Quantitative Easing Explained

[Panda]

A few pointers, without sounding repetitive............

Wage inflation amongst the working classes, this is what they target, nowt else, i know inflation of costs are north of 5%, but this is not what they target, us/we are expected to swallow these costs or go without?

In my 30 years or so of working life, i have never had a wage settlement above 4% in one single year, and i was a good earner up until the mid 90's, since then my wages have been in decline relative to living costs.

Basically wages have been falling for the past 15 years, and i see that trend continuing, as it is.

We go on about inflation, but we hav had our inflation well us lucky ones. A house owned outright in 1998, valued at £100k, sold in 2008 for £300k , well in ten years a 200% profit, more than 12% per annum. So with that £300k earning 2.5% after tax in a bank account. Not bad, trying to retain the £300k in value relative to costs will be impossible for the next ten years, without riding a similar bubble or taking huge risks. What we are witnessing is a rebalance in the value of money relative to that profit of £200k. The initial £100k will be worth again £100k by the time they finish inflating one way or another......................

Edited November 20, 2010 by Panda

[Panda]

QE is paper shuffling from one side of the ledger, to the other. Anyone who claims that the UK version of QE directly causes inflation does not fully understand its’ mechanics. The determinedly ignorant claim that the British version of QE is simple ‘money printing’. It is not. The UK version of QE was designed to curtail the banks' ability to make money without bothering to lend to businesses and individuals. It didn't even achieve that because they still didn't lend. QE might have been put on hold for now but I imagine they will reach for it again at the first sign of stress, no matter what history tries to tell us. When they do, it still wont cause inflation and it still wont be 'money printing'.

[Panda]

You can see, attachment, quite scewed, really..........

[small_stakes]

QE is paper shuffling from one side of the ledger, to the other. Anyone who claims that the UK version of QE directly causes inflation does not fully understand its’ mechanics.

I think this is a shorter, more elegant version of what I was trying to say.

How is UK QE different to US QE? (in the sense that both involve central banks buying govt bonds, and announcing plans well in advance, allowing the big dogs to load up in advance).

The UK version of QE was designed to curtail the banks' ability to make money without bothering to lend to businesses and individuals. It didn't even achieve that because they still didn't lend.

Interesting - I would argue the direct opposite, that it was all about trying to make banks money via lowering long gilt rates, and the BoE didn't care about businesses and individuals. If the BoE *had* wanted banks to lend to businesses and individuals, then there would be other methods to achieve this (eg by a UK version of TARP in which the BoE took toxic waste off banks' balance sheets by buying mortgage/property/rubbish debt at par (*)). If I haven't used up my question quota on this thread, can you explain your point as well?

(*) Sorry edited to explain that obviously BoE buying toxic waste would aid bank lending because it would reduce their FSA PRR (position risk requirement) and CRR (counterparty risk requirement) by the amount of toxic waste removed, as well as giving the banks a windfall gain as they sold above a real market clearing price. So the banks would have £x bn risk weighted capital to deploy in lending to biz/individuals, as their capital base would increase and their risk weighted assets would decrease. QE is not the same as this TARP style approach in the US.

(I'm not sure my edit makes this post clearer).

Edited November 20, 2010 by small_stakes

[_w_]

What we are witnessing is a rebalance in the value of money relative to that profit of £200k.

'Rebalance' is the key word IMO. Asset markets need to fall relative to incomes. The only monetary stimulus that I imagine can trigger a rise in incomes (a.k.a. price of labour and companies' products and services) is rising costs, beginning with commodities IMO.

[_w_]

You can see, attachment, quite scewed, really..........

If you increase the quantity of money you will eventually cause rises in prices, history tells us it is unavoidable. RPI measures are interesting but they do not describe all the places where the money can go and raise prices: the last ten years are a perfect example, the BOE/banks have been pumping money like there was no tomorrow and the RPI barely moved, all the money moved towards the property market. And IMO, what the BOE did was exactly what the Fed did, and for the same reasons: attempt to generate inflation (although they will never tell you that).

Edited November 20, 2010 by _w_

[Panda]

I think this is a shorter, more elegant version of what I was trying to say.

How is UK QE different to US QE? (in the sense that both involve central banks buying govt bonds, and announcing plans well in advance, allowing the big dogs to load up in advance).

Interesting - I would argue the direct opposite, that it was all about trying to make banks money via lowering long gilt rates, and the BoE didn't care about businesses and individuals. If the BoE *had* wanted banks to lend to businesses and individuals, then there would be other methods to achieve this (eg by a UK version of TARP in which the BoE took toxic waste off banks' balance sheets at par). If I haven't used up my question quota on this thread, can you explain your point as well?

