quantitative easing

talexuser

One thing I can't understand - for 40 years since Denis Healey and the IMF bailout we have been told you cannot just print money for whatever - to improve services etc - it leads to inflation as night follows day.

Yet as soon as the banks get in trouble with bad loans we can apparently print oodles of money to buy what seems to me just bad debt unlikely ever to be repaid in full taking inflation and return on investment into account.

Did not Japan have this policy for 10 years with virtual zero interest rates and it failed?

Or is future inflation the desired outcome to reduce the value of the debt? And are savers thus being taken for a ride?

Milarky

The banking system is even more essential to normal life than (say) a functioning health service or school system. It's right up there with keeping the [STRIKE]praetorian guard[/STRIKE] police force on-side as a priority

Reaper

talexuser wrote: »

One thing I can't understand - for 40 years since Denis Healey and the IMF bailout we have been told you cannot just print money for whatever - to improve services etc - it leads to inflation as night follows day.

Yes it causes inflation BUT the theory is that if you do it when deflation hits then it balances out. Think of 2 cars head-to-head on full throttle balancing out. Of course if one stalls you can then expect a wild swing one way or the other.

Also the theory is that this money will be removed again from the economy in the future when the crisis is over thus preventing inflation. Though personally I think flying pigs more likely than a government burning its cash.

Did not Japan have this policy for 10 years with virtual zero interest rates and it failed?

Indeed. They are the only ones to have tried it before (as opposed to bankrupt states printing money to pay their debts which is a differet kettle of fish). The theory is that they were too timid with their QE which is why it didn't work.

Or is future inflation the desired outcome to reduce the value of the debt? And are savers thus being taken for a ride?

You could also say it devalues the currency which encouages exports and helps a country recover at the expense of others. China accused the US of doing this with their recent QE2 though that really is a bit ripe since China are the worst culprits for currency manipulation.

As for savers, they are not a priority. In fact as the government sees it if you save you are withdrawing money from the economy. They would rather you spent it.

rdtrdt

talexuser wrote: »

Or is future inflation the desired outcome to reduce the value of the debt? And are savers thus being taken for a ride?

It's reasonable to judge the BoE's MPC on its results of forecasting inflation and on hitting its inflation target.

You'll note that they've become, for a prolonged period, consistently wrong in their forecasts. And importantly, they are consistently wrong in the "same direction". That is, they continue to forecast that inflation will be much lower than it actually turns out to be.

In the letter that Mervyn King must send to the Chancellor, he must explain the reasons for them failing to hit the 2% CPI target, and also explain what steps the Bank will take to ensure CPI is returned to target.

What he actually does it to keep stating that the divergence from target has been caused by temporary effects which will soon disappear, concluding that inflation will return to target in the medium term. He maintains this argument about temporary effects, even though the divergence from target is becoming permanent, and the expected divergence is increasing.

Importantly, there is no mention of the policy action the Bank is taking to deal with the divergence from target, even though this is a specific requirement of the Governor's letters to the Chancellor when inflation is outside of its target range.

Therefore, judging on the available evidence, I think it's reasonable to conclude one of the following:-

1. That the inflation target has been abandoned for now

The manner in which this has been done, though, isn't acceptable. Rather than the Chancellor telling Parliament that he's (temporarily) abandoning the target due to circumstances, what we actually have are a group of unelected BoE bureaucrats implementing this as defacto policy. This is a policy which has immense implications for many people, and it's not right that such a change should be introduced via such a mechanism (through the actions of unaccountable bureaucrats).

or

2. That Mervyn King and the MPC are totally inept

If the MPC really are trying to correctly forecast CPI and keep to the 2% CPI target, then their demonstrably awful track record and their reading of events over the past few years is a sorry reflection of their abilities, and we really deserve an MPC of greater competence.


It's surprising that the financial media aren't kicking up more of a fuss over the MPC's record, and to figure our whether they really have abandoned their target remit, or are just wholly incompetent. I don't know about you, but I wouldn't mind a job where I could be totally wrong on an ongoing basis with no repercussions to my continued employment.

Masomnia

The problem is that the money that is being created is not being lent out, so it isn't causing inflation, and really isn't doing much of anything.

Rollinghome

talexuser wrote: »

And are savers thus being taken for a ride?

The suspension, or possibly the ending, of NS&I Index-linked savings could give that impression. "Granny Bonds" were introduced in 1975 with the fair-minded purpose of protecting pensioners from the then high inflation.

The NS&I "Investment Account" now offered with a top rate of 0.3% for £25K+ ensures that the "investor" is paid back far less in real terms than he puts in. We've come to expect misleading names for products from the banks but would perhaps expect more honesty from our government.

Milarky

rdtrdt wrote: »

It's surprising that the financial media aren't kicking up more of a fuss over the MPC's record, and to figure our whether they really have abandoned their target remit, or are just wholly incompetent. I don't know about you, but I wouldn't mind a job where I could be totally wrong on an ongoing basis with no repercussions to my continued employment.

The standard journalistic treatment is to phone around a bunch of 'economists' who then phone their friends (the other economists in the survey) and agree what their line will be. This CON-sensus is then presented to a skeptical public - which notes how often such surveys simply 'add-a-quarter' to the previous reading of the tea leaves.

purch

Did not Japan have this policy for 10 years with virtual zero interest rates and it failed?

Not failed exactly, just didn't work.

Of course it also didn't debase the currency or create run away inflation, so in many ways it wasn't all bad.

leveller2911

Reaper wrote: »

As for savers, they are not a priority. In fact as the government sees it if you save you are withdrawing money from the economy. They would rather you spent it.

You are right Reaper but it was only a few months ago we were being told that we should start saving money and not rely on using credit.The trouble with Governments is that they don't really know what to do or say.

They need to make up their minds .;) The whole mess we are in was caused by f@ckless morons maxing out on credit and spending money they didn't have,so I know what I will be doing with any spare cash.....

talexuser

purch wrote: »

Not failed exactly, just didn't work.

hee hee, the distinction between a policy failing and not working escapes me if the object was to get normal economic activity going again.

pqrdef

Reaper wrote: »

In fact as the government sees it if you save you are withdrawing money from the economy. They would rather you spent it.

Are these the same people who keep going on about the pension burden?