real-world economic growth that would give all of the new money a new home to go to. Eventually bringing the money supply back into equilibrium with the economic requirement for it.

This time it's very, very different. This time around, there will be no resumed growth. We have hit the limits of this planet's resources, at least in terms of the requirements of a global industrial civilisation of 6.5 billion humans and rising. Printing today is a form of borrowing from tommorow.

There is no tommorow.

The majority of humanity is going to get a lot poorer. All that QE policies will ensure is it that it is a poverty of pockets bulging with pieces of worthless paper.

Much of what you say is good, but flawed.

We can have massive growth if we focus on dumping oil as an energy source, both short and long term, and focus on energy efficiency. The problem is who is going to fund it when oil is still relatively cheap. Of course, we could allow out politicians to print the money and spend it on environmental projects.

Printing is not stealing from tomorrow, it's stealing from today's savers.

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  • 429 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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