Wednesday, February 18, 2009

Please Sir – Can we print some more ….

Bank will write to Darling to begin printing money

The Bank of England is set to begin "printing money" in a bid to boost the economy after its rate-setting committee unanimously agreed that its Governor must write to the Chancellor. The minutes of the Bank's rate-setting meeting earlier this month showed that as well as voting 8-1 to cut rates to 1 per cent, the nine-strong Monetary Policy Committee (MPC) agreed that the Mervyn King, the Bank's Governor, should write to Alistair Darling to seek permission to embark on "quantitative easing" — sometimes called printing money.

Posted by musn't grumble @ 11:32 AM (1665 views)
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38 thoughts on “Please Sir – Can we print some more ….

  • Let it be on record.

    CPI is 50% above target, and not falling (we all know what 0.1% means).

    1. Printing money has never ever worked successfully in pulling an economy out of depression – it has only made it much worse.
    2. Printing money to give to banks to allow them to socialize their losses is socially inequitable and morally questionable.
    3. The government won’t be able to buy back government bonds, and in any case, what will it buy them back with?

    This is, actually, the beginning of the end for fiscal common sense.

    All roads really do lead to Harare.

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  • Could someone please descibe the process of how this extra cash actually gets into the system? Surely they don’t just give the banks a wedge of notes? How do they account for that? I could understand if they gave it to the Govt so they could cut taxes…. Sorry – bit of a novice at this…

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  • Theiving scumbags.

    They should be strung up.

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  • timmy, that’s a good question which no-one really has a good answer for.

    Funny how the simplest questions from laymen (if it’s alright to call ourselves that) are always the most difficult to answer.

    My best guess is that the government will use the freshly printed notes to allow Northern Rock to put out cheap mortgages. It will appear to work at first.

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  • they buy bonds and gilts dont they ?

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  • Can anyone tell me, if someone owes money to an institution, say a bank and also has saving earning zilch interest, is it worth paying off the loan or does printing money help erode the dept?

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  • I presume government issue these bonds and gilts and then guarantee them in effect with the new money,which in turn is guaranteed by these gilts and bonds which again are backed by tax revenue. Confused?………..Of course!
    So it’s a question of confidence in these bonds and gilts which are guaranteed to be paid out by government,providing they have enough moeny to do so………which they will ‘cos they just printed it………….Help!!!

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  • timmy t said….

    They buy ‘assets’ from banks that are worthless (i.e. have no value on the open market) and collect this crap in a bad bank.

    example: The BEO prints/keys in £50,000,000,000 (that’s £50bn – or milliard – just so we don’t throw these terms around and start just chopping off naughts Zimbabwe style) and effectively buy a pair of bankers socks for it.

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  • stillthinking says:

    Price inflation is caused by excess demand against restricted supply, but there is excessive global supply to demand at the moment. I don’t personally see that quantative easing will increase demand, and I don’t see that quantative easing will increase demand for loans.

    The -whole bubble effect- is because the perception of the population was that interest rates were negative in real terms, i.e. the rate of asset inflation was above the cost of borrowing. This didn’t turn out to be really true. So from this the only way to further extend credit past the peak would be to make people believe in that idea again.

    The only way to convince a very scared public that this is true, would be to actually make it really truly true. In other words, guarantee a negative real interest rate from this point on forever, killing sterling as a store of value and causing currency collapse.

    Otherwise the quantative easing won’t work because there is no unused borrowing capacity left in the UK population , everybody who can borrow already has.

    So I see a continuation of deflation, although the rate of deflation is going to be lower. Does look very similar to Japan. Grinding slow and unpleasant but with much more unemployment.

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  • By the way they sell on these bonds and gilts to some sucker for their ‘real money’…….fools!

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  • 9. stillthinking..

    Correct there is no point printing a little bi of money like you say will make no difference, therefore to ‘guarantee negative real interest rate’ hyperinflation is necessary. You got it!

