QE = Devaluing the currency....

Blacklight

Graham_Devon wrote: »

To back up my view, which apparently is just black and white, and simply wrong....I introduce you to the Director of Research UK at Forex.com who obviously doesn't know what they are talking about either as some housing bulls know better.


http://uk.finance.yahoo.com/news/The-slow-death-pound-yahoofinanceuk-3272909453.html

Merv said he expected inflation to peak this month:

"The number for inflation that we'll see published in two weeks' time is likely to be over 5%. But that, we think, is the peak," King said in a television interview with broadcaster ITV.

"We are past the worst. And from now on, we should be in a position where slowly but gradually living standards, real take-home pay, will be able to pick up. That's the world we want to get back to," King said.

In addition he also said that he expects the rate of inflation to fall further in the first months of 2012.

I'm not sure what Mr Forex stands to gain from spinning the story to make out inflation is going to remain high and that this is due to more QE.

Graham_Devon

Blacklight wrote: »

Merv said he expected inflation to peak this month:

Mervyn and Co have been saying inflation will be at or below target for the last 3 years.

Not saying he won't be right this time. Just saying their track record isn't exactly brilliant.

JonnyBravo

Really2 wrote: »

The £ is up and is higher than pre-QEII?

If we have devalued it, it should be lower, should it not?

As Graham says, you can't measure it minute by minute.
Other countries can take more extreme measures ( or be anticipated to) and so relatively we can still strengthen, but increasing QE does increase inflation and does devalue the currency.

Graham_Devon

JonnyBravo wrote: »

As Graham says, you can't measure it minute by minute.
Other countries can take more extreme measures ( or be anticipated to) and so relatively we can still strengthen, but increasing QE does increase inflation and does devalue the currency.

Yup.

Though I do have a nagging feeling that if I'd argued QE didn't cause inflation, the same argument would be happening, just the other way around.

lvader

JonnyBravo wrote: »

.
Other countries can take more extreme measures ( or be anticipated to) and so relatively we can still strengthen, but increasing QE does increase inflation and does devalue the currency.

That doesn't mean that the pound will devalue from here or that inflation will increase from here. There are lots of variables contribute towards the value of a currency and inflation. People and the press are stateing as fact that QE means that the pound will devalue and that inflation will increase when neither are likely to happen.

Graham_Devon

lvader wrote: »

That doesn't mean that the pound will devalue from here or that inflation will increase from here. There are lots of variables contribute towards the value of a currency and inflation. People and the press are stateing as fact that QE means that the pound will devalue and that inflation will increase when neither are likely to happen.

Which is why I covered that also.

That does not mean that inflation will increase, and thats where the cast iron guarantee ends, as if prices are falling and outweigh the devaluation, inflation will fall.

But QE does increase inflation. If other price falls outweigh the increase, then inflation will fall. But it would have fallen further had QE not dumped a dose of inflation into the mix.

Just as a wage increase does not always outweigh living cost increases.

It's all pretty simple, and if some others had stated what I had said, the same people denying it would have thanked it. That's just the nature of forums.

lvader

I would argue that this round of QE doesn't increase inflation, it decreases the deflationary pressure of a 122bn deficit that needs to be serviced by selling gilts which removes the money from the economy.

Graham_Devon

lvader wrote: »

I would argue that this round of QE doesn't increase inflation, it decreases the deflationary pressure of a 122bn deficit that needs to be serviced by selling gilts which removes the money from the economy.

Well, they'll have to tell us their estimate of the increase in inflation this 75bn bought.

The Bank of England has estimated its £200bn asset purchase program has raised inflation by as much as 1.5%.

In the latest quarterly bulletin released today, the Bank used a variety of methods to assess the impact of QE on inflation and growth in the UK.

It concluded CPI inflation was likely between 0.75%-1.5% higher as a result of the asset purchase program, after it boosted asset prices and GDP growth.

The full range of esimates of the impact of QE on inflation in the report were between 0.75% and 2.5%

The Bank conceded the figures are an estimate and are "highly uncertain" but it nevertheless gives a rough indication of the impact of printing money.

I don't know why people wish to argue that this time it's somewhat different. The only difference is this is 75bn, and in the report above (their last quarterly bulletin) the amount was the previous £200bn.

What's to argue really? I don't get it. It's an inflationary measure.

The BOE, explaining QE. Stating basically it is used at times when they need to increase inflation.

In March 2009, the Monetary Policy Committee announced that, in addition to setting Bank Rate at 0.5%, it would start to inject money directly into the economy in order to meet the inflation target. The instrument of monetary policy shifted towards the quantity of money provided rather than its price (Bank Rate). But the objective of policy is unchanged - to meet the inflation target of 2 per cent on the CPI measure of consumer prices. Influencing the quantity of money directly is essentially a different means of reaching the same end.

Significant reductions in Bank Rate have provided a large stimulus to the economy but as Bank Rate approaches zero, further reductions are likely to be less effective in terms of the impact on market interest rates, demand and inflation. And interest rates cannot be less than zero. The MPC therefore needs to provide further stimulus to support demand in the wider economy. If spending on goods and services is too low, inflation will fall below its target.

The MPC boosts the supply of money by purchasing assets like Government and corporate bonds – a policy often known as 'Quantitative Easing'. Instead of lowering Bank Rate to increase the amount of money in the economy, the Bank supplies extra money directly. This does not involve printing more banknotes. Instead the Bank pays for these assets by creating money electronically and crediting the accounts of the companies it bought the assets from. This extra money supports more spending in the economy to bring future inflation back to the target.

Every explanation states it's an inflationary measure. The last report measures the extra inflation caused. The BOE explanations state they use QE to increase inflation, especially at times of under target inflation.

As for devaluing the currency, heres the BBC explanation fo what QE is:

Central banks increase the supply of money by "printing" more. In practice, this may mean purchasing government bonds or other categories of assets, using the new money. Rather than physically printing more notes, the new money is typically issued in the form of a deposit at the central bank. The idea is to add more money into the system, which depresses the value of the currency, and to push up the value of the assets being bought and to lower longer-term interest rates, which encourages more borrowing and investment. Some economists fear that quantitative easing can lead to very high inflation in the long term.

But apparently, I'm wrong. The BBC are wrong. The BOE themselves are wrong.

All based on some dubious debating techniques used to cause confusion and detract from what was originally stated.

(lvader this isn't in response to you, more wotsthat and really2).

lvader

That 1.5% is a one off over a year, not perptetual. At the time the BOE started QE inflation was well below the 2% target. The inflation we are seeing this year has little or nothing to do with UK QE.

What is the deflationary effect of selling gilts to the tune of £122bn? What net effect of inflation will £75bn QE have? Overall it's still deflationary, so is VAT not increasing, so is commodities dropping heavily in price, so are the government cuts, so are the low pay settlements... etc etc.

Everything points to lower inflation. Argueing that QE is inlfationary when without it we could have deflation and recession is rather pointless.

A._Badger

lvader wrote: »

Everything points to lower inflation. Argueing that QE is inlfationary when without it we could have deflation and recession is rather pointless and misses the point.

And that's a guarantee, is it?

Personally, I'm going to wait and see what, if any, beneficial effect this latest burst of frenetic money printing achieves.