Boe Qe Might Be Inflationary After All.

[Bloo Loo]

Point taken. It did occur to me after posting that you might have been talking more about the real value of QE rather than its face value.

Of course....the purchasing power of the QE is the same as the money in circulation....whats missing is a debt at the end of it, therefore, it has cost no-one anything to make it, all it does is dilute the value of current stocks...there is no new wealth to back up the new stock..thus, the value of all the money will fall.

[Redcellar]

Of course....the purchasing power of the QE is the same as the money in circulation....whats missing is a debt at the end of it, therefore, it has cost no-one anything to make it, all it does is dilute the value of current stocks...there is no new wealth to back up the new stock..thus, the value of all the money will fall.

No surely not. If that were true people on here would have seen it coming and said something

I truly wonder if these people 'in control' actually give a t0ss about the average person. They are so separated from it all. One could argue that their salaries should be the average for the UK, they should live in average houses with average lifestyles. Then see what choices they make and how productive they actually are.

[Traktion]

Shocker - Printing money causes inflation!!

Who are they trying to 'surprise' with this crap?

[billybong]

Output per hour worked has dropped by 3.9pc in a year, according to the Office for National Statistics, as employers keep hold of staff even as demand for their services shrinks.

So they've done everything possible to destroy employment security in the UK as well as making workers compete with people on jobseekers and incoming overseas workers as well as all the other stuff and now they want people to believe that employers are keeping hold of workers they consider to be unnecessary.

Pull the other one.

Edited January 4, 2013 by billybong

[Game_Over]

Indeed. The BoE is nothing but an unaccountable scapegoat for the incompetent economic decisions of this shower of sh1te we are told is a Government. A honest and accountable Government would be true to the people, sack the lot of them and take responsibility for their actions. That this situation has continued for as long as it has, shows we neither deserve the benefits of democracy, nor understand it's price.

Since the end of WW2 democracy in the West has largely involved politicians promising people more and more free stuff in order to buy their votes.

Where we are now is just the logical consequence of this process.

This has been the true price of democracy.

How does Democracy work when the only way forward is shrinking the size of the state?

[EUBanana]

Well blow me down with a feather, I'm stunned.

Printing billions of pounds causes inflation? Who'da thunk it?!?

...talk about being taken for a ride.

Edited January 5, 2013 by EUBanana

[DTMark]

The real issue won't be debt repayment, it will be dealing with the currency chaos that monetising the debt will ultimately cause. Well - that will be mainly an issue for the plebs, the elite will be well set up with their asset-based wealth. The real issue for them will be whether or not the societal unrest resulting from reaming the plebs will reach a level that threatens the stability of their long established socio-economic 'ecosystem' and hence threatens the continued existence of the system that benefits them so well.

+1 word-for-word.

[Bloo Loo]

Since the end of WW2 democracy in the West has largely involved politicians promising people more and more free stuff in order to buy their votes.

Where we are now is just the logical consequence of this process.

This has been the true price of democracy.

How does Democracy work when the only way forward is shrinking the size of the state?

Evidence this is correct when people, anyone says " The Government will pay for it".

[LiveinHope]

Evidence this is correct when people, anyone says " The Government will pay for it".

Have worked with a few late teens whose response to the question of what "job are you going to do after leaving school" is:

"I'm not going to get a job, that's what the government is for"

TBH, that view ts not their fault as they have no role models in their 'society' having been raised for all their life upon benefits

[Bloo Loo]

Have worked with a few late teens whose response to the question of what "job are you going to do after leaving school" is:

"I'm not going to get a job, that's what the government is for"

TBH, that view ts not their fault as they have no role models in their 'society' having been raised for all their life upon benefits

some would say this dependent attitude has been part of a master plan.