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  • Stillthinking a really succinct post although I suspect the subtlety of it will be lost on this thread.

    It is weird to me how difficult it is to get this particular idea across, I don’t mean so people buy into it but so that they will even consider it. The point is simply that the printing presses were running at an incredible rate for the past decade justified by inflated asset prices (so called security) and appetite for debt. The volume of money which the Govt would have to print to even replace these (never mind so as to hyper inflation) is gargantuan and way beyond I mean way way beyond what is happening now or anticipated to happen.

    I’m not saying we won’t go mad and go down that route, I’m just saying it is not happening at present and it is for reasons you outline far less likely to happen that people assume.

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  • Matt. Its worse. BOE buy Gilts, government buy bad assets, tax payer takes the risk and pays interest on the original govt loan, via taxes and inflation and tax from further monetization of govt debt when taxes fall short.

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  • Matt I know we have been here before but can you state your position in context. Are you saying that this govt or the next will pursue such policies against the background of the market taking sterling to zero outside its borders.

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  • matt_the_hat – they’ve been doing that for a while. How is this any different? Is it just that this time the money doesn’t need paying back? In which case they are just giving money to the banks… If so, surely every bank share price would be going through the roof today… which they aren’t.

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  • Espressodopio says:

    Many people consider this current thinking from a macro viewpoint, without thinking about what the relationships are between one’s individual income and expenditure requirements. That is one of the key themes of this site is that the relationship metrics fell foul over the recent history – i.e. 3-3.5 times net income of major earner for a house. Perhaps it is worth analysing in greater detail the effect of this printing money, in a controlled way, and its impact to the relationship between net income and day to day purchasing needs.

    To say that new borrowing is off the table is to also neglect the corporate bond market that is required to fully function to manage cash over the short, medium and long cycles. I see this cash management function in contrast the the debt markets used by PE for corporate privatisation.

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  • Is there an historical precedent of QE getting an economy out of a recession/deflation successfully? IE it both stimulated the economy(it didn’t in Japan) AND didn’t end up in an hyperinflationary mess? Cos if there isn’t, why are we doing it?

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  • 13. bellwether … Obviously my position on these things is not the official government position, they believe they can control inflation (which lags interest rates and QE effects) and reduce the debt burden without ‘talking down sterling’. The PM has stated multiple times that he does ‘not target sterling’ and only focuses on inflation.

    14. The money used for banks at the moment is accounted for as debt so no increase in money supply (as long as the debt is paid back), QE does not create an entry at the other side of the ledger. BTW anyone who gets hold of this new money before inflation sets in will do very well (I have bought banking shares recently – big gamble I know), expect a period when the problem is fixed (thats when you buy into gold)

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  • 12. bellwether … reasons you outline far less likely to happen that people assume

    You mean like the big HO HA about $700bn congress passes 6 months ago and how they now announce these sums regularly at news conferences.

    The money people have borrowed in the last decade cannot be paid back with a significant slowdown in future speading, the only way to maintain spending is to forgive the debts, savers are now paying peoples mortgage interest, QE will mean they pay off the mortgage. Please kid yourselves not, things are moving at a lightening pace.

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  • If debt is forgiven/paid off by the govt we have hyperinflation. Agreed on that.

    We differ then only on the probability of that happening. If UK pursues such a strategy the market will sink sterling before the printing even happens in any real sense.

    Bear in mind matt you are coming at this from a position of outrage, I’m pretty indifferent emotionally and utterly apolitical. I’m a saver I guess but I don’t identify with that position. If the situation turns hyper inflationary I expect I will react quicker than most. You think you are reading it right that’s great. You bought bank shares I wish you well with that.

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  • [email protected]

    Now we know why the pound slipped so quietly, -away from the media’s attention,- against the dollar and the euro. The port of escape for uk savers shut quietly down ( I am now looking around to open a sterling account abroad or even considering Iceland!).

