What will happen when QE stops.

inspector_monkfish

Generali wrote: »

Are you trading repos or money mkt if you don't mind me asking?

Cash Market.

Conrad

3 OPTIONS:

1) OPTIMISTIC - boom returns where it left off

2) PESSIMISTIC - the removal of temporary fiscal nourishment marks the return to hard times

3) REALISTIC - the fiscal bandage is removed to reveal a somewhat healed wound. The bandage exposes the wound to additional risk, but the wound has healed sufficiently whilst the bandage was in place.

Paying for the bandage will be noticable, but not at all impossible - afterall, we will still be immencely better off that those in the third world. We'll cope - yes, pessimists, we really will - it's called 'getting on with it'

ad9898_3

Conrad wrote: »

afterall, we will still be immencely better off that those in the third world.

This particular line does not fill me with much hope....:D, if this is the comparison we have to draw to make our current situation look good, all is not well.

purch

I agree with the Realistic.

QE will stop at some point (it will have to) and probably not much will happen.

The BOE will hope that they can withdraw from QE at the point that the economy starts to show signs of life, but the evidence so far seems to be against that happening.

Masomnia

Could it not be the case that the pound becomes more desirable to investors as the Fed and ECB continue to use QE?

mbga9pgf

Qick question, who makes the cash that is levvied by the BOE Base rate? I understand that there is a base rate, but who earns the interest? Is it the BOE or is it simply a minimum IR for banks to loan at?

Surely to recover QE, the BOE wiull need to hike rates significantly or will they just pull it out of the economy via government taxation?

Confused.com

kennyboy66_2

Generali wrote: »

As StevieJ implies, QE will have to be reversed. So how will that reversal happen?

The Government will issue debt but no money will appear in it's bank account as a result. The liability will be very real from the POV of the taxpayer - there will be an interest bill to be met as well as some debt being repaid (presumably) now and again.

How will you feel when your taxes rise with nothing to show for it? Just the warm feeling in your tummy that you get when you know that the monetary base is just a little more secure. Yeah I thought so - there are no votes in sound money until sound money is long gone.

Then you're screwed and you realise your mistake too late.

That's the risk of QE.

I think you exaggerate the additional tax implications of QE.

The BoE is buying Gilts that currently existed (or were recently issued). These had an interest rate attached to them, and in normal circumstances the UK taxpayer would have been paying that interest.
Effectively this interest is deferred until the reversal of QE (effectively, we would expect the BoE to be able to sell the purchased bonds for less than they paid, creating a loss). It will be the size of the loss that will be interesting.

The tax implications of the following;

Reducing the overall government debt.
Getting rid of the structural deficit.
Spending on civil servant pensions, where the benefit is high but for the few.

vastly outweigh any increase in tax that will be a result of QE.

inspector_monkfish

mbga9pgf wrote: »

Qick question, who makes the cash that is levvied by the BOE Base rate? I understand that there is a base rate, but who earns the interest? Is it the BOE or is it simply a minimum IR for banks to loan at?

Surely to recover QE, the BOE wiull need to hike rates significantly or will they just pull it out of the economy via government taxation?

Confused.com

the BOE currently pay banks 0.5% (base rate) for the 2billion quid i just dumped with them....

Fridge2

Of course, if money was actually sound then QE wouldn't be neccessary at all......

Fractional reserve banking has a lot to answer for.

Thrugelmir

inspector_monkfish wrote: »

Absolutely true.
Books are balanced right up until as late as possible, then any excess liquidity is off loaded back to the Central Banks.

The Bank I work for is a relativley small player in the InterBank Markets, but we have just offloaded almost £2billion to BOE, about USD1billion to the FED, and about EUR500million to ECB. They are keeping it nice and warm for us, until we need it all or some of it back!

So goodness knows what the larger players are doing....

This is all cash we have picked up from lenders that don't have the ability to lend to Central Banks, so have to give it to the likes of us.


I wouldn't know so much about the mortgage market.

Perhaps whats been forgotten is that two major banks RBS and HBOs were both "bust" at that critical point last year. As wholesale money dried up they couldn't have continued to trade. Although Government intervention gave them new life...... cash and a marriage in the case of HBOS. The extent of the problems in the lending books wasn't ascertained until later.

Although QE is pumping money into the system. RBS is undergoing a major amputation to shrink its balance sheet by 25%. On a daily basis its cash requirements are likely to be on a significant scale. Hence the BOE expanding the QE plan. As at the end of the days its to keep the banks afloat not to create more money for people to borrow,