[Georgia O'Keeffe]

Have worked with a few late teens whose response to the question of what "job are you going to do after leaving school" is:

"I'm not going to get a job, that's what the government is for"

TBH, that view ts not their fault as they have no role models in their 'society' having been raised for all their life upon benefits

People are on the whole pretty rational in their decisions when it comes to income and on the whole pretty irrational when it comes to Capital (bullish at the top of markets when Capital is plentiful and saturation/overinvestment is prevelant / Bearish at the bottom when Capital and investment is as rare as Rocking horse Shat) - Economistics and govt (being people) tend to struggle with the complexity of this so apply poetic licence and simplify it by completely ignoring it for modelling purposes

Edited January 5, 2013 by Kandinski

[JaneTracy]

I note than an economist I follow was quick off the mark in pointing out that he has been saying this for over three years! This begs the question of what has been the Bank of England's motivation in doing what it has?

The Bank of England takes over 3 years to agree with me

Back in the early days of my blogging career I pointed out this in December 2009.

My belief is that the UK economy has shown a type of inflation inelasticity which has surprised virtually everyone and there is more to this than just QE. In the UK Gross Domestic Product has fallen from its peak by 6% and yet inflation is only 0.1% below its target. As we move into 2010 our inflation rate will exceed its target in the early months of the year.

So my opinion was that the UK had an inflation problem which QE was making worse. Our economy had then -and of course has continued to have – an inflation rate which is not only above its official target but also higher than our economic performance would suggest. A clear impact of this on our economy has been that this higher inflation combined with low increases in wages has meant that inflation has directly led to further economic weakness as it has caused the level of real wages to fall. We have found ourselves trapped in the opposite of a virtuous circle.

Step forwards to January 2013

The Bank of England has issued Discussion Paper 38

In the conclusion we are told this.

For instance, ignoring cross-sectional dependence would lead a researcher to believe mistakenly that recent weak UK output growth was entirely due to demand rather than permanent productivity shocks.

This matters because it has been Bank of England which has been arguing that UK “weak UK output growth was entirely due to demand” via the so-called output gap theory that I have been criticising for the past three years. So in my financial lexicon “a researcher” is now a euphemism for the whole UK Monetary Policy Committee.

http://www.mindfulmoney.co.uk/wp/shaun-richards/the-bank-of-england-finally-agrees-with-me-three-years-too-late-for-the-uk-economy/

What a sorry mess the Bank of England has created.

[crashmonitor]

I note than an economist I follow was quick off the mark in pointing out that he has been saying this for over three years! This begs the question of what has been the Bank of England's motivation in doing what it has?

http://www.mindfulmoney.co.uk/wp/shaun-richards/the-bank-of-england-finally-agrees-with-me-three-years-too-late-for-the-uk-economy/

What a sorry mess the Bank of England has created.

Inflation and relatively strong employment are also a result of the real economy actually growing excluding North Sea energy and Banking since 2007.

There was never a danger of deflation with the real economy holding up, and stimulus was always going to overshoot the CPI target by over 50%. Policy has been all about propping up the banks and the housing market.

[Game_Over]

Inflation and relatively strong employment are also a result of the real economy actually growing excluding North Sea energy and Banking since 2007.

There was never a danger of deflation with the real economy holding up, and stimulus was always going to overshoot the CPI target by over 50%. Policy has been all about propping up the banks and the housing market.

If you take out increased Government spending and debt

and increased personal debt

I doubt the 'real' economy has grown for decades

However, you don't need growth to get inflation

hence the term Stagflation.

You can generate inflation at any time in any economy simply by printing money

demand has absolutely stuff all to do with it

IMHO

[crashmonitor]

If you take out increased Government spending and debt

and increased personal debt

I doubt the 'real' economy has grown for decades

However, you don't need growth to get inflation

hence the term Stagflation.

You can generate inflation at any time in any economy simply by printing money

demand has absolutely stuff all to do with it

IMHO

Not sure about personal debt, since that has stuck at about 1.4 trillion since 2007. Take your point on government debt though, easy to spend money that has to be repaid later and not necessarily by you, or by devaluing savings when as a Tory mogul your are invested in non paper assets.