Without OE, banks could raise servicing costs of loans, without lending any further money, due to a lack of liquidity. So increasing margins witrhout lending new money, which would pull money out of the economy. QE offered liquidity, for new lending, but what have they done, built up their balance sheets by way of an inrease in capital through the creamed profit from the shuffle, of selling and buying assets to and from the BoE.

[small_stakes]

So instead Ben buys into the most liquid and sizeable asset market in the world: the treasury market knowing that the new money will end up flowing, in part, to other asset markets.

I agree with this ... but I still think they are doing it to repair banks' balance sheets and for no other reason (w/o getting into any conspiracy theories). Getting "good inflation" is a smokescreen IMO.

[small_stakes]

Without OE, banks could raise servicing costs of loans, without lending any further money, due to a lack of liquidity. So increasing margins witrhout lending new money, which would pull money out of the economy. QE offered liquidity, for new lending, but what have they done, built up their balance sheets by way of an inrease in capital through the creamed profit from the shuffle, of selling and buying assets to and from the BoE.

Ok, no further questions m'lud. I think that's pretty much my argument, except you are saying the BoE pushed through QE to strip away any excuses the banks may have for the fact they weren't doing new lending ... but that QE didn't work.

[Panda]

If you increase the quantity of money you will eventually cause rises in prices, history tells us it is unavoidable. RPI measures are interesting but they do not describe all the places where the money can go and raise prices: the last ten years are a perfect example, the BOE/banks have been pumping money like there was no tomorrow and the RPI barely moved, all the money moved towards the property market. And IMO, what the BOE did was exactly what the Fed did, and for the same reasons: attempt to generate inflation (although they will never tell you that).

This new money never went to enterprise, craeting new jobs, it went into speculation in property, and now into commodities. No one wants to work, just speculate to make profit...................

New business ventures struggle to borrow capital due to risk seen by the banks, the banks would rather chase a speculative bubble, hence rising unemployment, falling wages etc etc. We all want to get rich without getting out of our armchair.

Its like a self propelling motor, speculate to accumulate, how big can all the bubbles go, peak bubble in all bubbles ain't far away...........................POP

[_w_]

I agree with this ... but I still think they are doing it to repair banks' balance sheets and for no other reason (w/o getting into any conspiracy theories). Getting "good inflation" is a smokescreen IMO.

I don't think there is such thing as 'good inflation', that's another misleading smokescreen to bamboozle everyone.

Banks benefit from QE via: a general but temporary rise in asset prices (makes balance sheets look good), a temporary steepening of the yield curve (that lasts as long as the Fed buys the short end of the curve), by being the first recipients of the new money. Ultimately though, even though those temporary profits boosts help the banks, the core of the banks problems is that for more than a decade they've systematically lent money to people who can't pay it back. The size of the small boosts the Fed gives the bank is tiny compared to the real losses the banks face, Ireland is giving us a good example of this with talks of 80% (80%!!!) of the Irish banks' loans being duds.

The only way to save the banks is to make existing loans servicing affordable again: low rates help but even at zero it's not enough. The only other component of the equation left is to find a way to raise debtors' incomes so debtors don't default 'en masse'.

[_w_]

This new money never went to enterprise, craeting new jobs, it went into speculation in property, and now into commodities. No one wants to work, just speculate to make profit...................

New business ventures struggle to borrow capital due to risk seen by the banks, the banks would rather chase a speculative bubble, hence rising unemployment, falling wages etc etc. We all want to get rich without getting out of our armchair.

Its like a self propelling motor, speculate to accumulate, how big can all the bubbles go, peak bubble in all bubbles ain't far away...........................POP

That is the tragedy that this inflationary policy has caused, and we have barely begun to pay for this in lost jobs, quality of life, etc. I'm going on a tangent here but this is what the Germans despite all the criticism they've been subjected to of late, understood many years ago and why their economy is geared towards enriching Germany rather than impoverishing itself. To follow that path requires decades of hard work though, something our politicians are unable to achieve due to their lack of integrity and character.

Edited November 20, 2010 by _w_

[Panda]

The only other component of the equation left is to find a way to raise debtors' incomes so debtors don't default 'en masse'.

Ummmm nice thought, but we are at peak debt, should wages rise, well these will be offset by rising debt servicing costs through the increase in the cost of money via base rates going north.

