The "wall Of Money": A Guide To Qe2

[The Masked Tulip]

US has deflation, we have inflation?

7. Has it caused inflation?

The UK is certainly seeing persistent above-target inflation, and the anti-QE critics predicted this. However the pro-QE people see this as entirely due to the VAT increases. The Bank of England is in a bit of a bind because of the conceit that it has to construct all its policies around is the inflation target. It has to say QE is just an extension of interest rate policy, with the aim of getting inflation within 1% either side of 2%. It has no target for growth, demand, money supply - only inflation. So this justification is wearing a bit thin - as inflation is on the high side of target. Much was made of the undershoot to inflation when QE was launched, in this explanatory document.

7a. However, in the USA there are warning signs of deflation. That's the qualitative difference between here and there. A certain double dip in the housing market, falling real incomes and inflation at around 1% - which is too low to sustain demand.

Some bank analysts believe the second downturn in the US housing market, with the threat of deflation, poor numbers in general etc has created a new pool of undeclared bad debts in the US banking system, totalling around $500bn. In addition, the long-postponed accounting for bad debt in the commercial property market has to happen at some point.

Both politically and economically there could never be a "second bail out" in the USA - the restructuring would have to look more like what happened when Yamaichi Securities went bust in 1997 - a state-controlled insolvency process for one or more banks. Or, of course, the Mother Of All Cathartic Moments, the enforced bank holiday of 6-9 March 1933 when Franklin Delano Roosevelt - one year into the Fed's quantitative easing spree - forced 2,000 US banks to close for good, followed by a massive injection of taxpayers' money into the surviving institutions (and of course their breakup using Glass-Steagall).

What we know from the 1930s is that QE was not enough: it had to be accompanied by massive restructuring of the finance system and in any case led to a beggar-thy-neighbour exit strategy, rival currency and trade blocs and an extended Depression for the countries that lost the exit battle because they clung to their old orthodoxies.

http://www.bbc.co.uk/blogs/newsnight/paulmason/2010/11/the_wall_of_money_a_guide_to_q.html#comments

[Fromage Frais]

That sounds possible since the dollar is the worlds reserve currency and used to buy oil etc etc.

You need dollars but you can take or leave pounds? If there is a currency war no doubt all those exporting countries are buying dollars and hoarding them to (try) force up its value.

Edited November 2, 2010 by Fromage Frais

[Pent Up]

Very interesting. Although inflation here is not 'on the high side of target' as the quote said but above target AND above the banks upper limit.

Also petrol prices have dropped. The VAT increase almost a year ago has fed through. The temporary factors are gone yet the inflation is still here.

With growth 1.1 and 0.8 over the last two quarters it seems to me that, despite what Merv says there is a distinctive LACK of spare capacity to absorb even a modest recovery.

All this and now there is another round of 'temporary factors' coming in two months time!

I've always said how can we have QE2 with inflation like this. I'd be amazed and shocked if they go ahead with it.

[Timm]

(...)

I've always said how can we have QE2 with inflation like this. I'd be amazed and shocked if they go ahead with it.

You are not alone.

Don't mean it won't happen...

http://www.actionfor...20101102125792/

Even though UK data recently has surprised on the upside, another round of quantitative easing is not off the table in our view.

BoE's QE2 will be larger surprise than the Fed's and will send the pound substantially weaker and UK yields towards all-time lows.

Some analysts have argued that recent weeks' encouraging data represent the "final nail in the coffin" for the likelihood that the Bank of England's (BoE) Monetary Policy Committee will expand the GBP200bn asset purchase programme when announcing rates on 4 November. Economic growth was surprisingly strong in Q3 according to the advance data (+0.8% q/q vs. +0.4% expected) and a leading survey showed that manufacturers enjoyed an unexpectedly good October (PMI rose from 53.5 to 54.9, the first rise since May). Positive was also that Standard & Poor's revised its outlook for the UK to "stable" from "negative". The fact that the house prices fell further and retail sales fell short of expectations was largely ignored in markets...

