What will happen when QE stops.

Generali

kennyboy66 wrote: »

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.

It is that stuff that bothers me TBH. I am interested in the arcane details of QE and how it works but that's just the way my brain functions (as regulars on here will be all too bitterly aware!).

The UK can't have interest rates at 0.5% indefinitely and She certainly can't continue to 'print' money to give to banks in return for assets indefinitely. If the BoE/Government keeps printing money indefinitely then presumably at some point you get high inflation and ultimately hyperinflation so we know that the policy has to end at some point as I don't believe that there is a politician sitting in Parliament now who wants to destroy the UK economy, not even the lunatic fringes.

I've gotta be honest - I have no idea how all this will end but I really can't see any easy or even especially pleasant solution. If recessions could be solved by printing money we wouldn't have recessions.

purch

Worryingly the only thing I could find on "exit strategy" was one para long and pretty vague

...which could well mean that they havn't decided/worked out what it is yet !!!!:eek:

ad9898_3

Well in answer to my OP, it looks like a few of the guys on here have an idea what might happen (Gen, Purch, Kenny), yet, worryingly nobody in the government/BoE do..... this doesn't bode well.

Generali

ad9898 wrote: »

Well in answer to my OP, it looks like a few of the guys on here have an idea what might happen (Gen, Purch, Kenny), yet, worryingly nobody in the government/BoE do..... this doesn't bode well.

To be fair to the BoE you can be sure they've spoken about this and have at least some idea about where they want to go under various scenarios.

The trouble is, what is going on fiscally across most of the industrialised world has never been tried before in such a systematic and calculated way AIUI. This is a huge monetary experiment and nobody can know what the outcome will be as it's never been done before. They're not going to put on their website (as a hostage to fortune) what they're going to do if they don't know what is going to happen! They're sure as hell not going to spell out all the grisly possibilities like the UK going 'bankrupt', hyperinflation etc. Imagine the headlines:

"Hyperinflation 'possible' say bank bosses"
"'UK may be Bankrupt' - Tories call for Public Enquiry" (Reader offer - Free Tin Hat for Every Reader (Coupon on page 83)).

As Han Solo once said, "I've got a bad feeling about this".

Thrugelmir

kennyboy66 wrote: »

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 systemic bank failures.

It is. Although we talk about the 'banks'. The major headache for the BOE is RBS. The last published figures showed a combined group balance sheet with around £1.6 trillion pounds of debt owing. RBS is trying to unwind its positions. Reduce loan and overdraft exposure, sell overseas operations etc. To reduce its overall debt exposure by 25%.

It probably is struggling to raise sufficent wholesale funds internationally even now. (This is what brought it to the point of insolvency). As banks lend long and borrow short. Hence why the liquidity pumped into the system is so important.

tomterm8

ad9898 wrote: »

it looks like a few of the guys on here have an idea what might happen (Gen, Purch, Kenny), yet, worryingly .

I disagree, I know it was a joke, but my psychic reading is, in my opinion, almost as good as any of the prime economic commentators. No one actually has a clue what will happen. The only economy to try it, Japan, never actually reversed QE... they just stopped printing new money... and went into a slump as a result.

It won't escape attention that when the US slowed the increase in money supply earlier in the year, three months later their economy worstened.

I don't think that QE will ever be reversed. I think the most likely outcome is that we will stop printing new money, not that we will somehow remove the money already printed from the money supply.

Masomnia

What I'm not really clear on is how you do take money out of the system.

As I understnad it, the money is just added to the BoE's accounts using some computer in the bank and then used to purchase assets. Is it as simple as just deleting numbers from the screen?

Presumably they don't just pick up fivers that people have dropped and shred them.

kennyboy66_2

For those that are interested, I have had this reply;

[FONT=&quot]"Hello Ken[/FONT]

[FONT=&quot]To answer your first question, the Gilts concerned are held in a separate organisation called the Asset Purchase Facility Fund. This was established as a subsidiary of the Bank on 30 January 2009. Please see:[/FONT]

[FONT=&quot]www.bankofengland.co.uk/markets/apf/apfquarterlyreport0904.pdf[/FONT]

[FONT=&quot]Please also see the announcement by the Bank on 29/1/09, at:[/FONT]

[FONT=&quot]http://www.bankofengland.co.uk/publications/news/2009/005.htm[/FONT]

[FONT=&quot]As to your second question - yes, we get paid the coupons (ie the interest) from the Government.[/FONT]

[FONT=&quot]For general information on the Asset Purchase Facility, please see:[/FONT]

[FONT=&quot]http://www.bankofengland.co.uk/markets/apf/[/FONT]

[FONT=&quot]Kind regards[/FONT]


[FONT=&quot]

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Original Message

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From: ken
Sent: Wednesday, June 24, 2009 1:16 PM
To: Enquiries
Subject: Enquiry about Quantitative easing[/FONT]
Hi,

What happens to the Gilts that the BoE purchases under the Quantitative Easing scheme.

Are they “retired” or do they still exist on the BoE balance sheet ?

Does the government still have to pay the coupon on these purchases ?

bluey890

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).

If the coupon rate becomes unsustainable there's always another round of QE.
My point is this. The UK is a country heavily burdened in debt. A beggar my neighbour devaluation of the currency approach is therefore a quick and less painful way out of the situation. It may not be popular with other countries. But if it's what it's going to take to rebalance the economy onto a more competitive and less indebted footing...

bluey890

kennyboy66 wrote: »

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.

Trouble is that good firms are often dragged under in a recessions.
Gradual sustainable growth is preferable to boom and bust.