Saturday, March 7, 2009

Why quantitative easing won’t work

Why quantitative easing won’t work

Now it has virtually nowhere left to go with interest rates, the Bank of England has started on the next phase of its great monetary experiment – quantitative easing. John Stepek explains what it is and why it's a futile exercise.

Posted by damien @ 11:45 AM (2010 views)
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13 thoughts on “Why quantitative easing won’t work

  • “Meanwhile, cutting interest rates is striking fear into those who want to see their savings grow – instead of spending more money, they’ll try to save even harder to keep ahead of inflation.”

    This is complete rubbish. The majority of people living off their savings are pensioners that have previously downsized. All they have is a meagre state pension and the interest from their savings. They do not have the ability to save anything and as inflation is running at around 4% with their savings at less than half this amount, the savings they have are reducing in value, while they continue to eat into them!

    What a mess.

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  • japanese uncle says:

    British savers/investor have clearly even less loyalty towards their own currency, than my compatriots have towards JPY. Pounds is destined to plunge further, hiking inflation index, putting BoE/government in a difficult position. I guess IR will have to rise next year.

    In the case of Japan, where sizable deflation gap have existed all along, devaluation of JPY did not have too big impact on inflation (price index), which is why they were able to stick to QE.

    Anyway QE is just an attempt to shift wealth from savers to banks in an appallingly unfair way, which is hardly acceptable.

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  • stillthinking says:

    You see a swift end to deflation then JU?

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  • Hi JU

    Haven’t the Gov/BoE now put themselves in a position where by they simply won’t be able to increase interest rates next year or may I suggest anytime in the next 5-10 years?

    We all say that QE will simply delay the collapse not actually re-invigorate the economy.

    Therefore any rise in interest rates will simply kill the economy stone dead..

    I hate to harp on about it but with regard to the housing element of the problem I see the solution as providing cheap £30k per 1/4 acre priced plots in every town and village across the country.

    That would at least pump real money into the economy instantly creating jobs in the construction industry as people build NEW houses.

    Dropping interest rates to encourage people to take out cheap Interest Only mortgages for houses that are already standing simply moves ‘digital’ money about without creating anything real other than more debt.

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  • WHAT IS GOING TO HAPPEN IN THE NEXT 12 MONTHS ACCORDING TO PASTOR LINDSEY WILLIAMS.

    http://video.google.com/videoplay?docid=-2219026291450576553

    ~~~~~
    He interacted with the high paid servants of the oil industry. That would be the executives of ARCO and other big oil companies when he served as chaplain for the Alaska pipeline. He knows and admits that the “real power” is much further up the food chain. Bottom line? Personally, as far as I am concerned, Reverend Williams character and credibility are unimpeachable. I think it is very important to pay attention to what he has to say.
    ~~~~~

    from comments
    I Agree 100%
    On December 16th, 2008 MageesterMixit says:
    Many people give “them” way too much credit and so does Lindsey Williams! Even to the point of exalting the “bad guys” to the level of “God Himself”! People are without faith. It won’t be the “bad guys” who are responsible for our utter downfall if it occurs but the people who have little to no faith.

    Give credit where credit is due but not overdue credit.

    He’s being “used” as propaganda, some form or fashion? Why else would they give him info like that?

    My Thought

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  • japanese uncle says:

    stillthinking:

    Yes, if the QE will be massive enough, and will be continued for some time. But again I guess it will drive investors/savers British or foreign in a stampede, fleeing from this isle. To where? For the time being Euro and USD and JPY, but after the imminent full-scale collapse of Euro zone, to JPY mostly (I envisage yet another crisis in the US in the near future). Swiss Franc ought to be another candidate, but in an apparent attempt to deter this, US/European authorities are targeting Swiss banks for disclosure of their client information. As mentioned time and again, QE will destroy sterling and the UK economy, thus utterly against the national interest, but those who behind this, obviously have little or no concern.

    Str2007

    Certainly, QE in the UK context is nothing short of giving away massive dose of free heroine to Amy Weinhouse no longer satisfied by cocaine, just to make the day of judgment even more horrendous. UK banks will quickly take it for granted and spoilt to the core. Zero IR means free cost of supply, yet they can still charge some interest to their borrowers. Everything is done for none but the banks, not the people on the street, not even for the national economy.

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  • japanese uncle says:

    Having said that, in view of the 15% inflation rate, Boe will be legally obliged to hike IR to get the situation back to normal, I hope.

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  • mark wadsworth says:

    What STR2007 says – it’s all well and good slashing short term interest rates (which has the effect of increasing long term ones), but no future government, oops, I mean “fully independent Bank of England MPC”, will have the nerve to increase them again. They might get a lukewarm cheer from savers, but the rage from the hallowed homeowner class will wipe that out. It’ll be fun watching the Daily Expressmail howl with outrage when interest rates are rising just as loudly as they howled while they were falling.

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  • japanese uncle says:

    It is blindingly obvious that MPC and BoE with such tremendous potential impact on the financial welfare of the general public, should not stay operating on such self-willed ‘independence’. Now that they have proved themselves to be utterly useless/incompetent in preventing such crisis of a galactic scale from happening.

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  • Does this guy know what he’s talking about? The rate at which money changes hands is not the “money multiplier”, it is the “velocity of money.” The money multiplier depends on the proportion of deposits a bank must keep to hand.

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  • stillthinking says:

    The government will certainly do the sneaky on the inflation rate. Thank god I have no savings.

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  • Chris @ This is complete rubbish. The majority of people living off their savings are pensioners that have previously downsized.

    In other words,,,,,they played the game and cashed in their chips.. Meanwhile my kids have to pay the latest price in the ponzi scheme ( and pay grannies state pension in taxes, while being told to save for their own) – sorry we all have to realise our currencey, houses, and pensions were superheated by the bubble….pop!!!!

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  • britishblue says:

    An even bigger problem that is brewing is the detachment of the banks from the Bank of England base rate. It used to be that mortgage interest rates were the base rate + a small percentage.. As BOE base rates are lowered to close to zero, the detachment is taking place. New mortgages that are being issued are being offered at 5% above base rate. Also banks are withdrawing new trackers.

    As this detachment takes place, consider what happens when interest rates rise. Do we really think that if the BOE base rate rose 2, 3 or 4%, that the banks would not raise their rates as a direct add on. So a 5% base rate could mean a 10% standard mortgage.

    In my mind two things are certain:
    a. Base rates will have to rise again. I don’t know when, but the long term average is around 5%.
    b. Banks have got to recapitalise and will do so at the expense of anyone they can. Unless they are nationailised they will extract every single penny out of customers they can. Any increase in the BOE base rate in the future will be directly factored into the offers banks make to customers

    This could mean that we see a double dip in the housing market. We could see another 15-20% decline over the next 18 months. then a small ‘recovery’, which then becomes deflated and goes down again as interest rates are put up and inflation kicks in.

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