What will happen when QE stops.

Cleaver

If we were all having this conversation in the pub, I would be the the one sitting in the corner nodding knowingly, scratching my chin in an earnest way and replying to everyone with a sage "hmmmm, I agree..." every now and again.

Meanwhile, I'd be singing a song in my head and mentally undressing the barmaid as I wouldn't have a clue what anyone was talking about. Mind you, as with a lot of pub conversations, maybe you lot don't either.

bluey890

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.

Could the government inflate the debt away, or diminish it via inflation over time (since the debt is in Sterling)?
i.e. while making coupon payments in the meantime.

penguine

bluey890 wrote: »

Could the government inflate the debt away, or diminish it via inflation over time (since the debt is in Sterling)?
i.e. while making coupon payments in the meantime.

This seems likely to me, as it's probably one of the least painful ways of getting rid of the debt.

tomterm8

Cleaver wrote: »

If we were all having this conversation in the pub, I would be the the one sitting in the corner nodding knowingly, scratching my chin in an earnest way and replying to everyone with a sage "hmmmm, I agree..." every now and again.

Meanwhile, I'd be singing a song in my head and mentally undressing the barmaid as I wouldn't have a clue what anyone was talking about. Mind you, as with a lot of pub conversations, maybe you lot don't either.

Hmph, if the well reasoned economics didn't grab you attention, maybe a little psychic reading? Free of charge with my trusty tarot deck, I shuffle and I draw three cards...


So, I have... past... the knight of pentacles, suggesting that we used to go out with optimism, and perhapse a sence of power. The knight is looking towards the future, but bears the mystic sign of wisdom, suggesting that the bank of england acted wisely before QE started.

Present... Judgement, a difficult card. There are difficult decisions to make. It will take wisdom to know what to do. The card also has a picture of naked people below an angel... signifying the bank of England is like the emperor in the new clothes fiasco.

Future... The five of cups... another difficult card, the future doesn't look to bright. you'd better not count on things running too smothly. Keep a plan B in mind.

So there you have it, the wisdom of the Tarot has spoken.

kennyboy66_2

bluey890 wrote: »

Could the government inflate the debt away, or diminish it via inflation over time (since the debt is in Sterling)?
i.e. while making coupon payments in the meantime.

The problem with this is that it will increase real interest rates that Government have to pay on issued Gilts in the long run. Bond investors will demand a higher rate for the risk that the UK is soft on inflation.

Thats why for example the German government pays a lower real interest rate on their bonds than USA or UK (at least in normal times).

The main danger with QE from what I see, is that it really should be used as a once in a lifetime event, ie to avoid a depression and systemic bank failures.

If it works and if it is sucessfully reversed politicians will want to use it again for the next recession or slowdown, which in normally economic cycles are every 8-12 years.

While recessions are painful they do actually serve a purpose in getting rid of the dead wood, punishing mis-allocation of resources and stimulating new business ultimately.

Generali

kennyboy66 wrote: »

The problem with this is that it will increase real interest rates that Government have to pay on issued Gilts in the long run. Bond investors will demand a higher rate for the risk that the UK is soft on inflation.

Thats why for example the German government pays a lower real interest rate on their bonds than USA or UK (at least in normal times).

The main danger with QE from what I see, is that it really should be used as a once in a lifetime event, ie to avoid a depression and systemic bank failures.

If it works and if it is sucessfully reversed politicians will want to use it again for the next recession or slowdown, which in normally economic cycles are every 8-12 years.

While recessions are painful they do actually serve a purpose in getting rid of the dead wood, punishing mis-allocation of resources and stimulating new business ultimately.

Spot on. Also, there are no votes in reversing it. It's a pretty tough sell to an electorate that you're increasing the National Debt with nothing to show for it.

RDB

Surely it all means inflation big time?

With that many extra Pounds about, we may need a 1000 note

mbga9pgf

No it wont, because no-one is lending, people are hoarding cash, money velocity is off a cliff... inflation is a function of both quantity and velocity. Think where it is going; buying up debt that in all probability will get written off. If it doesnt, the banks will repay the BOE and the money gets immediately taken out of the economy. The route is convoluted, but effectively

QE -> Bonds (Bank owned) -> Banks buy gilts -> government gives banks cash for bailouts

once things are sorted, it should go:

Banks give government cash or writedown debt (money destroyed in latter case, banks owned by government) -> government hand over cash as long as money velocity is recovering -> QE cash is destroyed.

AS LONG AS cash doesnt leak out into exotic lending products and banks restrain themselves to sensible lending (and to each other) Velocity will recover and so will confidence.

Problem is, 4th largest economy does a lot of manufacture, but it is not enough to support the huge fiscal expansion that took place 1999-2007. IMHO, that was the inflationary phase, IE when house prices were rocketing and everyone thought they were loaded. Alas, that cash is now going down the swanny.

With trade about to dip, commodities will take a big hit until the real recovery... sometime in 2012.

Degenerate

Generali wrote: »

Spot on. Also, there are no votes in reversing it. It's a pretty tough sell to an electorate that you're increasing the National Debt with nothing to show for it.

Why do you think reversing QE increases the national debt?

SilverStandard

So the pound is going to be devalued? At the moment its still quite storng, but for how long?

I still think have some money in silver, soon you can buy an average house for half the oz`s of silver that you can now.