What has Quantitative Easing done for us? Helped make many poorer for a start…

Today the Bank of England will raise its holdings of UK Gilts (government bonds) to £370.75 billion as part of its Quantitative Easing programme. It will undertake some of what I have christened “heavy-duty” QE this afternoon as Tuesday is the day that it buys longer-dated Gilts. For example the results of past Tuesdays have left it holding some £6.652 billion of our longest dated conventional Gilt which matures in January 2060. As the total planned for the current phase of this programme will be reached next Wednesday it is time to ask,with apologies to Monty Python,what has it done for us?

What was it supposed to do?

The Bank of England identified the primary purpose of the policy as being this.

The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand

Actually I find myself disagreeing already as the “inject money directly” part is in many cases not true. In its own explanation the Bank of England talks of it buying Gilts off private investors who then buy shares and corporate bonds. There is one leakage in that they may then buy abroad but even if they buy UK assets exactly how much money is injected by asset prices being higher? We also have the assumption that asset prices are higher as a result of QE. Some probably are but I discussed back on the 24th of August on my Mindful Money blog  that if you compare stock markets who have not had QE with the UK some of them have done better and even the Euro area with all its problems has done as well.

So I think that we have established an issue right at the beginning which is that due to the leakages described above the impact of QE is in my opinion far weaker than the £370 billion spent. If you like it has given a very poor “bang for its buck”. We have money slipping into foreign markets firstly then we require wealth effects due to higher asset prices on the rest to have an impact. So we end up with a rather indirect mechanism to my mind as we follow a game of financial pass the parcel to its end.

This should not have been a surprise as in the past the UK undertook what would be called anti-QE in the past where we over issued Gilts to soak up excess money in the system to slow down the economy. This was called overfunding and it worked fairly poorly too due to leakages and suchlike which were called as a group disintermediation. My argument has been from the beginning that anyone who understood the UK ‘s monetary past was unlikely to hold out much hope for QE doing any real good.

Even if you stick with the directly injected money argument look where it went

From the Bank of England’s paper of the 12th of July

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Making the already wealthy wealthier that will really kick-start the economy won’t it? Perhaps the Bank of England has lost faith itself as this from the same paper is hardly convincing or reassuring.

The effects of QE nevertheless appear economically significant, though subject to considerable uncertainty.

The Civil Service view

Yesterday Permanent secretary Sir Nicholas Macpherson told the Public Accounts Committee of the House of Commons this.

I’m confident that QE has had a positive effect but in one sense (this will be…) this is an experiment and we won’t know the ultimate answer for many years

Not quite the confidence expressed in the past is it? And just before this we saw a further reining in of past promises and expectations

This is an environment where monetary policy can only have a limited effect

And when really pressed at the end we got this on the effects.

We don’t really know

Is there any real evidence of the money being used?

Today the British Bankers Association has released its latest numbers on credit provision by the main high street lenders in the UK. If we look at lending by them to the UK private-sector then it has fallen every month in 2012 on a seasonally adjusted basis and fell by another £2.2 billion in September. Since QE began there have been 28 months of falls on this measure and only 14 rises. Interestingly six of the first seven months had rises so perhaps QE helped a little at the beginning but hopes faded. Of course all such numbers have many impacts on them but this is a crucial number in many ways for those claiming that it has helped our economy. After all it was supposed to be directly injected.

The British Bankers Association has tried to put a brave spin on many of these numbers but as you go through them you see gross mortgage lending lower than last year and falling business lending. In the end even the BBA has to sum it up thus.

Households are reducing borrowing requirements and have no appetite to take on more/new debt……. Firms are holding back on borrowing for investment until trade prospects improve

What about inflation?

The thinking here has been the most muddled of all as David Miles of the Monetary Policy Committee showed in a speech last month.

The decision of the MPC to embark on asset purchases on an enormous scale was not done because it had abandoned the inflation target; it was done because of the inflation target.

To those like me who point out that inflation has been above and not below target we got this.

The fact that many asset purchases were made at a time when inflation was substantially above target meant that many people interpreted it as an abandonment of the target.

Er well yes exactly David. If we look for evidence of how inflation might have behaved if we had not had QE then the cries of inflation collapsing do not get any support from our European neighbours. Even Greece still just about has a positive level of inflation and that is after an economic collapse and a depressionary scenario.