    Indeed this govmt is capable of anything. If sterling collapses we can switch to the euro?.

    The debt became so large that some of the interest on it has to be printed too, sacrificing savers. Obviously they will never print money to cover all the interest, but enough to make the debt load payable.

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  • I would like to point out that money creation does not _necessarily_ cause inflation.

    Firstly the newly created money may not find its way into general circulation – like now banks are hoarding capital, and so creating money may strengthen their capital base, allowing them the comfort to go about the business they are there to do without them ever freeing the said capital.
    Secondly inflation is a direct result of supply versus demand for goods and services. Currently businesses and consumers are holding off spending (and investing) – this is a decrease in demand which is deflationary.
    Furthermore even the argument that inflation must come in the long term is not justified as the money may also be destroyed through central bank account fees.

    To answer how they would be doing it – they would take securities from banks and credit their accounts (at the central bank) with money – they will just change the number.

    Lastly I do not think the user defined title is at all accurate
    “Please Sir – Can we print some more ….”
    They haven’t printed yet so how can it be a request to print more.

    Anyhow, I don’t believe printing is really going to help much unless both the securities purchased are the bottom rung toxic debt [unlikely] and this is common knowledge amongst the financial institutions* involved (including non-banks) [quite likely if point 1 is true].

    * It seems that most people are unaware that the banks that do most of bank lending are, in fact, lending quite a lot (e.g. JP Morgan lent $100bn in Q4 2008) – it’s really the money-market funds and hedge funds that are no longer active.

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  • 51ck,

    Rising prices is a symptom of of the cause of inflation, that cause being the money supply increasing at a faster rate than production of goods.

    If the BoE buys Gilts, isn’t it lending money to itself?

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  • jackas –
    …symptom of the cause…
    That is not correct – please read up on it before making such statements (and not at some Gold VI website! Preferably use a good economics textbook).

    If the BoE buys gilts it is not lending money to itself, no. The BoE would be buying gilts from institutions which hold an account there, effectively they would be giving money to those institutions in return for securities which were issued by the treasury.

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  • jackas:
    “…symptom of the cause”
    …unless by money supply you mean M4… which I accounted for in my prior post using the phrases “general circulation” and “_necessarily_”.

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  • 51ck

    I’m a post grad lecturer in economics. Do you want to come on one of my courses?

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  • jakas – really? I’m not, my strength is mathematics (but my name will be in the Economist within three weeks).

    I said “money creation does not necessarily cause inflation”
    because the money creation is M0 (they credit the central bank accounts of financial institutions) and does not necessarily feed through to M4, where your cause effect relationship occurs (which I agree is correct).

    Therefore please use your expertise to point out where exactly this argument is flawed? Or did you misread?

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  • In fact most of your statement is a tautology. Inflation IS rising prices and inflation is the result of the causes of inflation – does not say much.

    As for the rest – well you are correct but you have missed off the demand side. (e.g. the cause could simply be a change in demand… if the rate of production is fixed and the money in circulation is fixed, then an increase in demand will push up prices = inflation)

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  • Tenyearstogetmymoney Back says:

    I am wondering if you guys have missed the fundamental point which is the problem is global (as Flash keeps telling everyone).

    We now know that the likes of NR and HBOS borrowed hundreds of Billions of pounds from overseas on short term loans.
    As the loans mature the lenders want their money back. Other than having a property fire sale to foreigners there might be no
    other way than printing a load of money.

    What is really annoying is that no one mentioned these loans in the past. The thing that I never understood about the house
    price bubble was where all the money was coming from. I honestly thought there must have been a load of rich OAPs saving
    loadsof money. noone ever told us that all the savers were actually in China.

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  • Yeah I’ve kind of studied maths aswell to masters level at a University you would have heard of.

    I’ve read alot of comments on here that I haven’t agreed with but at no point have I ever told anyone to read a book. I teach textbook economics and I know it to be pragmatically flawed. I come on here because this is a quality forum for discussion by well informed people from all sorts of experiences, not because people spout economic theory to each other.

