The Bank of England would like to stimulate the economy, but I don’t believe that is QE’s real purpose. What it was meant to do was to cover a UK debt hole that most people don’t understand but could push the economy into depression.
The Bank of England has ended QE, at least for the time being. The total amount it ‘pumped into the economy’ represents around 15% of the value of UK production or GDP. It has done this with interest rates at 0.5% and a recently announced UK production (GDP) increase of 0.1%.
Yet, 0.1% doesn’t sound much and there is a good reason that it differs from the theory.
What you’re told
The theory is that the Bank of England flicks a switch and creates money. The Bank uses this money to buy bonds from investment and high street banks as well as large companies and therefore deposit money into their coffers. Bonds are contracts to pay back a certain amount of borrowed money plus interest.
More money in banks and low interest rates, means that bank managers can lend out more money to businesses, particularly small businesses. But QE is risky. Too much of it leads to inflation in the medium term and it may also put off global financiers buying UK government bonds or gilts.
The UK, though, has a good name when it comes to paying debt. Credit rating agencies tell global financial markets of the risks of not getting back money loaned to nations. The UK has a Triple A rating. Its bonds are called gilts because of this. The financial markets think the idea of the UK settling its debt is unthinkable.
Furthermore, the Bank of England can say there are indications that QE’s working. They also recently announced that provisional November 2009 figures show that net lending by all UK-resident banks and building societies to businesses was £0.1 billion. Meanwhile, there has been a more than expected jump in manufacturing output from December 2009 to January 2010 and QE has, as planned, helped firms buy more shares.
Yet, the lending numbers is a net figure and incorporates money businesses paid back to banks and building societies. Indeed, the Bank says that some business borrowed money from capital markets in order to pay off their bank debt. Meanwhile, the Bank admits that lending over the year remains subdued. As for the manufacturing increase, it has been small.
This should not be a surprise. Most of the QE money has not been spent on banks but rather government gilts. By the end of September 2009, out of £152bn spend on QE, £152bn was spent on gilts.BTherefore, QE as of yet has not been the success it should have been. So, what is really going on?
What you’re not told
QE is part of the mysterious process of money creation and the purpose that I suspect it fulfilled is connected to this and to the value of UK sterling.
Money creation is about the money people and organisations spend, have in bank accounts, invest and save. Most of a nation’s money is created by its central bank. The government gives certain commercial or investment banks bonds and gilts. These banks then hands over money to the central bank. The central bank can then buy more bonds from other banks. The money supply is then swelled. This is why pound notes are certified by the Bank of England rather than the UK Treasury.
But most central banks are owned by commercial institutions or by private individuals. The same ones to which the government gives its bonds and gilts. The Bank of England is semi-private in that its shares are held by the Treasury Solicitor and their board of directors is appointed by the government.
This process helps to create the UK National Debt. From figures published November 2009, UK public sector net debt was £870 billion or 61.7% of National GDP (
http://www.statistics.gov.uk/cci/nugget.asp?id=206). Roughly, National Debt is usually represented as the difference between money the government has spent and will spend that it has financed through tax and the extra spending that it raised through borrowing that it hasn’t yet paid back. In reality, a substantial proportion of that is money owed to the Bank of England when it created money.
In March 2009, the government found that global financial institutions avoided buying its gilts. Gilts are regarded as a very safe bet so this was virtually unprecedented. The Bank of England was forced to step in and buy the gilts. I believe this to be the origin of QE.
But government must also pay back with interest the money borrowed from global financiers in the past. Again, this is where QE steps in. I suspect that the main function of QE is to create money to pay back foreign lenders. Instead to going into UK banks, much of the money went abroad. It was not intended to substantially stimulate the economy.
What you should be told
So, what does the Bank of England fear? There has been talk that the UK and US might not pay back its debts. This would mean financial Armageddon. But this what Iceland and Greece are going through. So, if the UK did not pay back foreign lenders then it would lose its high credit rating. The consequence is that foreigners would not buy Sterling (through gilts and bonds), its value would fall and interest rates would go up. The UK would have to go to the IMF and they would run the UK Treasury.
