Quantatitive easing and savings - what effects?

Steve_xx

tradetime wrote: »

Agreed, that's where it gets difficult to work out who's worse off than who, for example, as I understand it the Euro banks are much more at risk to Eastern Europe, we have little exposure there, but how much exposure do we have to the Euro banks Everything is so interwoven in a global economy, and nobody it seems is sheltered.

Yes that's it. The economies are so interwoven and there has been so much elaborate dealing done, that nobody actually knows what's theirs or if they do know what's theirs, they don't know where it is!

tradetime

FATHEROFTWO wrote: »

Sorry I will re phrase it.
In starting QE and effectively buying back government debt owed then the government have reduced the national debt.

Is this not a good thing provided that no other negative factors impact the economy and it is effectively created free money for the government ?

Sounds good put like that doesn't it, but there's no such thing as "free money" The idea / risk is that when you print more money, you reduce its value, that is inflationary. Money is just like anything else, the more ££'s there are in circulation, the less value they have, problem with that theory of course as I said earlier, ££'s are disappearing from assets such as houses, stock markets, etc, so net net, I don't know. Your basically playing a balancing game, trying to create inflation, but not too much.

blizeH

Good advice that, thanks Steve

tradetime

blizeH wrote: »

Some good advice and information in here, thank you guys.

Still a little unsure as to what to do though; I'm thinking I should probably speed up the house purchase, just in case inflation goes massively above interest rates? Or is that a bad idea still..?

For the sake of arguement, let's assume it all goes horribly wrong, and there is massive inflation as an aftermath, it won't happen overnight, my guess is anywhere between 18 and 24 months out, so as Steve_xx says, given it is a virtual given that hoouse prices have more downside, possibly 10-20% it would likely be prudent to just hold back and not rush into anything, there'll be plenty of warning that inflation is on the rise.

blizeH

Thanks tradetime too, good advice... and seems your signature is something to note too

Reaper

sh856531 wrote: »

Hi Reaper,

I've never really understood why the economy would flip to inflation so quickly.

I would have thought that it would be a gradual thing as demand gradually picked up. Even if it weren't that gradual, surely the BoE could just reverse the QE activity and hike interest rates to reduce the money supply?

The problem is that it is not a gentle adjustment. Imagine instead two powerful sports cars bumper-to-bumper pushing against each other with tyres screaming. One car represents depression bringing inflation down and reducing spending, the other is QE pushing inflation up and increasing spending.

If you don't get the balance just right or one of the cars suddenly slackens off then they will lurch one way or the other.

Now put novice drivers in the cars because QE is a very new tool and nobody quite knows how to use it. It's only be tried once like this before (Japan) and the circumstances are not quite the same.

Just to add to the fun most supporters of QE think it should be done with a big wallop, not gentle pressure. Here's an extract from a BBC article with their take on the subject.

Quantitative easing is a high-risk strategy. If it is not done aggressively enough, banks will remain unwilling to lend and the crisis could drag on. To some extent that is what happened in Japan when this was tried 10 years ago.

I hope it works but I'm not enough of an economist to know whether it will. For that matter no economist really knows what is going to happen. Hang on to your hats!

John_Kennet

Spanglear wrote: »

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.

In general it is all bad news for savers. There are more of us, but interest rate cuts puts more money in the pockets of borrowers than savers, which theoretically puts more money in the economy. QE also devalues our savings while putting more money in the economy. So savers are being sacrificed to save the economy.

I have already started spending it. Bank interest rates are less than CPI. May as well. Us savers propping up the economy when interest rates are in the toilet by spending it is good for the economy. So you can feel virtuous about your spending while getting great value for money in the spenders market. Get those home improvements in now!

Spending on decent energy efficiency measures like cavity wall insulation is a better return on your money anwyay. Let's face it you aren't likely to move house in the near future...

Don't binge all your savings away though, It is entirely possible we could be here a few years.

Look at the Nationwide figures for house prices in previous recessions (www.nationwide.co.uk/hpi/historical.htm). If this was a normal recession house prices will still fall by about a third, and this is not a normal recession so will likely overshoot.

I am also ready to switch as much as possible to index linked savings, if QE overshoots and causes inflation. Which seems highly likely. Though when is the difficult question. The economy might bounce back in 2010 or more likely we are in depression 2.0 and are here for a few years.

Deflation is also good for us savers, it's an effective tax free interest rate rise, as long as banks don't give negative interest on your money.

sanfly

FoxtonsRIP wrote: »

My understanding is that yours and my savings have been devalued at a stroke by about 10%. So if you had £100k savings in the bank now it's only worth about £90K. It's scandalous.

Interesting comment, is this 10% devaluation your feelings or has it been reported as actual result of Q E............

tradetime

I too would be interested to see the calculation behind that 10% figure.

NumbersGuy_2

FATHEROFTWO wrote: »

If America dont participate in QE then our currency has effectively devalued similar to what a rights issue does to to a share price or am I wrong ?

Correct. Devaluing imprudent people's debt and eroding the wealth of responsible savers. :mad: