QE & inflation/deflation

zygurat789

Isn't economics wonderful

princeofpounds

The idea being, that the economy doesn't suffer, & the usual sources see risk reduce, & are therefore willing to return to the process of circulating the money?

A certain amount of suffering is inevitable. What monetary stimulus aims to do is smooth that pain out. It does indeed aim to improve economic activity (I would move away from this idea of money circulating as that doesn't necessarily have to imply economic activity). It does this by making money more available so you are incentivised to either spend it more quickly that you would otherwise or you are incentivised to borrow some and invest it in a project that would previously have been somewhat marginal.

Once this is observed, the money printers withdraw their cash from the economy, allowing it to maintain itself?

Rather than actually withdraw it all, it's more likely they will just slow down the rate of printing. They may withdraw some if required. They would do this when they think that the economy is capable of self-sustaining growth in activity (if the central bank targets growth) or if they think inflation pressures are returning (if the central bank targets inflation, as the BoE theoretically does).

I assume they take out the money they put in? Do they do this in 1 go? Or in bits? (Or does it depend on the context?)

Totally up to them but stages would be normal to manage people's expectations and allow them to adjust. As I said above, they don't necessarily remove all the money as the economy needs money to operate! They may remove a little bit or more likely slow down printing.

& then, what do they do with their money that they "printed"?

So they printed it, injected it into the economy in some form (usually with an exchange for an asset so it's not pure printing for nothing), got it back, and then they just cancel it. The BoE can create or destroy money on its balance sheet at will.

Or have I got none of it?:D

lemonjelly

princeofpounds wrote: »

A certain amount of suffering is inevitable. What monetary stimulus aims to do is smooth that pain out. It does indeed aim to improve economic activity (I would move away from this idea of money circulating as that doesn't necessarily have to imply economic activity). It does this by making money more available so you are incentivised to either spend it more quickly that you would otherwise or you are incentivised to borrow some and invest it in a project that would previously have been somewhat marginal.



Rather than actually withdraw it all, it's more likely they will just slow down the rate of printing. They may withdraw some if required. They would do this when they think that the economy is capable of self-sustaining growth in activity (if the central bank targets growth) or if they think inflation pressures are returning (if the central bank targets inflation, as the BoE theoretically does).



Totally up to them but stages would be normal to manage people's expectations and allow them to adjust. As I said above, they don't necessarily remove all the money as the economy needs money to operate! They may remove a little bit or more likely slow down printing.



So they printed it, injected it into the economy in some form (usually with an exchange for an asset so it's not pure printing for nothing), got it back, and then they just cancel it. The BoE can create or destroy money on its balance sheet at will.

Or have I got none of it?:D

Thanks for this princeofpounds.

Good explanations. Clear & accessible.

This is the type of thing this forum is for.

Thanks also for the patience! Kudos to you.

HAMISH_MCTAVISH

princeofpounds wrote: »

Slightly more? That's the whole point - you are right to say the QE deals are done in the secondary market but it is done with the very real intention of distorting the primary market.
.

No, the entire point of QE is to remove existing gilts from asset books of lenders, and replace them with funds to lend, thus increasing liquidity in the wider economy.

Whereas most people on here seem to assume it is done with the main point being to monetise debt through a back door, which is absolute nonsense.

princeofpounds

Hamish, you are totally right that they aren't straightforwardly monetising the debt and I agree, a lot of people get that wrong. They aren't just printing money.

I think in terms of our disagreement on the intention/effects of QE it's just from the result of perspective and timeframe. Your description of the stated aim of the program is correct from the perspective of the economists driving it, but if you look at the figures in the market as a practitioner what we are seeing is an artificially suppressed gilts yield and not much of a recovery in bank lending.

I guess that will change as and when banks become less keen to stick with gilts, but so far the effect has been very much to make primary market borrowing easier. If it works (and appears perhaps to be just starting to) then you will be right, but it hasn't happened quite like that to date.

