Thursday, October 6, 2011

Bank of England Restarts QE and Injects £75 billion into Economy, Calls the Current Financial Crisis "Worst In History"

Collateral damage: UK households, with increasing inflation. It's worth it, says the governor, Sir Mervyn.

Last time the Bank of England did the QE - quantitative easing - was in 2009, when it digitally printed £200 billion. This time around, it is expected, according to the Telegraph article linked, to exceed that amount by next year.

From UK's The Telegraph (10/6/2011):

Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.

Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.

Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.

This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”

The Monetary Policy Committee [MPC] also said that the inflation-driven “squeeze on households’ real incomes” and the Government’s programme of spending cuts will “continue to weigh on domestic spending” for some time to come.

The “deterioration in the outlook” meant more QE was justified, the Bank said.

Financial experts said the committee’s actions would be a “Titanic” disaster for pensioners, savers and workers approaching retirement. Sir Mervyn suggested that was a price worth paying to save the economy from recession.

(The article continues at the link.)

Just like the US Fed counterpart, Sir Mervyn must be thinking the stock market is the real indicator of the economy. Print money, give it to bankers so that they can bid up paper assets like stocks.

QE, or quantitative easing, is supposed to work this way:

  1. Central bank digitally prints money and buy government debts (treasuries, gilt, agency bonds) from the banks (in case of the US, primary dealers including many foreign banks);

  2. Bank lends the money to individuals and businesses, who will then use that money;

  3. Economy grows; if it doesn't grow, just keep doing the step 1 and see what happens. It takes a whole lot of money to achieve the result, they say, without quantifying "a whole lot".

How it worked in the US:

  1. Central bank digitally prints money and buy government debts (treasuries, agency, agency MBS);

  2. Banks get the cash, park it at the central bank receiving a decent interest; the portion they do not park at the central bank, they use it to bid up the so-called "risky assets" - mostly paper assets like stocks and futures, or bonds that they think the central bank will buy next;

  3. Banks don't lend to individuals and businesses who could use cheap money, but only lend to credit-worthy people and big businesses who don't need or want money;

  4. Stock market levitates on low volume, and the economy stagnates and shrinks.

  5. Go back to step 1, repeat ad infinitum.


the voice in your head said...

Where's the Eurobond?

Maju said...

It is the worst crisis in history (comparable only to that of the late 18th century) and, for that reason, no QE nor other unimaginative measures that only give money to the Capitalists will solve anything.

Capitalism as Marx explained destroys demand in the mid term by cutting salaries. This was patched in the mid 20th century with "socialist" (or Keynesianist) massive state intervention and, since Reagan, with the credit bubble (you have a pitiful salary but you can get in debt up to the eyebrows with us, banksters).

Today all patches have been exhausted. Hypothetically a return to "socialism-in-Capitalism" (Keynesianism) is possible to some extent but the doctrine has become that debt cannot be tolerated, so Keynesianism is not to exist anywhere. So for ideological reasons they are denying their own only option to save the system and hence their own positions of power.

QE is just giving money to the banks who do nothing of use with it. If QE would lend money (at such cheap costs) to private citizens directly, it might act as dynamizer of the economy but banks are just retaining that money and not lending it at all.

A big problem is one of inequality in public credit: only certain privileged people (banksters) can use privileged sources of income like QE and bail outs. Commoners instead are now bound to debt slavery, homeless death or...

... or revolution.

Anonymous said...

well said Maju - thank you

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