A consequence of raising inflation: falling real wages

What I do not think was ever thought through was the relationship between wages and prices. Before the credit crunch wages rose in real terms in the UK and growth was regularly 1.5% to 2% higher than prices. However that ended and they have consistently grown more slowly since. the Office for National Statistics has offered some insight into its effects of this morning.

In the second quarter of 2012 net national income per head in real terms was 13.2 per cent below its level in the first quarter of 2008; a sharper fall in economic well-being than the GDP data alone indicate

Household income has been put under pressure from price inflation, for example in September 2011 inflation peaked at 5.2 per cent whereas the annual change in household actual income per head rose by 1.9 per cent in the third quarter of 2011.

Indeed and it takes this further.

This fall in household actual income per head was primarily due to prices going up at an increasing rate over most of the period. Figure 6 shows that, by 2011, consumer price inflation was markedly stronger than it had been in recent years. Inflation hit a peak of 5.2 per cent in September of that year whereas the annual change in household actual income per head rose by 1.9 per cent in the third quarter of 2011. This peak equalled the September 2008 inflation rate and was otherwise the highest for almost twenty years. During 2011 high inflation was driven by rises in food prices, utility bills and fuel prices.

You might like to read the section concerning by David Miles’ thoughts again at this point.

Comment

My contention on the effects of QE is as follows. Its impact on the economy is weak because of all the leakages in its operation which make it an indirect monetary stimulus rather than the direct stimulus claimed. However the extra money has helped raise inflation which via its effect on real wages has had a contractionary impact on our economy and if we look at the numbers above maybe more than has been thought so far. An extra boost to inflation has come from the impact of loose world monetary policy on commodity prices. Here the Bank of England is a relatively minor player compared to the US Federal Reserve, the Bank of Japan and more latterly the European Central Bank but it has been a player and should take its share of the blame.

Once you start thinking like that you find yourself facing a grim possibility and that is that in spite of all the hype it may have done little or no good and one cannot rule out that it has had a deflationary (as in falling aggregate demand) impact.

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12 thoughts on “What has Quantitative Easing done for us? Helped make many poorer for a start…

  1. hello shaun

    one small reply on the oil price differnce between WTI and Brent – I believe this is because WTI is competing with supplies from Canada , so this is a local phenomina and when the Canadians get their pipeline to the Pacific coast they can ship their oil to China thus removing the local over supply.

    As for brent , this is still used as a bench mark for the the good stuff, pricing for Arabian Heavy sour is about $20 lower ( but ofcourse you get less gasoline diesel and other more valuable products from this oil , and more crap to put it bluntly ! )

    As for the effects of QE , I was always told to follow the money – seems in this case the banks got it to improve their balances .

    Needless to say there’s little left over to help any one else!!

    Failure or Success – depends on who you are saving I guess 😉

    Forbin

    • Hi Forbin

      Goldmans were arguing a month ago that the Brent/WTI spread should narrow. From the Financial Times

      “The discount is most visible in futures markets, where $92-a-barrel West Texas Intermediate, the US benchmark crude, sells for $16 less than Brent, the North Sea benchmark. Changes in pipeline flows and the use of rail routes to carry crude produced inland to the coast have led to bets that the discount will diminish.

      Goldman argues that a recent change in direction of oil flow along the Seaway pipeline is draining 150,000 barrels a day from the glutted WTI delivery and pricing point of Cushing. The pipeline’s capacity is due to rise 400,000 b/d in 2013.

      New rail infrastructure will carry more barrels from inland fields, reconnecting Cushing with the waterborne market. This should in turn shrink the WTI discount to $4, or the Seaway tariff, says David Greely, Goldman’s head of energy research. The bank is recommending clients buy WTI and sell Brent for delivery next June.

      Mind you what was that about recommendations from Goldmans…….The spread has in fact widened.

  2. Hi Shaun
    To echo Forbin’s last point, if you assume the actions of CBs are to advantage commercial banks first, foremost and almost exclusively, then QE is a success in that they still exist in their zombie state.
    The small non-exclusive advantage has gone to the Treasury who have continued to over-spend thanks to BoE support.
    Joe Blogs continues to be the sucker who pays for all this through direct taxation increases and indirect taxation increases ( inflation).

    • Hi JW

      Mervyn King in his speech tonight in Wales was hinting at your points.

      “I called this the “paradox of policy” – policy measures that are desirable in the short term
      appear diametrically opposite to those needed in the long term”

      Mind you there was some of the usual rubbish which as someone who can just remember the Welsh rugby winger Gerald Davies I can assure readers that the next bit is not true.

