Quantatitive easing and savings - what effects?

John_Kennet

The initial £75B quantitive easing is roughly 5% of GDP, and the £150B potential quantitive easing is around 10%. So it does amount to a one year 10% devaluation of the pound abroad (assuming it doesn't also continue in future years...). So for anything that we buy from abroad it does amount to erosion of spending power, and erosion of our savings held here compared to those held abroad. For buying UK labour and stuff it should only affect us insofar as they contain any foreign components.

gozomark

only if £ falls by 10% as a result.

tradetime

John_Kennet wrote: »

The initial £75B quantitive easing is roughly 5% of GDP, and the £150B potential quantitive easing is around 10%. So it does amount to a one year 10% devaluation of the pound abroad (assuming it doesn't also continue in future years...). So for anything that we buy from abroad it does amount to erosion of spending power, and erosion of our savings held here compared to those held abroad. For buying UK labour and stuff it should only affect us insofar as they contain any foreign components.

Thanx, by that simplistic explanation you would have to say that the value of the £ is determined by the amount in circulation v the demand for them, being equally simplistic of course. If we assume the demand remains more or less the same, then a 10% increase in the amount in circulation might have the effect described, but this is a 10% increase of one years GDP, couple that against the amount of Sterling value wiped off balance sheets in investments etc, and I would suggest that there is no basis in that arguement, it's just someone playing with figures.

Reaper

John_Kennet wrote: »

Look at the Nationwide figures for house prices in previous recessions (www.nationwide.co.uk/hpi/historical.htm).

The link doesn't work. Do you have the correct one as I would be interested to see it?

blizeH

/buys house

:P

sabretoothtigger

UK Interest Rates

Frankly interest rates being cut from 1% to 0.5% makes little if no
positive difference to the economy as the problem is the lack of
credit and not the level of the base interest rate, if anything it
further reinforces the fact that Monetary Policy has Failed, therefore
the government may have been wiser to have left interest rates at 1%
which would have sent a stronger message out to financial markets
rather than look here. We have panicked again and cut to 0.5% ! 0.25%
Next, then what ? The end of monetary policy that's what! I would be
surprised if rates were cut again, but with the lack of competent
decision making I am afraid it remains a distinct possibility.

In terms of the interest rate forecast for 2009, rates are
overshooting to the downside towards a target of 0.25% as recent
analysis <http://www.marketoracle.co.uk/Article8707.html>
projected towards.

Quantitative Inflation / Printing Money

The government and Bank of England talking heads call it a powerful
tool to kick start the british economy. However this is in effect the
LAST RESORT, something that has not been undertaken during the 300+
years of the Bank of England because it is akin to detonating a
nuclear bomb without worrying about the fallout. As mentioned earlier
the �75 billion will eventually result in an increase in the amount of
credit in the economy of some �750 billion.

How does Quantative Easing Work ?

The Bank of England will go out in the money markets and firstly buy
government bonds to the tune of �100 billion to drive down long
interest rates, and secondly buy corporate bonds and therefore create
a demand for corporate debt thus driving down corporate bond yields.
This allows companies to raise funds and should in theory result in
greater investment and hence increase employment and corporate
activity.

Will it Work ?

I cannot see how buying government bonds will work as at the moment
demand exists for UK bonds. Buying corporate bonds does increase the
demand and hence the supply of corporate bonds will increase which
will put cash into the corporate coffers, it all depends on what the
corporations do with the cash i.e. do they do what the banks did and
bolster their balance sheets or do they spend it ? However printing
money does risk igniting inflation as the supply of money goes through
the roof. Whilst it has never been tried in Britain before, not even
during the last Great Depression. But where it has been tried it has
ALWAYS FAILED, as once the printing presses start the governments then
find it harder to stop printing and wean the economy off the need for
repetitive injections of fresh cash as happened in Germany's Weimar
republic that ended in an hyper-inflationary collapse and the most
recent example of Zimbabwe which clearly illustrate what eventual
outcome of quantitative easing is i.e. total destruction of the
currency. Britain is on the SAME PATH which at this point in time
suggests much higher inflation as the December inflation forecast
concluded (UK CPI Inflation, RPI Deflation Forecast 2009)
<http://www.marketoracle.co.uk/Article8004.html>
that deflation will give way to much higher inflation with the most
probable outcome of stagflation for a number of years.

In my opinion this is a doomsday event for the BRITISH CURRENCY!,
Their is much talk that a country cannot function without a banking
system, well how is the country going to function without a currency?
For the answer to this we just need to look at history where EVERY
EXAMPLE OF PRINTING MONEY ENDED IN DISASTER - EVERY TIME ! Those
pointing towards Japans experience need to remember that Japan has
been in an economic depression since 1990! and its currency has only
been maintained due to the large trade surplus which Britain does not
enjoy.

Fighting Deflation With Inflation.

The government and the Bank of England are attempting to fight
against the ongoing deflation as a consequence of the collapse of
asset values, and the bankrupt financial institutions continuing to
deleverage from as high as X60 of capital leveraged positions, which
in the process requires the Government to step in and recapitalise the
banks and take the toxic debts off the banks balance sheets.

My analysis of December 08
<http://www.marketoracle.co.uk/Article8004.html>
concluded that the UK is heading for real deflation during 2009, with
the RPI inflation measure expected to go negative by mid 2009 by
targeting -1.2%. The trend to date is ahead of expectations however
the most recent data showed the CPI measure take a step towards trend
by only registering a small drop by falling to 3% from 3.1%

<http://www.marketoracle.co.uk/Article8004.html>

Spanglear

Thanks everyone for your input - all very informative.

I think that the general consensus is that QE will be bad news for savers, but just how bad remains to be seen.

I do like the idea of NS&I index linked savings as a safe haven if inflation does take off (as I fear), but isn't there a danger of the treasury limiting the issue of them or dropping them altogether if inflation rises significantly? At what point would you buy-in?

tradetime

Spanglear wrote: »

Thanks everyone for your input - all very informative.

I think that the general consensus is that QE will be bad news for savers, but just how bad remains to be seen.

I do like the idea of NS&I index linked savings as a safe haven if inflation does take off (as I fear), but isn't there a danger of the treasury limiting the issue of them or dropping them altogether if inflation rises significantly? At what point would you buy-in?

Not absolutely sure, but I think they already limit how much you can buy in any one issue to £15K per individual. If that is the case, you could always buy index linked gilts. Personally alongside that I would look at commodities and commodity producers while prices are low, if you are investment orientated.

Yes £15K per issue. http://www.nsandi.com/products/ilsc/isitrightforme.jsp

gozomark

Spanglear wrote: »

I think that the general consensus is that QE will be bad news for savers,

is it ? I don't think it will be

sh856531

Guys,

When the BoE buys government debt, corporate bonds or whatever else it fancies and hands over the cash, can it insist on swapping the cash back out at a later date?

In other words, can it reverse its actions later - perhaps by forcing the banks to buy back the bonds, gilts, houses or whatever? Or is it done once and the banks effectively have the cash with no strings attached?

Many Thanks

S