We are at peak tax also, a small bit of me thinks we are at peak wage relative to debt levels servicing costs, and increase in the loop will help no one but the elite?

I just feel it took 40 years to get here, it ain't going anywhere quick? The next move for me is asset stripping by the rich, who know's................

[pandora's box]

The determinedly ignorant claim that the British version of QE is simple ‘money printing’. It is not.

QE is money printing for the banksters.

[_w_]

Ummmm nice thought, but we are at peak debt, should wages rise, well these will be offset by rising debt servicing costs through the increase in the cost of money via base rates going north.

Who said Mervyn was going to raise rates when inflation picked up? Oh yes, he did ...

Shame on you for falling for it. :-)

I just feel it took 40 years to get here, it ain't going anywhere quick? The next move for me is asset stripping by the rich, who know's................

Hasn't that already happened?

[A.steve]

I've done a lot of thinking about QE, and a fair bit of reading.

The one thing I can be certain about is that most people are confused about what the likely consequences will be.

QE is not the same as 'printing money' in the way that failed regimes do... as long as government borrowing is kept in check. If we assume that government borrowing remains constant (a big ask, I admit, but bear with me...) then QE, if implemented as documented, will remove high quality financial assets from the monetary system. The upshot of this is that banks will have less assets that they can easily dispose of (i.e. less assets with a clear price) and - if banks are constrained by the credibility of their solvency - this means banks need to be a LOT more cautious about risk.

An analogy: a century ago, we had a gold standard and we had bank runs when banks were perceived as having insufficient high quality assets to repay depositors. Today, without the gold standard, the high quality assets are mostly government debts and/or the very safest bands of structured debt... or cash. Systemically, the high quality monetary assets don't evaporate as debts are repaid and balance sheet shrunk. (A government bond will be owned by someone until it matures.) Conversely, cash (and here I'm not talking about notes and coins, but the cash that arises through QE) can be used to cancel debts such that no-one holds that money any longer... (because we have a flexible money supply regulated by commercial banks - and that money supply can grow or shrink depending upon net lending.)

If commercial banks are a lot more cautious about risk, then they will make fewer loans, and - with fewer loans - asset prices should decline.

On the surface, this outcome seems oddly the inverse of 'money printing' - but this is to ignore one key point: if the financial assets that are bought using QE are high quality and liquid, and only a fair price is paid (OK, this might be considered a big ask) then the cash is needed to replace the assets on the balance sheet on which the assets used to sit. Sure, this cash can then be dispersed more easily - but, if this cash is then used to pay down debts - rather than as a margin on which more borrowing is done - then it will simply disappear as balance sheets contract.

I think it entirely possible that we will see inflation - but I do not believe it will be caused by QE, if implemented as described by central banks. If governments over-borrow, that may lead to inflation... and we may see inflation in particular currencies in goods that are imported from countries which have had especially weak relative currencies in the past. If we care about inflation, we need to look at what governments are spending.

[small_stakes]

I, Ireland is giving us a good example of this with talks of 80% (80%!!!) of the Irish banks' loans being duds.

I know things are bad but didn't realise they were that bad ... do you have a link?

Anecdotalising, but an Irish mate of mine has just gone home after 3Y temping in the City ... no jobs in Dublin for him at the moment, but trying to patch up things with his missus. His house has gone down in value by EUR 500k (from 750k to 250k) while he was away ... he says it makes the divorce negotiations a bit easier because he's got b*gger all cash.

[easy2012]

The one thing I can be certain about is that most people are confused about what the likely consequences will be.

Oh yes... even Uncle Ben and Uncle King are confused about this. QE can cause inflation, or hyperinflation or deflation, it all depends where the money goes

and what people do with the newly printed money.

If the money just stays there are reserve and banks don't take advantage of them, nothing will happen.

If the banks now start exchanging their dollar/£ (i.e. selling the $/£) with other central banks for other currencies, then the currencies are driven down and you get all those

nasty commodity prices inflation

If banks now feel that they no longer gets sufficient income from the reserve at central banks and their operating cost is creeping up and they just *have* to make loans at any cost, then we have high inflation.

Ultimately, if people lost faith in the USD/GBP fiat currencies because of the QEing... then you get hyperinflation.

Personally I think these $600bn QE will not do very much at all. But if they continue with QE2, QE3 then we will have serious problem. Also, apparently QEed prosperity does not ever last - it has an effect of maybe 2 quarters, then tailed off and then crash.

[Bloo Loo]

Oh yes... even Uncle Ben and Uncle King are confused about this. QE can cause inflation, or hyperinflation or deflation, it all depends where the money goes

and what people do with the newly printed money.

If the money just stays there are reserve and banks don't take advantage of them, nothing will happen.

If the banks now start exchanging their dollar/£ (i.e. selling the $/£) with other central banks for other currencies, then the currencies are driven down and you get all those

nasty commodity prices inflation

If banks now feel that they no longer gets sufficient income from the reserve at central banks and their operating cost is creeping up and they just *have* to make loans at any cost, then we have high inflation.

Ultimately, if people lost faith in the USD/GBP fiat currencies because of the QEing... then you get hyperinflation.

Personally I think these $600bn QE will not do very much at all. But if they continue with QE2, QE3 then we will have serious problem. Also, apparently QEed prosperity does not ever last - it has an effect of maybe 2 quarters, then tailed off and then crash.

Nice to see A.Steve posting.

Merv states the whole idea of the QE he did was to raise asset prices.

He wasnt talking about houses, he was talking about the MBS, CDOs and other "instruments" that banks and Investors held and nobody wanted to buy.

But, he didnt buy these things in the main...he bought Government stocks second hand from the favoured Gilt market dealers.

These dealers took a cut.

He also undertook the SLS scheme, to "lend" to banks cash for the assets nobody A, wanted to buy and B, therefore could not be valued by the market. Because there now was a market for this stuff, ie the BoE, the banks could put a value on them...

the solution was supposed to be, and is touted as temporary in that the loans were time limited...we are approaching the first settlement dates....and the banks either have to pony up the cash back to the BoE, or, maybe they wont!!!

the SLS cash seems to have gone into the asset markets, stocks and shares and stuff, the QE seems to have gone to pay Government bills.

Now, this is inflationery, and the argument is that this inflation is set just right to balance the credit DEflation the banks have seen.

But the trouble with top power money, is that it can be levered up.....when the inflation comes, and it will, its this extra leverage in the system that will cause it.

So whats holding it all back....well, IRs are at record lows, savings are producing zip, and people are starting to fear for their incomes...both from having an income at all point of view, to the pincer of little or no increase, v rising costs of living.

Energy, transport and food are all rising much faster than inflation. I you survive on memory sticks and sofas, then your costs are going down.

QE was done 2 years ago....the inflation is arriving.

[Bloo Loo]

Just a small point. The SLS was run by the government. The BoE buying the gilts enabled the government to fund the sls.

so many schemes, so little time.

Special Liquidity Scheme

The Special Liquidity Scheme (SLS) was introduced in April 2008 to improve the liquidity position of the banking system by allowing banks and building societies to swap their high quality mortgage-backed and other securities for UK Treasury Bills for up to three years. The Scheme was designed to finance part of the overhang of illiquid assets on banks' balance sheets by exchanging them temporarily for more easily tradable assets.

The drawdown period for the SLS closed on 30 January 2009. For more information on use of the Scheme, see the Market Notice dated 3 February 2009 (16k) .

Although the drawdown window to access the SLS has closed, the Scheme will remain in place for three years, thereby providing participating institutions with continuing liquidity support and certainty.

Latest Information

• Market Notice: Summary of Changes to Collateral Haircuts in Official Operations (20k)

  25 September 2009

• Updated Market Notice: Special Liquidity Scheme (79k)

  25 September 2009

Information for Participants

• Market Notices
• Documentation
• Eligible Collateral

Edited November 21, 2010 by Bloo Loo

[scepticus]

- QE does add to the monetary mass; it adds to deposits (which also does add to bank reserves), thus increasing direct spending power in the economy

- QE is NOT a swap of financial instruments: it swaps financial instruments for money that people can use to spend in the economy. As Acting Man states, you can't go to a shop with a treasury bill and expect to have it accepted as payment. However if the Fed buys your bill then you can spend the money you get in return.

There is no significant difference spending wise between a bank deposit and a government bond. You can buy a sandwich with a government bond by changing it for base money which then gets given to the sandwich vendor. Likewise a bank deposit used to buy a sandwich is changed to base money, then given to the sandwich vendor via the sandwich vendors bank. The sandwich vendor then lends that back to his bank.

Both the bank deposit and government bond must be changed to base money before being used to buy anything.

Lastly, given that the guy with the bond presumably had the bond because he didn't want to spend his money, why would he suddenly change his mind and decide to spend it all because he now has a bank deposit rather than a bond? Either can quite easily be sold instantly - both are completely liquid.