Edited January 5, 2013 by crashmonitor

[Harry Sacks]

[LiveinHope]

Thanks

[Gigantic Purple Slug]

Too late, their little (big) fraud is already unravelling.

http://www.telegraph.co.uk/finance/financialcrisis/9779784/Investors-shun-UK-debt-as-borrowing-costs-climb-above-France.html

Investors shun UK debt as borrowing costs climb above France

Britain's borrowing costs have climbed above France's for the first time in almost 20 months, as investors favoured the ailing Gallic economy over the UK's AAA rated deb

My guess is that the markets are slowly coming round to the idea that the euro will not be allowed to fail. How the respective balance between countries will be made is yet to be determined, but it will probably be spread across a range of options.

In the end there will probably be little difference between policy the US, Europe, UK and Japan. Major differences probably include things like europes recent attempts on the periphery to get its budgets under control. Over a short timescale this may lead to stress, but over a longer timescale this could lead to europe being in a much better fiscal state than the US/Japan in 10-20 years time. In some ways the crisis of politics that exists in the UK/Japan/US (buying the electorate) cannot be done in Europe because the governments are not buying off their electorates effectively with their own money, but with someone elses ... the relatively fragmented EU position could become a strength rather than a weakness ?

Where does this leave the UK, a comparative micro economy - I wonder.

[punter]

Now have had a quick full skim read of the BoE paper, it is obvious that some QE was needed to provide demand stimulus, but the efficiency of QE is very questionable. The timing of the SLS programme (which they didn't look at) seems to have been useful in stabilising demand (stopping it fall further) with QE may be only the first £50bn seems to be highly effective at providing demand stimulation, with efficiency rapidly declining after £75bn mark.

No QE was needed. You cannot print money out of thin air. It devalues the currency, undermines productivity, screws savers and is a path to the road to ruin. If printing money was good for an economy then Zimbabwe would be the richest country on earth.

We need to stop this stupid thinking now and repeal legal tender laws so that the BOE's pound can sink like the Zimbabwe dollar while the rest of us can use real money

[Mikhail Liebenstein]

Well blow me down with a feather, I'm stunned.

Printing billions of pounds causes inflation? Who'da thunk it?!?

...talk about being taken for a ride.

"In our next report MoD admits war can be bloody"

[punter]

Robert Mugabe agree's with the Bank of England:

QE Works!

Everyone in Zimbabwe is a trillionaire because of it:

The Bank of England should continue taking economic advice from Zimbabwe and PRINT our way to prosperity!!

[Bland Unsight]

Not sure about personal debt, since that has stuck at about 1.4 trillion since 2007. Take your point on government debt though, easy to spend money that has to be repaid later and not necessarily by you, or by devaluing savings when as a Tory mogul your are invested in non paper assets.

This point cannot be emphasized enough.

Source: Bank of England interactive database

And as about £1.2 trillion of the £1.4 trillion is Council of Mortgage Lenders' mortgages, this graph is the reason why we will definitely not see nationwide aggregate HPI return until the banks have absorbed the colossal losses that are out there waiting on them. No doubt the Northern Rock loan book was the worst of the worst, but I sincerely doubt that they had the monopoly on high loan to value, self-certified, interest only mortgages secured on houses booked at bubble prices. The losses, like the nominal crash in London, are just out there waiting on us.

Lending growth has ended, despite a 0.5% base rate, despite quantitative easing driving down bank funding costs and hence mortgage interest rates.

Funding for lending is now being used to drive down personal loan rates and the interest rates on other forms of unsecured lending, but I really think that it won't work, because people either cannot service the debt that they already have or are using whatever disposable income they do have to pay down debt whilst rates are cheap, because they worry, correctly, about what might be waiting for us in the not too distant future.

Most importantly the debt binge that led to the previous growth rates in private debt was the result of the madness and delusions of crowds on the part of the sheeple (with the encouragement and complicity of the government and the financial sector). Together they conspired to run HPI so hard for so long that it has now essentially choked off the supply of new entrants to the Ponzi scheme.

