What will happen when QE stops.

kennyboy66_2

Degenerate wrote: »

Why do you think reversing QE increases the national debt?

I was pondering this as well.

I thought that the BoE purchasing Gilts had no impact on the national debt, it merely meant that the Government owes the BoE rather than a financial institutiuon.
I know the many cyncics on here will say that there is no difference between the BoE and the Government, but I think there is.
I then wondered if Govt paid the interest on those purchase Gilts. I sort of assumed so but I'm not sure.

What would seem fairly certain is that when QE reverses, the BoE has another £125bn worth of Gilts to sell in addition to those is will have to sell to fund current spending.

This can only increase interest rates.

chucky

RDB wrote: »

Surely it all means inflation big time?

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

why would QE cause inflation?
theres no proof that it will

kennyboy66_2

chucky wrote: »

why would QE cause inflation?
theres no proof that it will

An increase in money supply normally causes inflation in some part of the economy, whether it is general prices or asset prices.

If you have more money chasing the same goods, the price of those goods should rise.

As one of the aims of QE is to counteract deflationary forces, it would seem logical to think it must have some impact.

StevieJ

kennyboy66 wrote: »

An increase in money supply normally causes inflation in some part of the economy, whether it is general prices or asset prices.

If you have more money chasing the same goods, the price of those goods should rise.

As one of the aims of QE is to counteract deflationary forces, it would seem logical to think it must have some impact.

Surely they are merely attempting to counter the liquidity destruction caused by a withdrawal of credit, so providing they reverse it as credit returns it should be neutral, although Dopester thinks that the QE will be knowhere as much as the credit removed so will have limited impact.

chucky

kennyboy66 wrote: »

An increase in money supply normally causes inflation in some part of the economy, whether it is general prices or asset prices.

If you have more money chasing the same goods, the price of those goods should rise.

As one of the aims of QE is to counteract deflationary forces, it would seem logical to think it must have some impact.

it was a tongue in cheek question Kenny, i'm was hoping that one of the "genius" negative people comes along and explains which type of inflation

hasn't QE replaced debt (big credit/balance sheet hole) with a different asset class - wouldn't you just be improving the velocity of money

ruggedtoast

I dont think the government has a lot of control over what happens to the money once its been put into the banking system. If banks sit on it ad finitum and there isnt much lending, inflation presumably wont be a problem.

Nor will bankers be especially concerned about profitability if theres a get out of jail free card from the tax payer for every single bank that gets into trouble. As there appears to be.

If theres a sudden uptick and they all start lending crazily to one another and retail customers, then inflation could rocket in a short space of time.

Generali

kennyboy66 wrote: »

I was pondering this as well.

I thought that the BoE purchasing Gilts had no impact on the national debt, it merely meant that the Government owes the BoE rather than a financial institutiuon.
I know the many cyncics on here will say that there is no difference between the BoE and the Government, but I think there is.
I then wondered if Govt paid the interest on those purchase Gilts. I sort of assumed so but I'm not sure.

What would seem fairly certain is that when QE reverses, the BoE has another £125bn worth of Gilts to sell in addition to those is will have to sell to fund current spending.

This can only increase interest rates.

If that's the case then I'm wrong. I was under the impression that the debt was retired when the BoE bought it.

I emailed the BoE to ask if this was the case ages ago but they didn't reply. Normally Government Departments are good at responding to queries like that.

purch

Well the Banks Balance Sheet is expanding, so whatever they are buying still performs.

Asset Purchase Facility transactions are undertaken by a subsidiary company of the Bank of England, the Bank of England Asset Purchase Facility Fund Limited (BEAPFF). The BEAPFF borrows from the Bank to pay for the purchases it makes. It is this lending to the BEAPFF that appears on the Bank's balance sheet as an asset.
On the Bank's balance sheet the liability corresponding to this asset was initially a deposit from the government's Debt Management Office. This deposit appeared under 'Other liabilities' on the Bank Return.
Since the move to Quantitative Easing, the Bank financed its lending to BEAPFF by the creation of central bank reserves. On the Bank Return this is reflected in an increase in the level of Reserves Balances.

http://www.bankofengland.co.uk/markets/apf/balancesheetimpact.htm

Generali

purch wrote: »

Well the Banks Balance Sheet is expanding, so whatever they are buying still performs.

Asset Purchase Facility transactions are undertaken by a subsidiary company of the Bank of England, the Bank of England Asset Purchase Facility Fund Limited (BEAPFF). The BEAPFF borrows from the Bank to pay for the purchases it makes. It is this lending to the BEAPFF that appears on the Bank's balance sheet as an asset.
On the Bank's balance sheet the liability corresponding to this asset was initially a deposit from the government's Debt Management Office. This deposit appeared under 'Other liabilities' on the Bank Return.
Since the move to Quantitative Easing, the Bank financed its lending to BEAPFF by the creation of central bank reserves. On the Bank Return this is reflected in an increase in the level of Reserves Balances.

http://www.bankofengland.co.uk/markets/apf/balancesheetimpact.htm

So net debt reduces but gross debt remains the same(?).

I don't know about the BoE but during the surplus years (<sarcastic mode>cheers Rudd</sarcastic mode>) the RBA measured Gross and Net debt. The RBA used to borrow money long term despite having a surplus to give markets a 'risk free rate' to use as a yardstick. Gross Aus had a National Debt of (I think) 15% of GDP. Net it was a surplus of a few % of GDP.

kennyboy66_2

Generali wrote: »

If that's the case then I'm wrong. I was under the impression that the debt was retired when the BoE bought it.

I emailed the BoE to ask if this was the case ages ago but they didn't reply. Normally Government Departments are good at responding to queries like that.

I'll email BoE and see if they can provide a answer.
Worryingly the only thing I could find on "exit strategy" was one para long and pretty vague.