´óÏó´«Ã½

The idiotic and facile idea of quantitative easing might be working a little better if the banks weren't hoovering up all the spare (and not-so-spare) money floating around.

You have a look at vastly-inflated interest rates, fees and charges being made by the banks on the private sector mortgages and overdrafts, business loans etc. etc. by the banks and you will see the effect they are having on a struggling economy.

We are getting a double-whammy from them. First they wrecked the system -skimming their undeserved take, then we bailed them out and now they are trousering the proceeds of some new scams on top.

I am sure Merv. could twist some necks, I thought he was showing a bit more bottle in recent months.

Regards,

We are in uncharted territory, and yet the Budget 2009 forecast "expects" QE to directly cause a 5% increase in GDP.....

All this at a time when the marginal productivity of debt is currently negative. In other words, due to excess capacity and excess supply, businesses who borrow money are unlikely to experience an increase in demand for their products. Why would you want to borrow to try to increase productivity when there is already over-capacity and over-supply in the global economy? Could it be that unproductive loss making businesses are desperate to borrow, in order to keep themselves afloat for another few months in the vain hope of an upswing?

This latest QE announcement has caused sterling to fall, which will keep consumer price inflation running higher than wage increases and interest paid on cash deposits. CPI is currently 3%. If CPI starts climbing even higher come the autumn of 2009 when the high commodity prices of 2008 finally disappear from the CPI/RPI calculations, and importers' currency hedges finally run out, interest rates may have to rise, which is the opposite of what the BoE is trying to achieve through QE....

Paul

I think they have got you sucked in.
Allmyfault (hope it isnt!) post 1 seems to have it a lot more sorted than you.

So do our European cousins have any better ideas ?

Maybe ? Maybe not ? Compare BoE strategy with FT's round up of ECB options, and the arguments for and against the ECB buying government bonds:

For- This would indicate determination to take bold action and help inject demand into the economy.

Against -The ECBs biggest objection is that this would blur fiscal policy with monetary policy. Deciding which governments bonds to buy would be hard. It would also add to the difficulties of creating an exit strategy.
Likelihood -Extremely unlikely.

Full article here :

#1. allmyfault wrote:

"I am sure Merv. could twist some necks"

We need a new Governor! Not in a few years, NOW.

The bond market may collapse this year - simple as that.

How and why is complicated and the info can be found quite easily by those who know how to Google or who have a basic understanding of the real cost of a tin of baked beans. Suffice to say, it comes down to all the money being pumped into the US and UK markets and the effect of all this 'cash' has on the price of bonds, bond yields and, ultimately, on interest rates.

The low BOE 0.5% rate that we have today may explode upwards by the start of 2010, and carry on rising throughout the rest of the year, bringing the global economy not just to its knees but to a prone and spent position that you usually only find in one of the finer Dominatrix dungeons within walking distance of Parliament.

Ironically, what the politicians are banking on saving the economy - this QE (I can't bring myself to even type it out) - could be the double whammy that comes back and hits us all making last Autumn's collapse of the investment & retail banks seem a minor disaster by comparision.

That will be one dramatic result of a collapsing bond market and all the current spin, all the current PR of 'green shots', of ludicrous and stupid attempts to maintain the price of over-inflated property prices and convince us all that there will still be honey for tea will be...

Well, it won't matter then whether you own gold, cash or have a horde of pot noodle and carnation milk in your cellar - overnight hundreds of companies will go bust, millions of people will find that they no longer have a job and even if they have a job they probably will not be able to afford their mortgage. It will be a party like 1929!

This QE is not working. If it works it has the potential to bring the depression that it is supposed to avert and I really think we are in the Emperor who has no clothes territory now - no one has the courage to stand up and point out what a mess it is because, in truth, no one truly understands it. At best, even the best financial minds are just guessing.

On a side note...

I visited several banks and building societies today to try and get a decent fixed term bond for my savings. Interesintgly, not one bank or building society that I visited was offering anything less than a 12 month fixed term bond (Yes, I know these bonds are different to the above mentioned bonds). All wanted to offer me 12, 24, 36 month or even longer bonds.

I think this is a sure-sign of where the banks and building societies see interest rates going by the end of this year - lock people into long-term low rate fixed bonds now and profit handsomely from 2010 onwards once the interest rates have soared.