A bit like claiming that you aren't watering the soil by filling up a bucket, only the bucket happens to be almost full to the brim and the water is spilling out.

tomterm8

HAMISH_MCTAVISH wrote: »

No, the entire point of QE is to remove existing gilts from asset books of lenders, and replace them with funds to lend, thus increasing liquidity in the wider economy.

Whereas most people on here seem to assume it is done with the main point being to monetise debt through a back door, which is absolute nonsense.

In 2009-10 the UK government issued new gilts of net £208.1 billion. The QE bond program purchased over £200 billion. While the QE programs are conducted through secondary markets, the predominant sellers were, I believe, banks and pension funds with a legal obligation to use the resultant money to purchase government bonds or other AAA rated bonds. The effect of the QE program was to depress interest rates on long term government bonds, increase the capital base of banks, but also to fund the deficit during 2009-10 . I made no comment as to what I believe the purpose of QE is in the previous posts, except to say that I believe it is principally used to control inflation. I find your characterisation of my posts as 'rediculous' to be quite offensive.

Thrugelmir

The purpose of QE is to maintain inflation at the BOE's target rate of 2%.

As base rates had hit nearly nearly zero. There was no further way forward on this front.

In October, the yields on 3,5, 10 and 20 year gilts were little changed from January 2009. So QE has had little to no impact on recapitalising the banks.

The trouble is the retail banks should have been lending the money to stimulate the economy. Instead, with a lack of Tier 1 capital as required by regulatory requirements. They've been hoarding it onto there balance sheets. Hence the further increase in the amount of QE.

Technically the Government could shred the short dated Gilts held by the BOE as they mature. Though the BOE is supposed to be independent. And the effects of £200 billion in the monetary system would devalue the £ somewhat. Also causing inflationary pressure in the system.

Generali

I have very little to add to the above except to say that you can see how this extra money isn't feeding through to the money supply by looking at the M4 money supply figures:

http://www.bankofengland.co.uk/statistics/m4/current/index.htm

that link should always take you to the latest figures.

Currently, M4 is pretty much flat in months where little or no liquidity is added through QE and up by about 0.7% in months where it is. A normal increase in M4 would be over 1% per month I reckon although I'd be happy to be corrected as I don't normally watch it that keenly. Perhaps IM has access to historical figures (I mean the data series, not Henry VIII).

fc123

I have a question too...sorry to hijack LJ's thread. It might be a stupid one so be gentle

OK, I get the basic 'what's going on' bit but is inflation already kicking in above the official figures and are house prises rising because it's the inflation now taking off?

Silly, little things I notice like washing powder was £1.56 Dec and now £1.98.

My own products (new range going in) are going to be increased in price from next Saturday by about 15%.

princeofpounds

already kicking in above the official figures and are house prises rising because it's the inflation now taking off?

Near/mid-term inflation is not really officially expected to be that great, which is why the BoE is happy pursuing its QE mechanics (remember, it targets inflation to be low but positive). They have a variety of reasons to believe this but the basic one is that there is a lot of excess capacity in the economy, and it is very hard to raise prices when there are producers just waiting to restart operations and take your business from you.

Longer term inflation expectations have risen of late, and it has become slightly more expensive to borrow over the longer term because of that as you need to compensate the lender for the expected inflation (you might hear about the 'long bond' yield rising).

The recent house price inflation since the mini-crash isn't really to do with general inflation. Houses are financial assets rather than goods and services, and so they behave in quite different ways. The recovery in the price of houses has much more to do with the fact that the BoE base rate was slashed to unprecedentedly low levels, which makes borrowing big sums of money seem cheap and so allows people to indulge their demand for housing more than they otherwise would.

What you are seeing on the washing powder is actually very much likely to be a consequence of the pound weakening. The chemicals and salts that it is made from are priced in dollars (which is itself has been devaluing against real commodities) and so appear to be more expensive in pounds. This is inflationary, but the central banks worry about it less in the first instance as it is expected to be a one-time effect rather than structural inflation.