quantitative easing

pqrdef

rdtrdt wrote: »

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).

If the Chancellor wants them to stick to their remit, he only has to say so. It's not conceivable that they'd stick to their present policy against the government's wishes.

The whole thing was a stitch-up between Darling and King, which happened to suit both of them. And Osborne is happy to see it continue.

Meanwhile, what we get is just a game of manipulate-the-message.

slinga

There are quite a number of views which say that QE will cause the biggest bubble ever and if things and QE carry on as at the moment then in 5 to 10 years we'll see a world financial crisis that'll make the Depression look like a damp squib.

pqrdef

And the worst part is, our governments haven't got any better ideas. Nobody knows how a post-industrial economy should make a living, so the only response they've got to the bursting of a bubble is to blow it up again asap.

talexuser

the other thing I can't understand is that Glass Steagall (which prevented using deposits in the casino) worked fine for 70 years, now we are in a mess after it was dropped and there is no real impetus to bring something similar back again. We surely are being sold a line here just with so called greater % reserves?

Did not the Irish Banks pass their "Stress Tests" earlier this year or did I miss something?

lvader

rdtrdt wrote: »

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.

Inflation is above target for one reason and one reason only, the VAT increases. Once the government stops increasing VAT year on year inflation will drop back down (unless something else changes).

The next question is should they do anything to counter the VAT increases i.e. force effective deflation? I would say no. Infact I think inflation should be calculated on prices before VAT is taken into account, this way it wouldn't confuse people and everything would be fine.

middlepuss

Masomnia wrote: »

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.

Where is all the QE money going? Not into consumers' pockets to cause retail price inflation maybe.

It's being used by banks etc to buy financial assets - eg shares - and thus QE is resulting in inflation - inflation in financial asset prices - shares, gold and so on.

In theory, having pumped billions into the markets via QE, central banks can at a later date claw the cash back by issuing Government securities and thus prevent it causing general inflation.

But the huge debts that many countries are building up gives them a big incentive to cause inflation as inflation effectively reduces the value of the money they owe.

The trouble is that Ireland and Greece etc are being forced to reduce wages and benefits (and thus prices): in other words they are going to experience deflation. (In the old days they would have avoided deflation by devaluing their currency but they can't do that because they are in the Euro). So, because of local deflation, indebted countries' debts are going to grow in real terms making it ever harder for them to repay their debts. Two solutions: rapid economic growth in those countries OR leaving the Euro.

Or the eventual result will be that Germans reach the point where they no longer want to work their *******s off to keep Greeks, Belgians, Portugese, Spaniards and even French in the manner to which they have grown accustomed, and a future German government takes Germany out of the Euro.

middlepuss

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?

That is a good question.

There are many posts on this site suggesting that cash investments are lower risk than stock market investments. But the unspoken assumption is that inflation remains low.

If inflation takes off investments that will tend to rise in line with inflation might well be lower risk than cash accounts that don't.

There is sometimes confusion between risk and volatility: a cash account will have no volatility but the risk of losing value could be high in a high-inflation world. Stock market investments go up and down, ie they are volatile, but if over a given period they are probably going to keep up with high inflation they could be viewed as lower risk than cash.