QE might clear away a large amount of debt that firms and business have on their books, but what about personal debt? Most individuals have massive personal debt, its the price that the economy paid for keeping wage inflation down over the last 10 years or so, as instead of pay rises people just borrowed more money to buy the things they wanted. You can wave a magic wand and spirit away the business debt, but if individuals can not afford to borrow any more money it won't do much good in my view.
Lets face it Merv and his mates didn't see this crisis coming, so how can we have any confidence in the same people when they say there will be no unforseen problems as a result of what is at the end of the day nothing more than printing money.

#6 Tawse57

Amusing and insightful stuff, I may not be a bond geek but I know enough to recognise the whiff of underlying truth when I see it.

And yet I hope you are wrong! Yet I instictively know that hope in the sense that we are been fed it at the moment in the context of the current real economic situation simply digs a deeper hole.

Not sure about the carnation milk and pot noodles in the cellar though.

Jericoa

6. tawse57

excellent stuff. It has been obvious to anyone willing to view events with a jaundiced eye that none of the giverning bodies or leading players have a clue where this will all end up.

I have a 6 month deposit maturing this June. Last November, the Co-op were offering 7% on a 6 month FTD if you were willing to give Norwich Union the same amount to play with (sorry, invest) for 5 years with a money-back guarantee i.e. just like putting it in a mattress but with a possible upside.
My current thinking is that it will be more tax efficient (and more fun)this time to risk it at the bookies than bury it in an ISA or fix the rate for longer than 6 months.

LANGUAGE EXPANDS TO FILL THE VACUOUSNESS AVAILABLE.

Stephanie says we can't yet get a CLEAR STEER on QUANTITATIVE EASING. That'll be a CSQE no doubt. Perhaps we should try EXISTENTIAL BRIDLEMENT?
Or does she mean: we haven't a clue if money can cure money without an injection of QUALITATIVE REALITY?

geeks?

surely, in an adult world, NN values those with expert knowledge? Or would any intelligent answerer get called 'swot' and 'egghead' in derision by the bad lads who sit at the back of the NN office and who spend coffeetime hanging around the bbc loos extracting dinner money from the 'mummy's boys'?

Ah. giving bumps in puddles, scuffing new bags. happy days.

:)

"...The Q.E. process involves the Bank effectively printing money to buy government and corporate bonds..."

Does the BofE announce exactly which bonds they have seen fit to buy with this fantasy money?

Might be interesting to find out who they choose to be friends with in this ongoing bail-out phase II.

Regards,

This comment was removed because the moderators found it broke the house rules. Explain.

The Hunting of the bank
Lewis Carroll
Fit the Second - The Bellman's Speech


--------------------------------------------------------------------------------


The Brownman himself they all praised to the skies--
Such a carriage, such ease and such grace!
Such solemnity, too! One could see he was wise,
The moment one looked in his face!
He had bought a large map representing the sea,
Without the least vestige of land:
And the crew were much pleased when they found it to be
A map they could all understand.

"What's the good of Mercator's North Poles and Equators,
Tropics, Zones, and Meridian Lines?"
So the Bellman would cry: and the crew would reply
"They are merely conventional signs!

"Other maps are such shapes, with their islands and capes!
But we've got our brave Captain to thank:
(So the crew would protest) "that he's bought us the best--
A perfect and absolute bank!"

This was charming, no doubt; but they shortly found out
That the Captain they trusted so well
Had only one notion for crossing the ocean,
And that was to tingle his bell.

He was thoughtful and grave--but the orders he gave
Were enough to bewilder a crew.
When he cried "Steer to starboard, but keep her head larboard!"
What on earth was the fsa to do?

Then the bowsprit got mixed with the rudder sometimes:
A thing, as the Brownman remarked,
That frequently happens in tarpical climes,
When a vessel is, so to speak, "snarked."

But the principal failing occurred in the sailing,
And the Brownman, perplexed and distressed,
Said he had hoped, at least, when the wind blew due East,
That the ship would not travel due West!

But the danger was past--they had landed at last,
With their boxes, portmanteaus, and bags:
Yet at first sight the crew were not pleased with the view,
Which consisted to chasms and crags.

The Brownman perceived that their spirits were low,
And repeated in musical tone
Some jokes he had kept for a season of woe--
But the crew would do nothing but groan.

He served out some grog with a liberal hand,
And bade them sit down on the beach:
And they could not but own that their Captain looked grand,
As he stood and delivered his speech.

"Friends, Romans, and countrymen, lend me your arrears!"
(They were all of them fond of quotations:
So they drank to his health, and they gave him three cheers,
While he served out additional rations).