Inflating the bubble required a very large proportion of the population to ignore what was rational and all run in the same direction gorging on debt, assuming that house prices would rise forever. It was near enough a force of nature - the nature of sheeple to be optimistic and gullible, the nature of bankers to seek profits today and to let tomorrow worry about tomorrow, and the nature of our elected politicians to rationalise whatever it takes to get them elected. Compared to that, the present shennanigans from the Bank and Treasury -. ZIRP, QE, Funding for lending, SMI, New Buy - the whole lot together are irritating but, as the graph shows, they are just pissing into the wind. Most importantly, we are no longer all running in the same direction. We are about to start fighting over the allocation of the losses and determining who will really have benefited from this period of insanity that has now passed, and determining who will suffer the greatest hardship as a result. A house divided against itself cannot stand. I was listening to the talking heads on Radio 4 arguing the toss about changes to benefits. That's what the puppet theatre is concerned about. There is no over arching narrative weighing up the advantages of inflation against its costs.

To defend these house prices would require collective endeavour, but there is no consensus to support that endeavour and there is no consensus because to support these prices the young must be gouged and the old will have to lose their incomes to defend the prices of their assets. I do not think that it is necessary to defend these prices in order to defend the banks; they know how to ride out a bust. These prices will not be defended.

[Panda]

This point cannot be emphasized enough.

Source: Bank of England interactive database

And as about £1.2 trillion of the £1.4 trillion is Council of Mortgage Lenders' mortgages, this graph is the reason why we will definitely not see nationwide aggregate HPI return until the banks have absorbed the colossal losses that are out there waiting on them. No doubt the Northern Rock loan book was the worst of the worst, but I sincerely doubt that they had the monopoly on high loan to value, self-certified, interest only mortgages secured on houses booked at bubble prices. The losses, like the nominal crash in London, are just out there waiting on us.

Lending growth has ended, despite a 0.5% base rate, despite quantitative easing driving down bank funding costs and hence mortgage interest rates.

Funding for lending is now being used to drive down personal loan rates and the interest rates on other forms of unsecured lending, but I really think that it won't work, because people either cannot service the debt that they already have or are using whatever disposable income they do have to pay down debt whilst rates are cheap, because they worry, correctly, about what might be waiting for us in the not too distant future.

Most importantly the debt binge that led to the previous growth rates in private debt was the result of the madness and delusions of crowds on the part of the sheeple (with the encouragement and complicity of the government and the financial sector). Together they conspired to run HPI so hard for so long that it has now essentially choked off the supply of new entrants to the Ponzi scheme.

Inflating the bubble required a very large proportion of the population to ignore what was rational and all run in the same direction gorging on debt, assuming that house prices would rise forever. It was near enough a force of nature - the nature of sheeple to be optimistic and gullible, the nature of bankers to seek profits today and to let tomorrow worry about tomorrow, and the nature of our elected politicians to rationalise whatever it takes to get them elected. Compared to that, the present shennanigans from the Bank and Treasury -. ZIRP, QE, Funding for lending, SMI, New Buy - the whole lot together are irritating but, as the graph shows, they are just pissing into the wind. Most importantly, we are no longer all running in the same direction. We are about to start fighting over the allocation of the losses and determining who will really have benefited from this period of insanity that has now passed, and determining who will suffer the greatest hardship as a result. A house divided against itself cannot stand. I was listening to the talking heads on Radio 4 arguing the toss about changes to benefits. That's what the puppet theatre is concerned about. There is no over arching narrative weighing up the advantages of inflation against its costs.

To defend these house prices would require collective endeavour, but there is no consensus to support that endeavour and there is no consensus because to support these prices the young must be gouged and the old will have to lose their incomes to defend the prices of their assets. I do not think that it is necessary to defend these prices in order to defend the banks; they know how to ride out a bust. These prices will not be defended.

Great post, very informative.......Can i ask, how do you think this will play out.....By this i mean, house prices until 2020, interest rates untill 2020, wage and cost inflation, the same period...