    Ok, my supposition is that given the government keep banging on about banks lending to businesses and householders, their intention must be to force an expansion of credit money into the these hands. Call it the M25 if you like, the point is the stated intention is to increase the amount of money in circulation at the consumer, business and homeowner level.

    That will cause inflation in general. Sure there will be some deflating assets like bad mortgage debt that will not deflate as much, but relative to what would have happened without easing you could still call that inflated prices – it’s the same thing.

    Prices can’t go up in general if the amount of money in the system remains the same. Different asset prices can rise and fall due to supply and demand, but inflation, which is a general rise in prices across the board can’t happen.

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  • 20. bellwether …

    I would describe my position of one as if hyperinflation was inevitable, the government will print money and I am not outraged, this is the logical course of action effectively defaulting on the debt the country has. You may react quicker than most, but I have already made my move in the uncertainty that is here, I wait to see if it is the right one!

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  • jackas take it from me 51ck-6-51x strength is not mathematics I can testify to that but he does have several books on maths and because he has an undergraduate degree in engineering believes he can design a control system for a plane without any experience.

    However 51ck… does have time on his hands after using his financial ‘engineering’ skills in the city, shame he is one of these that got us into this mess, what a gloyt!

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  • gardeniadotnet says:

    34. matt_the_hat…

    Touché!

    Revenge is a dish… etc.

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  • 32. jackas said… Prices can’t go up in general if the amount of money in the system remains the same. Different asset prices can rise and fall due to supply and demand, but inflation, which is a general rise in prices across the board can’t happen.

    Don’t want to mess with an economics lecturer – I’d be well out of my depth, but I don’t see how this statement is correct. Surely this is fundamental to the whole problem. Haven’t prices risen (some at least – plasma tellies etc.) due to increased demand, driven, not from additional money in the system, but from debt secured against an asset which has increased in value (i.e. houses)? So the amount of actual money in the system has remained the same but the ‘value’ of assets has risen, and now that these are falling the gap is being plugged by printing more cash.

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  • jackas –

    I usually agree with what you say on this forum – and did confirm that I agree that if the capital gets into the hands of businesses and householders that would induce inflation. I cannot see why you cannot concede the point that there is no necessary causality from the initial capital creation in a BoE account to inflation when I can concede that it is sufficient.

    “Prices can’t go up in general if the amount of money in the system remains the same.” – I beg to differ! Inflation is defined as the decline in _value_ of real money – so as a very simple counter example the money supply may be fixed and resources diminishing, with demand fixed.

    I did ask you to explain where my argument was flawed but you have not done so – you confirmed that we think the same about the “M25”, but have not attempted to do anything else. I think you were just in the mood for argument.

    If, however, you have a published paper that describes your thoughts more precisely I’d be more than glad to look at it; if you produced it, even better. Otherwise I urge you again to explain yourself clearly, which should not be hard if you are such an expert.

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  • matt_the_hat –

    I have a masters degree in electrical & electronic engineering from Imperial College of Science Technology & Medicine… only maybe the number 4 university for engineering in the world, and hardly snub-worthy!

    Yes, I have also studied quantitative finance – because there will be a new finance coming and I am going to be there – I am not someone who got us into this mess, I’d be happy to take a smaller salary that those greedy buggers – I enjoy problem solving, not having loads of cash. I think that weak regulation is a very poor state for capitalism to be in – I would personally advocate anarcho-capitalism which would have no state regulatory systems, and I believe this would be far superior to weak regulation and better than strong regulation (although the latter would still be better than the former, just not so efficient – think of all those left boots produced in communist Russia.)

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  • matt_the_hat – Furthermore I do not believe I can design the entire control system for an aeroplane – what a nonsense idea. I told you I would be comfortable working on them within the industry – that is a very different position I’m afraid.

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