"We have sailed many months, we have sailed many weeks,
(Four weeks to the month you may mark),
But never as yet ('tis your Captain who speaks)
Have we caught the least glimpse of a bank!

"We have sailed many weeks, we have sailed many days,
(Seven days to the week I allow),
But a bank, on the which we might lovingly gaze,
We have never beheld till now!

"Come, listen, my men, while I tell you again
The five unmistakable marks
By which you may know, wheresoever you go,
The warranted genuine banks.

"Let us take them in order. The first is the taste,
Which is meager and hollow, but crisp:
Like a coat that is rather too tight in the waist,
With a flavor of Will-o-the-wisp.

"Its habit of getting up late you'll agree
That it carries too far, when I say
That it frequently breakfasts at five-o'clock tea,
And dines on the following day.

"The third is its slowness in taking a jest.
Should you happen to venture on one,
It will sigh like a thing that is deeply distressed:
And it always looks grave at a pun.

"The fourth is its fondness for ATM-machines,
Which is constantly carries about,
And believes that they add to the beauty of scenes--
A sentiment open to doubt.

"The fifth is AAambition. It next will be right
To describe each particular bAAatch:
Distinguishing those that have feathers, and bite,
And those that have whiskers, and scratch.

"For, although common banks do no manner of harm,
Yet, I feel it my duty to say,
Some are Boojums--" The Bellman broke off in alarm,
For the Baker had fainted away.

bookhimdano (#11) "surely, in an adult world, NN values those with expert knowledge?"

Nahh.... remember, they once substituted Derek Draper for Peter Hyaman in 'The Panel' - which I see as a bunch of cloned gossipers. Many of the other experts on the programme aren't the sort fo people I would call experts, experts are 'dangerously' outspoken and .....well geeky.. :-)

Still I'd like to see Richard Lynn, Charles Murray, Arthur Jensen, Philippe Rushton, Linda Gottfredson, Chris Brand, Robert Plomin and David Coleman and maybe some from ETS on the programme, pitted against 'experts' which the ´óÏó´«Ã½ would usually field (e.g. Flynn and Mackintosh?), along with a few ministers like Ed Balls, David Miliband perhaps, and even those from 'The Opposition'.

Now, that would make historic and worthwhile viewing in my view, it would need to be a Special though.

I'm sure it could be arranged too.

Mason, Gilt geeks ??

Trouble is, you have to think about the politics as well as the economics. Darling&Brown are desperate to make sure their figures add up and to produce an economic recovery. Perhap you'll soon see Brown ordering Merv to start putting money directly into people's bank accounts. Anyone got a free wheelbarrow ?

Seriously , perhaps Merv is going to have to expand the QE programme to the Corporate debt market and (this could be controversial because of the politics involved) to start buying up all gilts being issued,including the new ones used to. That would have a serious impact which is what QE is supposed to do.

Paul,

The MPC forecasting period is two years.The MPC minutes of 4 and 5 March give you their take and may explain why they are now increasing the scale of purchase. MPC are authorised to spend 50bn on private assets and 100bn on gilts. The corporate paper and bond markets are relatively small to achieve their objective of increasing money supply, depress yields thereby forcing ( preferably) UK non bank institutions to look for higher yield assets stimulating demand. A much more significant asset purchase operation was needed in the secondary gilts market to make up for the 5% shortfall in nominal GDP ( 50 - 100bn).The MPC are obviously not convinced that the initial boost was enough to ramp spending and CPI upwards.They wanted to target gilts of terms held by non bank financial institutions rather than banks who could simply hoard the cash - medium / long maturities ( 5-25 years) gilts holders were targeted with 75bn for private and gilt assets over three months.

If the initial boost was too small it would bring into question the effectiveness of the tool and dampen the reduction in premia and the boost to asset prices. A month and a half in - the Quarterly APF report says that after initial drop in gilt yields they bounced upward. They need to find out what the sellers are doing with their cash from the APF. Which non bank investor-sellers are targeted - pension funds, overseas etc? What if they squirrel the money away to foreign shores or replace portfolios with index-linked gilts or new issuance. The budget flagged that new glit issuance could overwhelm and credit downgrades could put upward pressure on yields for new issuance, syndication is in the offing....worry and headache I would have thought.

I tell you, how good is it to see a ´óÏó´«Ã½ journalist get stuck in and question things rather than merely report the official releases - keep it up P and Newsnight !