I ask, as i see it, we are at peak consumer/asset cost debt. Interest rates are at zero, negative relative to rising costs. What the consumers saves on debt servicing through low rates of interest, he or she loses out on rising essentials cost. Assets are falling relative to rising costs, but stagnant valuations, maybe small falls, but nothing exceptional. Wages now here is the key, poor empoyment outlook, stagnant wages, even falling relative to rising costs, savings the same as wages, maybe a 2% return at best, but falling in value relative to rising costs of essentials.

If wages picked up a tick, would interest rates rise? The trouble is as i see it, with a poor demand for goods and services, so poor employent prospects which leads to poor wage demands. We can at best tread water. Well until this huge mountain of debt is paid down, which will keep suffocating demand, which will keep employemnt prospects weak. It's as if we could be treading water for years and years, just to maintain the ponzi, and prevent an all out bust....Are we at the early years of Japan? If so, its going to be a long drawn out stagnant depression......

[giantbat]

This point cannot be emphasized enough.

Source: Bank of England interactive database

And as about £1.2 trillion of the £1.4 trillion is Council of Mortgage Lenders' mortgages, this graph is the reason why we will definitely not see nationwide aggregate HPI return until the banks have absorbed the colossal losses that are out there waiting on them. No doubt the Northern Rock loan book was the worst of the worst, but I sincerely doubt that they had the monopoly on high loan to value, self-certified, interest only mortgages secured on houses booked at bubble prices. The losses, like the nominal crash in London, are just out there waiting on us.

Lending growth has ended, despite a 0.5% base rate, despite quantitative easing driving down bank funding costs and hence mortgage interest rates.

Funding for lending is now being used to drive down personal loan rates and the interest rates on other forms of unsecured lending, but I really think that it won't work, because people either cannot service the debt that they already have or are using whatever disposable income they do have to pay down debt whilst rates are cheap, because they worry, correctly, about what might be waiting for us in the not too distant future.

Most importantly the debt binge that led to the previous growth rates in private debt was the result of the madness and delusions of crowds on the part of the sheeple (with the encouragement and complicity of the government and the financial sector). Together they conspired to run HPI so hard for so long that it has now essentially choked off the supply of new entrants to the Ponzi scheme.

Inflating the bubble required a very large proportion of the population to ignore what was rational and all run in the same direction gorging on debt, assuming that house prices would rise forever. It was near enough a force of nature - the nature of sheeple to be optimistic and gullible, the nature of bankers to seek profits today and to let tomorrow worry about tomorrow, and the nature of our elected politicians to rationalise whatever it takes to get them elected. Compared to that, the present shennanigans from the Bank and Treasury -. ZIRP, QE, Funding for lending, SMI, New Buy - the whole lot together are irritating but, as the graph shows, they are just pissing into the wind. Most importantly, we are no longer all running in the same direction. We are about to start fighting over the allocation of the losses and determining who will really have benefited from this period of insanity that has now passed, and determining who will suffer the greatest hardship as a result. A house divided against itself cannot stand. I was listening to the talking heads on Radio 4 arguing the toss about changes to benefits. That's what the puppet theatre is concerned about. There is no over arching narrative weighing up the advantages of inflation against its costs.

To defend these house prices would require collective endeavour, but there is no consensus to support that endeavour and there is no consensus because to support these prices the young must be gouged and the old will have to lose their incomes to defend the prices of their assets. I do not think that it is necessary to defend these prices in order to defend the banks; they know how to ride out a bust. These prices will not be defended.

Eloquently written. But the BOE has been defending these prices with zirp and QE pretty well since Q1 2009 and may continue for several years yet. The gilt market don't care at present. I take your point that personal credit debt has flatlined and now we have zombie banks and a zombie housing market. I think the BOE is trying to cushion nominal asset prices from a gradual normalisation of rates down the road with as many years of inflation as they can 'until the economy recovers'. But prices are gradually falling and each year they don't rise is a nail in the coffin of boomer hpi sentiment.

GB

[giantbat]

Laughable commentary on borrowing cost from BBC interview with David Cameron. No mention of QE strangely.

http://www.bbc.co.uk/news/business-20925758