      “In confronting the paradox of policy, the Bank has had to show some of
      the same fleetness of foot and ability to feint as my Cambridge contemporary, Gerald Davies”

  3. Shaun, “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand.” Surely since QE debasement is at present injected into the monetary system by buying Gilts, this money goes directly to the exchequer, which then spends it in the economy. One must remember that despite all the hype from the BoE, the real reason for QE is to fund the government’s continued and increasing profligacy, and indirectly to continue to bale out the banks by giving them virtually free money. The debased money created by QE thus goes directly to the government to prop up its expenditure in the Public Sector, to allow it to continue spending way above incoming revenue (which is falling in real terms), to continue to employ more people in the Public Sector than it would otherwise be able to do; to continue paying excessive welfare benefits; to continue the war in Afghanistan; to continue giving excessive amounts of foreign aid which the UK cannot actually afford; to continue the excessive payments to the EU leviathan monstrosity, etc. So in this sense I believe King is correct- QE does inject money (that is fake money) directly into the economy; that is why it is inevitably so inflationary; but of course because the banks have been gathering and storing much of their acquired free money, QE has not yet been as inflationary as would have been expected for the large amounts involved, but that will not be the case for much longer! As always however, Kings statement is only a half truth; although QE injects debased money directly into the economy it does not in any way boost nominal demand. The real issue is that QE is not actually an economic stimulus; it does not in any way encourage the real economy to grow, but it only encourages the Public Sector to grow, which is the direct opposite of what is required to stimulate the economy in the present scenario, and is actually an anti-stimulus.

    • Hi Drf

      The Bank of England buys Gilts in the secondary market rather than when they are sold. So the money goes to investors who presumably invest it elsewhere and so on until the trail runs cold! This is one of the issues of Quantitative Easing that anyone who says they know exactly where it has all gone is not telling the truth. But I still think that the effects are indirect.

      • Hi Shaun,

        I am not sure that all of the Gilts bought by the BoE are in the secondary market. I understood that most of them were in the primary market. That was the principal purpose. If you are correct concerning all of them being bought in the primary market then what you claim would clearly be true, but if not then I still think that on this point King is correct, but for the wrong reasons.

        I would be interested if you can quote a source to show that all of the Gilts bought by the BoE are in the secondary market?

      • Hi Shaun, Thanks for your reply. That may be a statement of yesterday’s purchases only, but having looked at this a bit more this is probably another example of smoke and mirrors which is the root of all policy nowadays it seems? There appears to be some deliberately introduced confusion now over exactly where the demarcation is between QE and APFs; it may be that the BoE is actually purchasing new Gilts from the DMO using APFs, but of course in reality there is no difference! The purchases are made with debased money, so the effect is identical to supposed QE? see http://www.bankofengland.co.uk/markets/Pages
        /apf/default.aspx

        In any case as with all other official statistics published now I believe very little of it is fact, and most of it is manipulated truth at best! On http://www.bankofengland.co.uk/markets/Pages/apf/default.aspx in at least one of the pdf documents listed there the BoE states: “6. The Fund will not offer to purchase gilts newly-issued by the DMO within one week of
        their issue; and will not offer to purchase gilts which the DMO has announced it will re-open, including via a mini-tender, during the period one week either side of the re-opening. If the

        1 DMO announces a re-opening, including via a mini-tender, within that period, of a stock that
        the Bank had previously announced it would offer to purchase on a particular day, the Bank
        will remove the stock from those to be purchased.”

        That seems to me to indicate that the BoE does intend to purchase and thus has purchased effectively newly-issued Gilts from the DMO. This is typical of the strategy of BoE, to make statements which are deceiving and open-ended effectively, so that in practice they can do whatever they decide on any particular day! It certainly does not preclude purchases of new Gilts, and I remember reading an article by the CEO of the DMO not that long ago in which he confirmed that new Gilts were being purchased by the BoE when auctions had failed, and the government needed the money.

  4. Hi Shaun, Please excuse my obvious typing error. I meant of course “…in the secondary market…” in the fourth sentence in my last comment.

  5. QE bids up the prices of assets already in existence, particularly financial assets. Unfortunately in this advanced stage of financialisation “financial assets” includes fuel and food.

  6. Falling real wages may very well be a facet of all crises, with or without QE. The data may verify or refute that, but let’s not be too quick inattributing all the major ills to central bank action without examining all likely possibilities.

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