Some analysts suspect that UK national debt is higher than £870bn. The Centre for Policy Studies argued that the real national debt is actually £1,340 billion - 103.5% of GDP. This figure includes all the public sector pension liabilities such as pensions, and Private Finance Initiative contracts Northern Rock liabilities, etc.
The government would say that this debt doesn’t really count because we have a long time to pay it back. And anyway, the UK is a resilient economy. It will overcome these problems and in the meantime why panic people?
Although, financial analysts have said a UK debt default is unthinkable, the mood is becoming less optimistic. Consultants McKinsey Global Institute presented a study of the UK debt situation at the global elite bash, the Davos World Economic Forum. It said that the UK problems is the worst of the major economies and would take up to seven years to get rid of. Add Morgan Stanley, and financier George Soros to those agreeing with this bleak picture of the UK and you’ve got something to worry about.
QE has bought some time. We all expect is that coming next is the slashing of public spending, an increase in taxation and perhaps an increase in interest rates. But should we also be expecting the IMF to take over the running of the UK Treasury?
More information
Bank of England explains Quantitative Easing: http://www.bankofengland.co.uk/monetarypolicy/pdf/qe-pamphlet.pdf
Bank of England ends Quantitative Easing: http://www.guardian.co.uk/business/2010/feb/04/quantitative-easing-bank-of-england
Bank of England buys government gilts:
- http://www.bankofengland.co.uk/publications/other/markets/apf/apfquarterlyreport1001.pdf
- http://www.marketwatch.com/story/bank-england-buys-uk-gilts-begins
- http://www.guardian.co.uk/business/2010/feb/04/quantitative-easing-bank-of-england
Bank of England’s lending figures: http://www.bankofengland.co.uk/publications/other/monetary/TrendsJanuary10.pdf
What are ‘gilts’: http://www.dmo.gov.uk/index.aspx?page=gilts/about_gilts
UK National Debt: http://www.economicshelp.org/blog/uk-economy/uk-national-debt/
Manufacturing grows more than expected: http://www.guardian.co.uk/business/2010/feb/01/manufacturing-sector-growth-soars
Banks not lending enough to firms: http://www.thisislondon.co.uk/standard-business/article-23746139-lack-of-bank-lending-hits-cash-starved-companies.do
Davos World Economic Forum:
www.moneymarketing.co.uk/regulation/news/experts-paint-bleak-picture-of-uk-debt-crisis/1006057.article
Morgan Stanley: http://www.telegraph.co.uk/finance/economics/6693162/Morgan-Stanley-fears-UK-sovereign-debt-crisis-in-2010.html
George Soros: http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/01/soros_bleak_outlook_for_uk.html
If you look at Balance of Payments, GDP and manufacturing, can you tell if the UK is heading for depression?
http://www.writepublicity.co.uk/writepublicity.co.uk/What_I_Blog/What_I_Blog.html
Yet, 0.1% doesn’t sound much and there is a good reason that it differs from the theory.
What you’re told
The theory is that the Bank of England flicks a switch and creates money. The Bank uses this money to buy bonds from investment and high street banks as well as large companies and therefore deposit money into their coffers. Bonds are contracts to pay back a certain amount of borrowed money plus interest.
More money in banks and low interest rates, means that bank managers can lend out more money to businesses, particularly small businesses. But QE is risky. Too much of it leads to inflation in the medium term and it may also put off global financiers buying UK government bonds or gilts.
The UK, though, has a good name when it comes to paying debt. Credit rating agencies tell global financial markets of the risks of not getting back money loaned to nations. The UK has a Triple A rating. Its bonds are called gilts because of this. The financial markets think the idea of the UK settling its debt is unthinkable.