[but], just like the MPC targets inflation at 2% on the medium-term horizon and not the current inflation, it is the economic outlook on the medium-term horizon that counts. And since the outlook is pretty dreary, we can't see it is wise to wait until the downturn has actually materialised and it may be too late to turn the negative spiral.

We think the Fed's decision to adopt more monetary stimulus will affect the BoE in the same direction. This in contrast to the ECB that seems dedicated to its 'exit strategy'. However, the BoE faces some of the same serious threats as the Fed and has previously applied quantitative easing on a large scale...

The 4 November rate meeting decision is accompanied by the Inflation Report on 10 November. Usually, larger changes to monetary policy occur at rate decisions that are followed by an Inflation Report. Even though another round of quantitative easing has little to do with the inflation outlook, the report is an opportunity for the BoE to justify its actions and present its updated outlook.

We think it will have a huge market impact if the BoE increases its asset purchase target - much larger than if the Fed applies QE2. Most likely, it will lead to a dip in the yield on the 10-year note below its all-time low of 2.83% and send EUR/GBP towards its October-high around 0.89. We are humble in our call for additional asset purchases as it requires many members to be converted. This may be difficult with the buoyant data over the past week. Our call relies therefore on the Fed doing QE2 which can convince other MPC members to "see the light".

[Dorkins]

The idea that the Bank of England is working to do what's best for the wider economy is a polite fiction. It does what's best for the banks across the street from it. As long as the banksters have enough freshly printed cash to service their debts, the BoE couldn't care less what you are paying for a loaf of bread.

[Executive Sadman]

Very interesting. Although inflation here is not 'on the high side of target' as the quote said but above target AND above the banks upper limit.

Also petrol prices have dropped. The VAT increase almost a year ago has fed through. The temporary factors are gone yet the inflation is still here.

With growth 1.1 and 0.8 over the last two quarters it seems to me that, despite what Merv says there is a distinctive LACK of spare capacity to absorb even a modest recovery.

All this and now there is another round of 'temporary factors' coming in two months time!

I've always said how can we have QE2 with inflation like this. I'd be amazed and shocked if they go ahead with it.

Petrol prices

Jan 2009

86.6pplhttp://www.theaa.com/onlinenews/allaboutcars/fuel/2009/january2009.pdf

Now

117.7pplhttp://www.theaa.com/onlinenews/allaboutcars/fuel/2010/october2010.pdf

$147 a barrel peak in Jul 2008

119.5pplhttp://www.theaa.com/onlinenews/allaboutcars/fuel/2008/july2008.pdf

Gotta love that strong pound. Oil not much more than half its 2008 high, petrol costs as much as ever.

In the US, the average price is $2.76 a gallon, well below their 2008 high of $4.05 a gallon

Doesnt demand destruction start taking place at these levels, as families start spending considerably more on filling up the car (ie essentially sending money abroad) and less on everything else.

[General Congreve]

Doesnt demand destruction start taking place at these levels, as families start spending considerably more on filling up the car (ie essentially sending money abroad) and less on everything else.

Yep. And so it will be when VAT increases strip another 2.5% out of disposable income to go into 'dead' govt. debt repayment money.

The town I am in today is a disaster zone, the high street is littered with empty shops and offices and of the shops open that aren't charity shops, most are the big chain retailers who all have sales on, many of up to 70% off RRP. As for the 'shoppers', at least half have the 'benefits' look to them. Welcome to the future.

Edited November 2, 2010 by General Congreve

[General Congreve]

The idea that the Bank of England is working to do what's best for the wider economy is a polite fiction. It does what's best for the banks across the street from it. As long as the banksters have enough freshly printed cash to service their debts, the BoE couldn't care less what you are paying for a loaf of bread.

Although there is the price of one commodity they are silently panicking about! Let's see what their QE does for that. Go on boys, push the button!