Shire, many thanks for that. It helps clarify things. I will get cracking on this issue. Mind you the Guardian today offers a still more gloomy reason why Mervyn has done this. Overandout: Paul

Ties in with the IMF picture in their April outlook - UK banks estimated to need further recapitalisation of 125 - 250bn dollars ( latter to mid 90s ratios of prudence) , inadequate loss declarations,bad bank needed, banks in long term funding crisis and pension fund / insurance co balance sheets collapsing and in need of capital.............

The good news is that my mates over 50 down the pub came up with a plan :

Instead of giving billions of pounds to banks that will squander the money on lavish parties and unearned bonuses, use the following plan. You can call it the Patriotic Retirement Plan:


There are about 20 million people over 50 in the work force. - Pay them £1 million apiece severance for early retirement with the following stipulations:

1) They MUST retire. Twenty million job openings - Unemployment fixed.

2) They MUST buy a new British CAR. Twenty million cars ordered - Auto Industry fixed.

3) They MUST either buy a house or pay off their mortgage - Housing Crisis fixed.

4) They must send their kids to school / college /university - Crime rate fixed

5) Buy £50 of alcohol / tobacco a week there's your money back in duty / tax etc

It can't get any easier than that!

P.S. If more money is needed, have all members of parliament pay back there claimed expenses and second home allowances

Run it past Mervyn !

Evening all. My misses was wondering if our credit card balance got a bit high, whether we could do some quantitative easing? By printing some money using the scanner and colour printer. Its only £50,000 so hardly shows up in the decimals. Do you have Mervs email address so I can ask?

More QE stuff for the anoraks / geeks : adjusted M4 is the figure to watch, being the growth in money in the economy excluding financial corporation activities - ie banks. The initial 75bn was aimed at boosting adjusted M4 from an awful 08 rate of c.3.5% by 4-5% to achieve an annualised growth adjusted M4 of c.10% for 2009- the BoE reckon this target gets recovery underway so its said ( do they know?). Apparently, Mervyn wont disclose the monthly adjusted M4 data cos he says its 'confidential'and monetary policy disallows freedom of information access - but next week's inflation report will show Q1's adjusted M4 in a chart.As before, the risks are that BoE buys gilts from banks/overseas investors which impair the boost or ( ?Guardian) that shrinking credit supply caused by banks contracting balance sheets stifles the boost.

The worry down the road is that if the risks cause a bigger QE input boost now ( as seems the case), how will BoE unwind what they have done before inflation ticks upward uncomfortably.

My concern is another impairment to the boost - insurance / pension / investment trusts sell their gilts to Mervyn and use liquidity to buy new government debt issued by Alistair - now we're really chasing our tails in the QE merry-go-round!

Great stuff this financial origaaami,enough folds and you have a bird in hand[and no need of japanese inflatables], pull its tail and its wings flap and with enough hot spots its aaairborne like the flight of the feenicks on its way with someones pound of overlycircumscribed flesh to the promiced land via the merchants of palm beech.

#22

On a similar theme but a different subject ´óÏó´«Ã½ news quotes 4 per thousand infected may die from Swine flu.

What is wrong with saying 1 in 250?

Or is it the case that in an office like mine where about 250 people work you can actually visualise what that means.

I wish the media and governmental organisations of all kinds would stop relying on number blindness among the population to keep us all in the dark.

For goodness sake! what does it take to divide 1000 by 4?? Why report it as 4 deaths per thousand in that way professor fergusson of the WHO ??

Why????

Why dont the ´óÏó´«Ã½ do the math for him?

Jericoa

#23

For goodness sake I just heard news at 10 announce the '4 in 1,000' predicted fatality rate for swine flu by the resident expert.

Have a word with them please Paul, and let him know that 1 in 250 is the same thing. Hang on it does give a rather different perception (funny that), I am beginning to doubt my own sanity!

Here's an interesting article related to this blog subject. It's a week old now but still interesting none-the-less.

Some of the comments/posts are particularly worth reading.

#25 BankSlickerminustheR
Its all in Mervyn's report today but in typical understated BoE tones.The impairments to QE are admitted but there is no analysis of what sellers of gilts are doing with the cash, or who they are. And yet, the 125bn QE boost is fed into the CPI / GDP projections as if it will work, with health warnings. They seem to now accept depressed growth paths even with 125bn QE boost because restricted credit supply will forecast higher market rates of interest with base rate neutered.At least I think thats what underlies it.

Adjusted M4 excluding OFCs ( other financial institutions) - see p. 12 Mervyn's report - a seemingly very weak 3.9% for Q1 2009 - not good for QEers!