Furthermore, the Bank of England can say there are indications that QE’s working. They also recently announced that provisional November 2009 figures show that net lending by all UK-resident banks and building societies to businesses was £0.1 billion. Meanwhile, there has been a more than expected jump in manufacturing output from December 2009 to January 2010 and QE has, as planned, helped firms buy more shares.
Yet, the lending numbers is a net figure and incorporates money businesses paid back to banks and building societies. Indeed, the Bank says that some business borrowed money from capital markets in order to pay off their bank debt. Meanwhile, the Bank admits that lending over the year remains subdued. As for the manufacturing increase, it has been small.
This should not be a surprise. Most of the QE money has not been spent on banks but rather government gilts. By the end of September 2009, out of £152bn spend on QE, £152bn was spent on gilts.BTherefore, QE as of yet has not been the success it should have been. So, what is really going on?
What you’re not told
QE is part of the mysterious process of money creation and the purpose that I suspect it fulfilled is connected to this and to the value of UK sterling.
Money creation is about the money people and organisations spend, have in bank accounts, invest and save. Most of a nation’s money is created by its central bank. The government gives certain commercial or investment banks bonds and gilts. These banks then hands over money to the central bank. The central bank can then buy more bonds from other banks. The money supply is then swelled. This is why pound notes are certified by the Bank of England rather than the UK Treasury.
But most central banks are owned by commercial institutions or by private individuals. The same ones to which the government gives its bonds and gilts. The Bank of England is semi-private in that its shares are held by the Treasury Solicitor and their board of directors is appointed by the government.
This process helps to create the UK National Debt. From figures published November 2009, UK public sector net debt was £870 billion or 61.7% of National GDP (
http://www.statistics.gov.uk/cci/nugget.asp?id=206). Roughly, National Debt is usually represented as the difference between money the government has spent and will spend that it has financed through tax and the extra spending that it raised through borrowing that it hasn’t yet paid back. In reality, a substantial proportion of that is money owed to the Bank of England when it created money. In March 2009, the government found that global financial institutions avoided buying its gilts. Gilts are regarded as a very safe bet so this was virtually unprecedented. The Bank of England was forced to step in and buy the gilts. I believe this to be the origin of QE.
But government must also pay back with interest the money borrowed from global financiers in the past. Again, this is where QE steps in. I suspect that the main function of QE is to create money to pay back foreign lenders. Instead to going into UK banks, much of the money went abroad. It was not intended to substantially stimulate the economy.
What you should be told
So, what does the Bank of England fear? There has been talk that the UK and US might not pay back its debts. This would mean financial Armageddon. But this what Iceland and Greece are going through. So, if the UK did not pay back foreign lenders then it would lose its high credit rating. The consequence is that foreigners would not buy Sterling (through gilts and bonds), its value would fall and interest rates would go up. The UK would have to go to the IMF and they would run the UK Treasury.
Some analysts suspect that UK national debt is higher than £870bn. The Centre for Policy Studies argued that the real national debt is actually £1,340 billion - 103.5% of GDP. This figure includes all the public sector pension liabilities such as pensions, and Private Finance Initiative contracts Northern Rock liabilities, etc.
The government would say that this debt doesn’t really count because we have a long time to pay it back. And anyway, the UK is a resilient economy. It will overcome these problems and in the meantime why panic people?
Although, financial analysts have said a UK debt default is unthinkable, the mood is becoming less optimistic. Consultants McKinsey Global Institute presented a study of the UK debt situation at the global elite bash, the Davos World Economic Forum. It said that the UK problems is the worst of the major economies and would take up to seven years to get rid of. Add Morgan Stanley, and financier George Soros to those agreeing with this bleak picture of the UK and you’ve got something to worry about.
QE has bought some time. We all expect is that coming next is the slashing of public spending, an increase in taxation and perhaps an increase in interest rates. But should we also be expecting the IMF to take over the running of the UK Treasury?
