Quantatitive easing and savings - what effects?

Spanglear

Hello All, I've finally registered on this excellent forum after watching from the sidelines for some time now.

I have been a cautious saver for some years after having paid off most of my debts, so I'm more than a little irked at the current status quo whereby savers seem to be being penalised with poor returns while borrowers are basking in a sea of low interest paradise.

After todays announcement of the BoEs intention to push ahead with "quantatitive easing" (or the virtual printing of money in lay terms), I am a little unclear on how this will affect savings in the long term. Is it yet more bad news for savers?

Already reeling after the harsh interest rate cuts of the past few months, do you think we now about to see savings eroded further by this new measure?

I'm seriously considering going on a monster spending binge at the moment, afterall, you can't take it with you, and I'd rather they didn't take it down with them either.:D

Your thoughts, Cheers.

Reaper

Here's my reply to a similar question on another board. Please excuse the cut & paste...

It is being used to prevent deflation (negative inflation) and try to stimulate the economy. It is a valid but dangerous weapon as the economy can flip very fast between deflation and inflation.

So what does it mean to your savings...? Well inflation is bad for savings but can not be looked at in isolation. High inflation is normally contolled by putting interest rates up. If the government do that by as much as inflation is going up then it makes no difference to your savings.

If, however, the worst happens and we get "stagflation" (high inflation and recession at the same time) then the govenment won't be able to put interest rates up for fear of damaging the economy further. If this happens then one possible strategy is to spend your savings and load yourself up with debt - eg buying the biggest house you can get. The theory being that low interest rates make it affordable and high inflation means the value of the debt plummets until you can pay off the mortgage with half a stale biscuit. A controversial strategy but one I would consider if the worst happens.

... of course there are less controversial solutions such as NS&I index linked savings.

gozomark

good post Reaper - QE is dangerous, but not as dangerous as not QE right now.

Of course, given that many savers seem to care more about nominal than real interest rates, many will feel happier if inflation returns with a bang, even if real rates are actually negative...

Masomnia

Well put, Reaper.

Oscar_Wilde wrote:

The only thing worse than having QE is not having QE.

LardyCake

Won't QE lead to the pound loosing its value against other currencies and mean for us in the UK, more expensive imports and thus cause inflation? I ask, in genuine ignorance!

gozomark

its a very good question

simple answer is no - why ?

1. most other countries will do the same
2. countries that don't do it risk seeing their economies implode anyway

it would be yes if this crisis was only in the UK, but it isn't, its worldwide

sabretoothtigger

If this happens then one possible strategy is to spend your savings and load yourself up with debt - eg buying the biggest house you can get.

I think you've nailed it.
This is what they want you to do and it might be like pushing string at the moment because the banks are suffering leveraged losses that easily swallow the extra cash but at some point the effects will hit the general population

LardyCake

Ok, thanks - here is another question: has QE been tried in the past and did it work then?

sabretoothtigger

japan
nope

gozomark

mute point - QE might have saved Japan from even worse. It was also used very late in Japan (early 2000's, when crisis was nearly 10 years old), and when bank problems were still not resolved

Steve_xx

gozomark wrote: »

its a very good question

simple answer is no - why ?

1. most other countries will do the same
2. countries that don't do it risk seeing their economies implode anyway

it would be yes if this crisis was only in the UK, but it isn't, its worldwide

Other countries may be doing the same, but, sterling has fallen against most currencies and it remains firmly in the doldrums. In effect, that means that imports will cost us more and so the reality of that is that it must drive inflation upwards?

On the positive side, our exports are cheaper for foreigners to buy. In theory, that should mean that demand for our goods rises and therefore factories ought to be working overtime to cope with the demand and indeed recruiting employees. However, at the moment the reverse seems to be the case.

I think that the Bank of England has acted in panic, reduced rates too far, too soon. According the the bank, it takes two years for rate movements to filter through to the real economy.

I think that both the government and the bank are fiddling with the economy, rather than allowing the correction that must surely happen at some point. I think that throwing huge amounts of creative accounting at the situation will serve only to exacerbate an already desparate situation.

It'll all end in tears.