Increasing the money supply - "pushing string"?

MyLastFiver

I forget who coined the term "pushing string" to describe ineffective supply-side measures, but it seems to make sense.

The government think that if they increase the money supply, banks, individuals and businesses will spend/lend it. Right?

Banks, businesses and individuals are up to their eyes in debt already, right?

And apart from anything else, they are terrified for the future, right?

Because they know that slashing interest rates and QEing are signs of desperation, right?

And they worry about rocketing inflation and interest rates, right?

So what they really want at the moment is cash in the bank, right?

So won't this new £170,000,000,000 just end up sitting on deposit, rather than in cash registers?

mewbie_2

At some point, someone will look at the cheap money and do something with it that makes some money. They will be followed by others and off we go again.

I have deliberately simplified this argument because I am very stupid.

Graham_Devon

Yer but no, but yer, but no.

This 170 with lots of noughts will just be eaten by the banks, they have already eaten more than this while pushing the rates up for us peasants.

However, the next trillion to come from QE (which I reckon we will surpass), may end up in our pockets.

But by then, you'll be paying the bus driver £670m for a single bus journey 2 miles into town anyway.

I have completely forgot why or what I was talking about now. What was the question?

MyLastFiver

I'm very stupid too, so please bear with me. Will enough people spend/invest their cheap money, or will they use it to pay down existing debt, fearful that low inflation and low interest rates aren't sustainable and will go through the roof sooner or later? Because that's how I feel and, if this board is at all representative, many others do too.

tomterm8

MyLastFiver wrote: »

I forget who coined the term "pushing string" to describe ineffective supply-side measures, but it seems to make sense.

The government think that if they increase the money supply, banks, individuals and businesses will spend/lend it. Right?

Banks, businesses and individuals are up to their eyes in debt already, right?

And apart from anything else, they are terrified for the future, right?

Because they know that slashing interest rates and QEing are signs of desperation, right?

And they worry about rocketing inflation and interest rates, right?

So what they really want at the moment is cash in the bank, right?

So won't this new £170,000,000,000 just end up sitting on deposit, rather than in cash registers?

If the government buys enough bonds with the money, the banks have to lend it out. If they buy £170,000,000,000 bonds at, say, a cost of 2% if they don't do anything with it the cost of the money will slowly destroy them. There's a point where if you print enough money the banks no longer have a choice and have to lend it.

MyLastFiver wrote: »

I'm very stupid too, so please bear with me. Will enough people spend/invest their cheap money, or will they use it to pay down existing debt, fearful that low inflation and low interest rates aren't sustainable and will go through the roof sooner or later? Because that's how I feel and, if this board is at all representative, many others do too.

It's an accounting identity, you can't save money unless the bank lends it to someone else. If you repay debt, that still improves the economy because you will have greater future income which you will either spend or which will eventually become savings which will be lent to someone else.

mewbie_2

MyLastFiver wrote: »

I'm very stupid

No you're not.

No one knows for sure what is going to happen. Plenty of doom scenarios, thank goodness the internet wasn't around during the Plague, Fire of London, 100 Year War, Great War, etc.

My guess is that we are in economic hard times, which will be very painful for those who lose their jobs, but will not be so bad for those who can keep working. This is not the end of the world, and we will recover within a couple of years.

Looking back it will be seen as another of those 'blips' in history - something the financiers got very excited about, but for most normal people was less important than other stuff.

This is my hope. It may be foolish, but it helps me when I'm feeling down about it all.

leftieM

Didn't Japan introduce QE when they had their problems? Or was their QE different?
If it's the same, then this article may be of interest to those of us who are feeling concerned.

http://www.frbsf.org/publications/economics/letter/2006/el2006-28.html

MyLastFiver

tomterm8 wrote: »

If the government buys enough bonds with the money, the banks have to lend it out. If they buy £170,000,000,000 bonds at, say, a cost of 2% if they don't do anything with it the cost of the money will slowly destroy them. There's a point where if you print enough money the banks no longer have a choice and have to lend it. .

Tom, you have me interested now. Could you explain this again to me in complete idiot language please?

tomterm8

It works exactly the same way as for a private borrower. If the government buys a £100 bank bond at 2%, then the bank needs to repay £102. If it doesn't, it loses money. In essence, Banks can only make money by lending it out to other people. So, if you print enough money, banks have to lend it or go bankrupt.

That's one example. But whatever assets the bank of england buys, Bank money always belongs to someone else. If a bank doesn't make use of the money, the client will take the money and lend it to another bank that does. It's an accounting identity... whatever money the banks have, they have to lend to someone.

MyLastFiver

Sorry. Why does a private bank have to borrow by selling bonds? And why will it lose money if it doesn't repay £102?

tomterm8

MyLastFiver wrote: »

Sorry. Why does a private bank have to borrow by selling bonds?

A bank borrows on the retail market (i.e. from consumers) or the wholesale market by selling bonds. In QE, The government would be buying assets (i.e. bonds) on the wholesale market.

There is no cast iron reason a bank couldn't get all its funding on the retail market, but no major UK bank functions in that way. This is because we have a low savings rate in the UK, and so there is a gap between how much banks can profitably lend and the deposits that they can get from customers. Unfortunatly, the wholesale markets are not operating at the moment because foreign investors are not lending UK banks money. This is because they are insolvent.

The purpose of qualitative easing is to full that gap, so that banks have essentially the same amount of money to lend that they did in 2007. In any case, a bank that didn't operate in the wholesale market would not directly recieve the additional money from the government. But its deposits would probably increase, meaning it would still need to fund the interest on those deposits by lending the money.

MyLastFiver wrote: »

And why will it lose money if it doesn't repay £102?

It would be defaulting on a contract, and so other investors wouldn't trust it as much as they did in the past. People would probably still lend it money, but only at a substantially higher interest rate.