Qe

purch

Imagine the same situation but someone comes in and lends me a pound during the bidding process. I can now outbid you and pay £3.05 for the beer

What they are hoping of course, is that the "someone" can only afford to lend you 10p so, you can only bid £2.60.

I don't think anyone could argue that at some point in this cycle the QE won't be inflationary.

It is the amount of the inflationary pressures caused, and when they will materialise that is open to question.

Radiantsoul

Generali wrote: »

.

'Printing money' doesn't mean more goods are produced. Potentially it means that they cost more money that is worth less.

Perhaps it does though by encouraging consumption and investment.

Generali

treliac wrote: »

Gen, you explain things so straightforwardly.

So, would I be right to think that joe public will be able to buy less for their money, thereby leading to a rise in the cost of living?

Or isn't it as simple as that? Because if it is, the people ain't gonna be happy.

That's about it.

It's not quite that simple because there's a complicated bit in the money supply which is 'velocity of circulation'. That is the number of times money changes hands. To (over?) simplify if the banks swallow up the cash being 'printed' then there'll be no impact on inflation and also the policy will be ineffective. If they lend it (and can find borrowers which isn't a given) then it will be inflationary to some extent.

The problem with inflation right now is that I think pay rises will soon become a thing of the past unless you get promoted. If your cost of living goes up 10% and your pay goes up 10% too then it's not a big problem. If your cost of living goes up 10% and you don't get a pay rise then you're looking at a year of economy baked beans and scratchy loo roll.

Degenerate

ray123 wrote: »

What is quantitative easing?
Ben Bernanke, the chairman of the US Fed, once suggested quantitative easing is akin to dropping money from a helicopter.

He said no such thing. In the speech that got him the nickname "Helicopter Ben", he was talking about monetising debt to fund tax cuts, not QE:

http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

I never even studied economics and i seem to have a better concept than you!

Explain then, after dropping £75B from a helicopter, how does one reign it back in when things have picked up? I think it would be rather politically difficult to take in an extra £1250 tax revenue for every person in the country, just to destroy it to make up for what you dropped from the sky.

On the other hand, if the created money is used to purchase assets (not the bad bank assets, but some of the highest quality financial assets you can get), those assets can be sold back into the market and the created money destroyed relatively easily. This is QE.

Generali

Radiantsoul wrote: »

Perhaps it does though by encouraging consumption and investment.

Perhaps. I've yet to see any example of QE being effective. I have examples of it being ineffective (US 1931, Japan 2001) and it being disastrous (Zimbabwe now, Germany 1920s). Never effective.

I can see why it would encourage consumption but not why it would encourage investment. Consumption is brought forward in a high inflation environment (buy it before the price rises). Investment goes abroad at times of high inflation.

Degenerate wrote: »

how does one reign it back in when things have picked up?

Degenerate wins tonight's special prize! There is no way that it's going to be possible to destroy this cash, at least not by these idiots you have in charge at the moment. It'll take another Thatcher to do it - people still hate her yet she saved the economy of the UK!

Degenerate

Generali wrote: »

Colloquially, it's 'printing money'.

The Bank of England presses a few buttons and increases the Government's bank balance. They then use that money to buy assets from banks. Banks then (in theory) lend that money to you and I who spend or invest it.

The reason it may be inflationary is this. Imagine a situation where you have 2 thirsty people (you and I) and one beer.

If you have £3 and I have £2.50 then you can outbid me for the beer and would end up paying perhaps £2.55 for it.

Imagine the same situation but someone comes in and lends me a pound during the bidding process. I can now outbid you and pay £3.05 for the beer.

In both situations there is only 1 beer to be had but in the 2nd example the price of the beer is higher so what changed? The amount of money available to the potential buyers of the beer is what changed.

'Printing money' doesn't mean more goods are produced. Potentially it means that they cost more money that is worth less.

What you're missing from this description is that money is made up of more than just central bank money, there is credit money created by fractional reserve banking too. That supply has collapsed, which is creating huge deflationary pressure, and the QE is just an effort to plug the hole with central bank money, bringing the broad money supply back up to a sensible level while the banks get their act together.

itsnever2lateisit?

Degenerate wrote: »

He said no such thing. In the speech that got him the nickname "Helicopter Ben", he was talking about monetising debt to fund tax cuts, not QE:

http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm

Explain then, after dropping £75B from a helicopter, how does one reign it back in when things have picked up? I think it would be rather politically difficult to take in an extra £1250 tax revenue for every person in the country, just to destroy it to make up for what you dropped from the sky.

On the other hand, if the created money is used to purchase assets (not the bad bank assets, but some of the highest quality financial assets you can get), those assets can be sold back into the market and the created money destroyed relatively easily. This is QE.

I bet that is what they do though. Having 'given' £75bn to their pals much easier to kick the average oik in the teeth (immediately after the next general election, just like 1979)

Generali

Degenerate wrote: »

What you're missing from this description is that money is made up of more than just central bank money, there is credit money created by fractional reserve banking too. That supply has collapsed, which is creating huge deflationary pressure, and the QE is just an effort to plug the hole with central bank money, bringing the broad money supply back up to a sensible level while the banks get their act together.

True. I was trying to keep the explanation simple.

The banks are insolvent for the most part, they can't get their acts together. They've lost hundreds of billions in the UK alone and we are only just scratching the surface of the recession.

I'd be really interested to see an example of QE working as currently intended. AIUI, it's been tried and failed many times before.

Edale

The important point of QE which is often missed is that it drives down borrowing rates. Look what has happened with Gilts and Corporate bonds over the last couple of days. Making borrowing cheaper is the most important point of QE.

Good to see you're back Generali!

Degenerate

Generali wrote: »

Degenerate wins tonight's special prize! There is no way that it's going to be possible to destroy this cash, at least not by these idiots you have in charge at the moment. It'll take another Thatcher to do it - people still hate her yet she saved the economy of the UK!

Er, no. QE is being managed by the BOE as a monetary tool, reigning it back in will be an economist's decision like raising interest rates. If the government were to abandon this principle, forget about selling gilts on the open market and get the BOE to privately monetise them just to finance the deficit, then you would have a point. Until then your complaint is just partisan bleating in the face of economic necessities, a la Cameron and Osborne.