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Telegraph: The Gloves Are Off, Qe Is Now Seen As An Aggressive Depreciation Tool

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Liam Halligan on more QE and depreciation

3...2...1.... BANG!

The gloves are off, QE is now seen as an aggressive depreciation tool

We live in a strange world. On Friday, data were released showing that during September alone the US economy lost a worrying 95,000 jobs. In response, Wall Street rallied.

By Liam Halligan

Published: 9:00PM BST 09 Oct 2010

Under normal circumstances, additional evidence that America's recovery remains anaemic, and unemployment is rising, would cause share prices to drop. But these are not normal circumstances. Instead of viewing the ongoing stagnation of the world's biggest economy as bad news, equity traders pushed the Dow Jones Index of leading US stocks above the 11,000 mark, to a five-month high.

The reason, of course, is that less than a month before key Congressional elections, President Obama is under heavy fire for his economic stewardship. The new numbers confirm that unemployment has remained above 9.5pc for 14 consecutive months – the longest stretch since the Second World War. America's House of Representatives, and possibly even the Senate, could soon be under Republican control. Were that to happen, Obama would look like a "one-term" President. That wasn't in the script.

The White House is now fully aware it's in trouble. As Wall Street denizens know well, that means the Federal Reserve will soon be ordered, once more, to crank up its virtual printing press. The Fed already has an unprecedented $2,350bn (£1,471bn) of assets on its balance sheet – including reams of government and corporate IOUs purchased with electronically-created credits. And rising joblessness means Obama's political problems just got deeper.

So more "quantitative easing", or QE, is now a done deal. In other words, equities are set to receive yet another state-sponsored "sugar rush". The banks, meanwhile, will be able to transfer still more dodgy loss-making mortgage-backed securities and other ill-judged non-performing loans from their own books and on to those of the long-suffering general public. That's the main reason stock markets just rallied. Traders are anticipating an upcoming

QE-boost for equities, as an increasingly desperate Obama takes steps to rescue his own depressed political share price.

It's not just America, of course. The Chancellor, George Osborne, has just given the green light to more UK money-printing as well. The Bank of England has already pumped £200bn of QE "funny money" into the economy before calling a halt in February. Last week, at its monthly meeting, the Bank resisted calls to restart QE. But with the Government now effectively looking for more, such resistance may soon be broken.

This time last year, the Conservatives took a brave stand on this issue, questioning the use of wildly expansionary monetary policy. In his 2009 party conference speech, David Cameron was pointedly lukewarm about QE. "Sometime soon, it will have to stop," he said. "Because in the end, printing money leads to inflation."

Back then, of course, Cameron was in opposition. Now he is running the country. Maybe the responsibility of high office is clouding thought processes among Tories' upper echelons. Or maybe not. The reality is, though, that Cameron's observation remains just as true today as it was before he entered Downing Street – if anything, even more so.

Consumer price inflation is at 3.1pc – way above the Bank's 2pc CPI target, as it has been for many months. There are clearly more price pressures in the pipeline. Barely noticed figures, also released on Friday, show that UK producer input inflation is now 9.5pc.

While the US has doubled its monetary base over the past 18 months, the UK's base money supply has tripled. That's right – UK base money is now three times bigger as a percentage of GDP than it was at the start of 2009. Given all that money-printing – sorry, QE – the danger is that inflation expectations take hold, and price pressures spin out of control.

For now, a lot of the UK's QE money remains "inert", and therefore not yet inflationary, seeing as the banking sector has so far refused to lend it on to firms and households – one reason the UK economy remains so weak. That will continue to be the case, in my view, until the banks have blackmailed the British Government into following America's "lead", and expanded QE to include the purchase of toxic corporate "assets" as well as Government bonds.

Eventually, though – and it may not take long – the huge expansion of the UK's base money supply will cause broader monetary aggregates to balloon as well, even if credit creation multiples remain relatively subdued. The QE money is out there and is almost impossible to withdraw. Once that money gets into circulation, and is leant against many times over, the UK could face "stagflation" – when high and rising inflation combines with an economic slump.

At the moment, none of these concerns seems to matter to anybody who is remotely in a position to directly influence events. For over the last few days, the tone of the inter-governmental debate about global economics has become terse and increasingly bad-tempered. At the annual meetings of the International Monetary Fund and the World Bank in Washington this weekend, ministers and officials were using language that truly hasn't been heard on the international

peacetime stage since the mid-1930s. The talk is of "aggressive trade barriers", "protectionist retaliation" and "currency wars".

Until very recently, QE was presented as an unfortunate but necessary policy to ward off deflation, while allowing more government borrowing and promoting lending via bank recapitalisation. This was the official rationale for money-printing as practised by many "advanced economies" in response to the "sub-prime", most notably the US and UK.

The gloves have since come off. QE is now being seen as a policy designed to weaken a country's domestic currency in order to make exports more competitive and lessen the real terms value of sovereign debts held by creditors overseas. Many Western economists are acting as if they're surprised this is the case. Some of us have been pointing to this tawdry reality for what seems like a very long time.

The race for cheaper currencies has only just begun. Last month, Japan intervened in the currency markets for the first time in six years. The US and UK, meanwhile, with QE2 now looming, look to be actively depreciating their currencies. This is the start of a trend that will dominate the world's $4 trillion-a-day foreign exchange market for years to come.

China, of course, is increasingly accused by the West of artificially depressing the value of the yuan. The large emerging nations, meanwhile, now explicitly point to Anglo-Saxon money-printing as a debt-reduction ploy. The danger is, of course, that semi-covert moves to depreciate become aggressive, jingoistic devaluations. That way lies great danger. It was such retaliatory "beggar-thy-neighbour" currency policy in the 1930s that brought the capital controls and sky-high trade barriers that sapped the life out of global commerce and sparked the Great Depression.

The emerging markets are growing much faster than the "advanced economies" – 6.4pc this year, compared to only 2.2pc in the West. That trend will continue for years to come. So it's highly likely the yuan, real, rouble and the rest of the "new" currencies will rise against the dollar and pound over the medium- to long-term. The West will ultimately get what it wants.

Between now and then, though, politicians will do enormous economic damage, and cause diplomatic turmoil, if they continue printing money and wading into currency markets in search of a favourable headline. But that's hardly likely to stop them. The only lesson of history, after all, is that we never learn the lessons of history.

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So far its not working too well for Japan. The Yen is rising as they do QE. Currenices are a complex thing to put it mildly. The US dollar actually rose through the QE 1.0, and has been falling since it ended.

Liquidity can make a currency more valuable. If you are in a far flung Peruvian village and you are the only one with a few US dollars, its not useful for commerce - hence valueless to you. But if lots of people in your village have dollars, it can be used for exchange out there.

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Forgive a bear of little brain, but does anyone else feel that the currency strength/weakness/manipulation debate is a bit of a red herring?

Surely the problem is that we (the west) have too much debt, both to ourselves and foreign nations. Since we appear unable to service it without dipping back into recession the only option available to us is to print money/debt to buy up worthless assets and support government spending. This action has the unfortunate side effect of weakening the currency.

To put it another way, wouldn't it be great if we could do this without weakening the currency? We would have the benefit of being able to borrow/print as much as we like with no inflationary effects on imported products.

I propose It is therefore disingenuous to suggest that we need to print money because our currency is too strong. More like, we need to print money, but lets tell everyone it's because the Chinese are villains with an under valued currency, and we need to race them to the bottom.

You might as well say, the British earn too much money... wouldn't it be better if we all worked for half as much. We would be more competitive! While true, I don't think it would necessarily be the great thing the pundits are suggesting.

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printing never works because it always has an immediate effect to the good...the first receivers are well off again... the last to get it, the people get the inflation with it.

course, this isnt about the people. its about votes and power.

the real solution is to let a few busted banks go to the wall...a few bonuses go unpaid.

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printing never works because it always has an immediate effect to the good...the first receivers are well off again... the last to get it, the people get the inflation with it.

The other effect is that the more you tell people you are going to debase/print, the more money will disappear overseas in search of 'safer' investments. You only have to look at commodity / foreign-equity prices to see where the money is fleeing to.

On your second point, I couldn't agree more. I would have loved to have seen as few more banks go bust, or possibly a global nationalisation of the entire banking system.

Alas, I fear we missed our chance.

Edited by libspero

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The other effect is that the more you tell people you are going to debase/print, the more money will disappear overseas in search of 'safer' investments. You only have to look at commodity / foreign-equity prices to see where the money is fleeing to.

On your second point, I couldn't agree more. I would have loved to have seen as few more banks go bust, or possibly a global nationalisation of the entire banking system.

Alas, I fear we missed our chance.

yes, I see what you mean by the fear effect...course, the other effect is that bankers, with cash and no-one to lend to will put the QE to good work propping up the stock markets.

Ive been unsure whether to cash in my bit over the last few weeks.

strong arguments for are the MBS issues in the US getting stronger by the day, against, as you say, the possibility of QE.

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Give the junkie more heroin to cure the heroin addiction, it really can't possible fail.

Hardly any of this money will reach the proles, the money is for the elite only.

And like heroin if you give enough it'll kill them.

They should build something useful that brings in a long term revenue, boosts the economy and helps people. 100Bn on council houses would be good!

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Forgive a bear of little brain, but does anyone else feel that the currency strength/weakness/manipulation debate is a bit of a red herring?

Surely the problem is that we (the west) have too much debt, both to ourselves and foreign nations. Since we appear unable to service it without dipping back into recession the only option available to us is to print money/debt to buy up worthless assets and support government spending. This action has the unfortunate side effect of weakening the currency.

To put it another way, wouldn't it be great if we could do this without weakening the currency? We would have the benefit of being able to borrow/print as much as we like with no inflationary effects on imported products.

I propose It is therefore disingenuous to suggest that we need to print money because our currency is too strong. More like, we need to print money, but lets tell everyone it's because the Chinese are villains with an under valued currency, and we need to race them to the bottom.

You might as well say, the British earn too much money... wouldn't it be better if we all worked for half as much. We would be more competitive! While true, I don't think it would necessarily be the great thing the pundits are suggesting.

+1

I think we should start printing money as fast as possible and spend it all on Chinese goods doubling our orders each month. We will see who gets bored first.

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They should build something useful that brings in a long term revenue, boosts the economy and helps people. 100Bn on council houses would be good!

But that would cause a house price crash. Can't be done in a country that relies on financial engineering and benefits.

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+1

I think we should start printing money as fast as possible and spend it all on Chinese goods doubling our orders each month. We will see who gets bored first.

Then the chinese can come here and buy up all the houses and offices and then brits can be tenants for life and money shipped to china on a monthly basis..

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And like heroin if you give enough it'll kill them.

They should build something useful that brings in a long term revenue, boosts the economy and helps people. 100Bn on council houses would be good!

Spot on.

If it's going to be done, do it in a way that provides a lasting asset, creates real employment and will help to contain the benefits bill.

This will mitigate any inflationary effect, as opposed to handing it over to global commodity speculators.

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The same Liam Halligan that used to tell us QE was the right thing to do and will aid the recovery. Speaks out his ****, doesn't know what he's talking about. I'm betting he read our comments, found this forum then just copied all of our points. Then again he wouldn't be the first news reporter to get his stories from here.

Noticed he mentions stagflation, I was one of the first people on this forum to call it. A few people mentioned the possiblity of it before me, but I was the first person to make a thread saying we will have stagflation and get people talking about it. At the time almost everyone said I was wrong and it would be deflation or inflation.

Edited by Saberu

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Does Beijing own the Telegraph?

Pure Chinese appeasement.

Shocking actually.

What would you propose.. trade/currency barriers with all emerging states?

Bit tricky for the west after we spent the last half century convincing the world how great free markets are.. :unsure:

Edited by libspero

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What would you propose.. trade/currency barriers with all emerging states?

Bit tricky for the west after we spent the last half century convincing the world how great free markets are.. :unsure:

The Chinese economy is heavily controlled, mainly (in fact almost exclusively) for the long term betterment of their economy. Free trade doesn;t come into it and certainly isnt being practised.

It is only idiot countries like this one that at the same time throw the doors open and let everything go.

Edited by OnlyMe

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The Chinese economy is heavily controlled, mainly (in fact almost exclusively) for the long term betterment of their economy. Free trade doesn;t come into it and certainly isnt being practised.

It is only idiot countries like this one that at the same time throw the doors open and let everything go.

How about the other BRIC countries? Even if China did stop making it's population work for lower rates than they deserve, what would stop currency flowing into other low cost countries?

Doesn't that still lead us down the path of trade barriers / protectionism?

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  • 245 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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