QE

Quantitive Easing ‘QE’ or the Death of Financial Prudence.

As a student of the economy for many years I have seen the transformation of economics from an art form to a science built on the immutable facts of the 'laws of supply and demand' and 'market forces'. If anything can be said to have demolished all the assumed fundamental of economics it is the pass 3/4 years and it is the after effects that are being fought now. These laws and the application of special pleading for light regulation took no account of human nature to manipulate the game for self reward,  short-termism, fast returns and greed. There is no real evidence that QE has ever had a broad beneficial effect in economies. Its sole purpose is to bolster the defunct banking and finance sectors, it is a confidence trick to appease the markets and play for time. It helps stop the whole banking finance sector from freezing up from the toxic debt they have took on not knowing just how much is toxic or who is holding the loss. Hence, pass it onto the taxpayer (Bank of England) with very little chance of off loading it back onto them. Given that the UK has a large personnel debt problem and that the growth of the past years has been built on consumer spending that is now hitting the buffers, QE is unlikely to do anything for the real growth engine of the country, the consumer. These are the same consumers that are being told to roll back on the credit cards and pay back loans by the PM (a statement retreated from for obvious reasons). It is one thing to tell the consumer to stop spending but as it is the consumer that has propped the economy up over the past 15 years, it will be more useful to offer a time limited spendable money bond (spend it or loose it) to every house hold in the UK. Now that will have a more dramatic effect on the ability of business to see a return on their activity. Unfortunately we cannot limit the use of such bonds to goods made in the UK as manufacturing now occupies a too small a position in our GDP, never the less such a dispersal scheme would have a greater effect on the economy than stuffing the banks with cash. 

So up to now we have had QE, the pumping of £300Bn into the UK banking system alone to keep the confidence money game going, primarily for the benefit of the banking sector with very little positive impact onto the real everyday working economy. It is something to note that large companies are sitting on cash with no prospect of investing or with any difficulty of raising investment funds if required at a time when they think there will be little profitable return. This also applies to the majority of the Small to Medium sized Enterprise sector which although they may be more flexible and can respond quicker to any up turn, do not have the clout to gain risk investment funding from a banking structure that now has little interest in taking any risk in exposure offered by the SME sector or the housing market.

David Miles – External Member of the Monetary Policy Committee has reviewed the effects of the Bank of England’s asset purchases during 2009/10.  Referring to empirical studies carried out by Bank economists,  Professor Miles states that: “a range of estimates suggested that the asset purchases had about the same effect as a cut in Bank Rate of between 150bp to 300bp, increasing GDP by about 1.5% to 2%.”  David Miles notes his scepticism about the reliability of many econometric estimates but finds it reassuring that a range of very different techniques give broadly similar results.  He says: “.I would certainly take these results much less seriously if these were just apparent empirical regularities for which there was no plausible economic mechanism that could have generated them.  Let me put the point in a less negative way.  I believe that there are very good reasons for thinking that purchases of government bonds in exchange for money created by the central bank will have an impact on a range of asset prices and will influence the cost and availability of credit to the private sector.”

Up to now 2010/12 there is no sign that any such impact has taken place, SME’s say they still cannot obtain new credit, banks are recalling loans, mortgage availability is still restricted and the cost of credit remains unchanged; rather like the publics attitude to bankers.

Although some action has been taken to ameliorate public concern about bankers financial megalomania, such as has been done to ‘Fred the shred’; he has had his knighthood taken of him as a way off showing displeasure at his action and responsibility in the RBS fiasco, he is not the only one that should be held to account, there is no reason not to take aim at the incompetence of Melvyn King the BOE governor and his (at the time opposite) Alan Greenspan. These were, with economist, others and Politian’s, ensconced in a blind connivance at a time when they were supposed to be the oversight experts in the banking and finance structures that allowed the CC to occur. MK has said that as it is now a choice between the economy, (banking & finance) savers or pensioners the game will be to focus on the economy i.e. the saver and pensioners that may have accumulated resources and not borrowed on the cheap now have to pay up by having their available cash resources corroded away by printing money, QE. This means that as well as deliberately devaluing the pound by 25%, impoverishing fixed income earners and savers to the betterment of the borrowers that caused the problem in the first place, he is content to let the banks off the hook; to let them off load assets to the taxpayer and to ‘buy’ bonds to build up their balances sheets and invest in commodities and city bonuses.

Unfortunately what is good for bankers is not much use to the every day economy of the consumer with a 25% depreciated pound that makes goods more expensive, inflation at 3% and a depressed wage demand is only bottling  up some high pressure problems a few years down the road. To see an ancillary effect of QE the share price of stocks is going higher yet the productive out turn and P/E is falling, GDP is hardly moving even though exports are helped by a weaker pound, it is not going to solve the under lying problems.

To add another slant to the above, this is a quote piece from Tim Price money morning

“Using newly created electronic money, the Bank of England has bought vast quantities of bonds. The hope was that capital would be recycled through the markets. In turn, this would boost investors’ ‘animal spirits’ and as a result, some form of magical ‘trickle-down’ wealth effect would mysteriously make us all feel richer, and therefore more susceptible to going onto the High Street and spending.

Now you may have spotted some of the flaws in this logic. The newly created pounds effectively caused all existing pounds to be worth a little bit less. So QE immediately made all holders of cash worse off. And this is at a time when savers are already being short-changed by the banking system, since interest rates have been driven down to near zero.