More information
Bank of England explains Quantitative Easing:
http://www.bankofengland.co.uk/monetarypolicy/pdf/qe-pamphlet.pdf Bank of England ends Quantitative Easing:
http://www.guardian.co.uk/business/2010/feb/04/quantitative-easing-bank-of-england Bank of England buys government gilts:
-
http://www.bankofengland.co.uk/publications/other/markets/apf/apfquarterlyreport1001.pdf -
http://www.marketwatch.com/story/bank-england-buys-uk-gilts-begins -
http://www.guardian.co.uk/business/2010/feb/04/quantitative-easing-bank-of-england Bank of England’s lending figures:
http://www.bankofengland.co.uk/publications/other/monetary/TrendsJanuary10.pdf What are ‘gilts’:
http://www.dmo.gov.uk/index.aspx?page=gilts/about_gilts UK National Debt:
http://www.economicshelp.org/blog/uk-economy/uk-national-debt/ Manufacturing grows more than expected:
http://www.guardian.co.uk/business/2010/feb/01/manufacturing-sector-growth-soars Banks not lending enough to firms:
http://www.thisislondon.co.uk/standard-business/article-23746139-lack-of-bank-lending-hits-cash-starved-companies.do Davos World Economic Forum:
www.moneymarketing.co.uk/regulation/news/experts-paint-bleak-picture-of-uk-debt-crisis/1006057.article
Morgan Stanley:
http://www.telegraph.co.uk/finance/economics/6693162/Morgan-Stanley-fears-UK-sovereign-debt-crisis-in-2010.html George Soros:
http://www.bbc.co.uk/blogs/thereporters/robertpeston/2010/01/soros_bleak_outlook_for_uk.html If you look at Balance of Payments, GDP and manufacturing, can you tell if the UK is heading for depression?
http://www.writepublicity.co.uk/writepublicity.co.uk/What_I_Blog/What_I_Blog.html 
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Economic Alternatives
08.02.2010 12:03
The Labour Party has sold out to the greedy Capitalists.
The Tories are led by Cameron who has not seen that he has to undo Thatcherism and repurchase the Family Silver. Thatcher's Tax cuts have boosted inflation, and as Money is the Lifeblood of Capitalism, she has undermined the institution of Capitalism that we all live by. She did far more damage than all the Marxists. She sold off the Nationalised Industries that were worth the National Debt, but she was no Conservative, at the same time she doubled the National Debt.
To put it right there needs to be a progressive tax on wealth. Hit the Bankers, who gambled with other people's money and have done so much damage, with an eye opening tax like Stafford Cripps introduced to ensure sound Money after WW2. (the foundation of all subsequent prosperity). One person had an income of £220,000 and an income tax bill of about £225,000. Having to sell Capital assets to pay the tax bill killed inflation stone dead.
Economic Growth has set underway the destruction of Earth's ability to support Life. The destruction of God's Creation is the prime objective of Satanists. The Lib Dems, indeed all the Politicians advocate restoring Growth so are agents of Satan. Those on the side of preserving Life on Earth will be looking for Contraction in the Economy, and Convergence in living standards to a level that is sustainable on this Planet.
To cope with the coming Depression the Bankers and greedy Capitalists have ensured, there must be Sound Money. The alternative is a total collapse into Chaos. Time for the Anarchist solution of No Government and No Money?
Anyone got some seeds of mutual aid and co-operation to plant?
Capitalist
Money should indeed be created by a central bank - but isn't.
15.09.2010 14:22
This is not true - only around 4-5% is created in that way, the rest being created by commercial banks as part of the lending process. Check on 'fractional reserve banking' for further information.
This is actually part of the problem and there are many who think that money creation should indeed be the preprogative of the nation, through its cetnral bank, rather than being a purely commercial exercise of the kind it is now - see, for instance, Josphe Huber and James Robertson's 'Creating New Money', available for download from the New Economics Foundation.
Iain Johnston