It’s a different story for the banks. They got free money courtesy of the Bank of England, plonked it in long-dated government bonds, and kept the interest rate spread (the gap between the cost of the money and the income earned on it).

In short, I think QE is a Ponzi scheme designed to please one powerful constituency – the City of London”.

David Stockman was director of the Office of Management and Budget in the Reagan administration. He was a key member of Ronald Reagan’s financial team. Here is what he said recently about quantitative easing, as practiced in the US and the UK.

“These [QE] programmes… are simply designed to… keep the stock indexes going up, [in the hope that] somehow that will fool the people into thinking they are wealthier and they will spend money. The people aren’t buying that. Main Street is not stupid enough to believe that engineered rallies as a result of QE stimulus are making them wealthier and so they should go out and buy another Coach bag. This is really crazy stuff... I think the Fed is injecting high grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient.”

The unraveling of the economic mess and any attempt to understand where it is going is no clearer now than when CC first started. There is far too much uncertainty as to the ultimate effect of QE other than it is being taken (in hope) that it has had an effect on bond equity asset market and ‘trickle down’ however it is apparent that it has had no positive effect on the consumer supply of money, ‘the pound in the pocket’.  

To be bedazzled or astounded further look at the assessment of:-

The United Kingdoms quantitive easing policy: design, operation and impact- quarterly bulletin 2011 Q

It is instructive to read and it comes as close as they dare to make a statement that there is no real indication as to the effectiveness of QE and have little idea of what is to follow “While there is considerable uncertainty about the magnitudes, the evidence suggest that QE asset purchases have had economically significant effects” not on the real economy but the markets, property, equities / stocks and bank balance sheets.

The report uses a form of duplicitous civil service speak that is a factual created form of information prestidigitation, a way of presenting detail in an academic style that offers one view and makes no attempt at elaborating an alternative negative element. It takes prejudicial reading to unwrap the unspoken unrepresentative negative elements. “The aim of the policy (QE) was to inject money into the economy in order to boost nominal spending and thus help achieve the 2% inflation target” The uncomfortable truth in this was that at the time the government and banking structure were terrified that a deflationary spiral could be caused out of the CC 2008, zero growth, a consumer withdrawal squeeze, seized up interbank lending and unrequited debt. It much preferred to feed the hydra of inflation (mostly imported) to support the inflation ‘target’ (i.e. not have it drop far below) in the hope that RPI / CPI would mitigate away by cost cutting and no one will care about devaluation.

The paper looks a number of ‘channels’ as evidence of the impact QE asset purchases may have had and has to conclude “It is difficult to measure directly the effects of monetary policy measures such as QE and so estimates of those effects are highly uncertain”

The one thing that one can be certain of is that the whole excursion into QE and the fiscal and monetary stimulus put in place by “advanced” economies was and as is still unfolding, is a massive confidence trick, an exercise in the face of a cataclysmic economic mal-administration. 

To put the QE into a context remember were it came from, the CC 2007/08 was caused by a slight move upwards in interest rates, bio fuel drove up the cost of energy, food and grain, inflation crept up, US housing default rose, interbank lending seized up, bank insolvency via bad debt exposed balance sheets, banks failed, government bailouts came into play, deficits were ramping up, trade slowed down and stressed economies feared sliding into recession / depression.  It appears there was a spiral of effects that had no automatic corrective method which would offer a positive spin to drive market confidence up. At the same time commodity inflation was having an effect on consumer disposable resources and there was no attempt to use the usual method of raising interest rate to stifle it as the rates were already at an inordinately low level and it would have had a unpopular effect on borrowers and the housing market upon which the bust of the CC owed so much.

It was now that QE came into being; it became clear that the imperative was to boost confidence in the governments approach to tackling growing debt and deficit, to secure the banking structures, deleverage and boost them with assets purchases – bond / gilts / equities as there was no scope do anything with the base rate to stave off inflation or possible recession. The stance was to be ultimately less concerned with local indigenous consumers or savers or what money M4 was available in open circulation. It is still a gamble to play for time to write off the created huge mercurial corrupting debt of the financial structures. To mend the financial systems of “the advanced economies” QE is now the only game to hand however the long term cost to offset the inflationary impact that is likely to follow, will be equally unpleasant and if we are unsuccessful a debilitation depression.

One can appreciate the frustrating dilemma and the seeming inability to offer a way out of the whole mess other that to play for time, time that may not be so easy to usefully obtain when the fundamentals of the west economy are proven disastrous. Even the masters of the universe, the economist are having dreadful time trying to make any logical sense of the mess or to guess at were it is going to support their own pet theories of economics – market forces, laissez faire, command economics, structural balanced deficiencies or just plain who the F knows!

As has been intimated on a number of occasions the ultimate diabolical solution to the created financial repression is the not so surreptitious theft of wealth from the parsimonious to aid the profligate and an eventual war! Before we get there, which could happen surprisingly quickly, tell tail signs will be a composite of things, increased civil disquiet as impoverishments bites, legalised oppression, energy cost and access to it, disingenuous scapegoats, trade tariffs and human dislocation (discordant immigration / migration). However to keep the peasants happy and their mind off important things there is the waste of £25bn on the Olympics, the queens diamond jubilee cavalcade, sale of the NHS and we await a royal birth, death, or marriage.  

© Renot 2012

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