If QE Was Withdrawn....

Glen_Clark

atush wrote: »

Not everyone uses their money in the best ways, as I used to see at the primary school gate where the kids from the council estate had better trainers than my kids, and their mom's all smoked.

Those with kids get looked after, its no longer politically acceptable to have children or families sleeping rough. -To be fair, house prices have so outstripped the basic wage in some areas that having kids to get housing benefits is the only way for some people to get a roof over their head. Not ideal, but people have to play the hand they are given as best they can, and can we be sure we wouldn't do the same in their situation? Then you get the likes of Mick Phillpot having lots of kids to get lots of benefits.
The ones who are worst off tend to be single, working age, with no disabilities, and usually male, so they fall outside the system. But if they have got no money they still need help.

bowlhead99

sabretoothtigger wrote: »

the 'If' in the thread title should be 'When' and it wont be withdrawn voluntarily and probably not gradually but sudden measures bought in to cope and balance books

If you look at history, the UK base rate was at 5.75% on 5 Dec 2007 and dropped to 0.5% by 5 Mar 2009. So it dropped by over 9/10ths in a year and a third.

Beginning of September '91 it was at 10.875%, by Jan '93 it was 5.875. Another example of dropping 5% in a year and a third.

First day of June '88 it was 7.375%; before end of first week of October '89 it was 14.875%. Up 7.5% in a year and a third.

Christmas '84 it was 9.5%. Before end of Jan '85 it was 13.875%.

Although people like to think there will be just a slow return to long term average... and that QE may not be fully dropped for a long time (particularly in the US)... and that it is ridiculous to postulate that any government would be foolish enough to make sharp changes to push the economy the way they want it in response to domestic or global issues... this is not borne out by history.

grey_gym_sock

that's the history of bank base rate. but of course there's no history for QE being withdrawn, as we've never had QE before

pedantry aside, i agree that policy tends to move slowly and sedately only until events force sudden changes.

reversing QE - i.e. the BoE selling off £375bn of gilts and then burning the cash - seems pretty incredible. i'm sticking to the opinion that there's no need to do it at all. (and therefore the UK's debt is far lower than is stated.)

however, merely having no further QE, without reversing what's been done so far, would be enough upset the markets. since they have been puffed up by QE, the end of puffing is likely to lead to withdrawal symptoms.

bowlhead99

grey_gym_sock wrote: »

however, merely having no further QE, without reversing what's been done so far, would be enough upset the markets. since they have been puffed up by QE, the end of puffing is likely to lead to withdrawal symptoms.

Exactly. The world paused for breath as Bernanke said that in a few months' time they might consider perhaps not buying quite as many bonds as they have been. He didn't say he was going to flood the market with bonds he didn't want any more, he merely alluded to the fact that he might not be buying quite so many, at some point. And the market crapped itself for a few days.

When the Fed ended it first two programmes of QE, US equities slumped. But the rally kicked off again last September with QE3. With the appointment of a long-term critic of the conservatism at the Bank of Japan as its governor with a mandate to end deflation and push their inflation to 2%. Japanese markets rose 70% from the start of the year. Such is the intoxicating power of easy monetary policy.

If we keep QE for a long time, we risk creating asset bubbles and inflation. But while some of us remember crazy inflation in the 70s, or at least have heard about it as recent history, central bankers also remember the withdrawal of monetary stimulus in the US triggering a double-dip recession back in '37/38. A depression is feared at least as much as inflation.

Rising growth forecasts over the next couple of years, together with sharply lower inflation, could/should allow the taps to be turned off. It's not going to happen for a while yet, and as you suggest, literally reversing the taps seems pretty far fetched.

dktreesea

bowlhead99 wrote: »

If we keep QE for a long time, we risk creating asset bubbles and inflation. But while some of us remember crazy inflation in the 70s, or at least have heard about it as recent history, central bankers also remember the withdrawal of monetary stimulus in the US triggering a double-dip recession back in '37/38. A depression is feared at least as much as inflation.

Rising growth forecasts over the next couple of years, together with sharply lower inflation, could/should allow the taps to be turned off. It's not going to happen for a while yet, and as you suggest, literally reversing the taps seems pretty far fetched.

The asset bubble and inflation are already here. The government has to keep issuing gilts just so that it can get the money it needs to finance the budget deficit. As it is, the BofE already has 1/3rd of the gilts market. Yes, they are not currently buying them, - a Debt management office auction of index linked gilts yesterday was 1.86 times oversubscribed.

On the face of it, that bodes well for not needing any more QE to stay afloat. But the flip side is did those gilts have to be index linked before investors were prepared to buy them?

I don't agree that we will have sharply lower inflation in the next few years. Quite the opposite. Those index linked gilts just sold had a real yield of -1.26%. That's a bet that inflation is going to be galloping along the highway, surely, i.e. enough of it to not only offest the negative yield but provide a real rate of return?

Glen_Clark

bowlhead99 wrote: »

If you look at history, the UK base rate was at 5.75% on 5 Dec 2007 and dropped to 0.5% by 5 Mar 2009. So it dropped by over 9/10ths in a year and a third.

Beginning of September '91 it was at 10.875%, by Jan '93 it was 5.875. Another example of dropping 5% in a year and a third.

First day of June '88 it was 7.375%; before end of first week of October '89 it was 14.875%. Up 7.5% in a year and a third.

Christmas '84 it was 9.5%. Before end of Jan '85 it was 13.875%.

Although people like to think there will be just a slow return to long term average... and that QE may not be fully dropped for a long time (particularly in the US)... and that it is ridiculous to postulate that any government would be foolish enough to make sharp changes to push the economy the way they want it in response to domestic or global issues... this is not borne out by history.

True, but money printing makes it the way the right wing government wants it - rich getting richer, poor getting poorer. We don't even have a left wing party now. So I still don't see it changing much.

Glen_Clark

grey_gym_sock wrote: »

however, merely having no further QE, without reversing what's been done so far, would be enough upset the markets. since they have been puffed up by QE, the end of puffing is likely to lead to withdrawal symptoms.

Just stopping the printing presses (if the Government can bring itself to do that) wouldn't end the 'puffing up'. The cash is still in circulation. If you use it to buy shares for example, the seller then has it to buy something else. So the extra £375 billion is still flying around like a dog chasing its tail puffing up asset prices. You would only stop the dog chasing its tail by withdrawing the £375 billion - selling bonds and burning the cash.

Glen_Clark

dktreesea wrote: »

The asset bubble and inflation are already here.

They certainly are. Agricultural land prices have tripled since QE began, which is feeding through to farm rents and food prices - up 40% already. Rents, Fuel and Utility costs similar. Government inflation figures include things like Blu Ray disc players - but how often do you buy one of them. The price drops to £20 and is then excluded, then the next new gadget comes in at £500 and is included, drops to £20 and is excluded, etc etc.

bowlhead99

dktreesea wrote: »

I don't agree that we will have sharply lower inflation in the next few years. Quite the opposite. Those index linked gilts just sold had a real yield of -1.26%. That's a bet that inflation is going to be galloping along the highway, surely, i.e. enough of it to not only offest the negative yield but provide a real rate of return?

Yes, sorry - as a catalyst for goverments to stop QE, I'd meant lower unemployment, not lower inflation - just typed a completely different word, now edited! Inflation is not going to go sharply lower while QE is going happening - quite the opposite.

The point was (and intended to be a general global view, wider than specifically the UK): too much QE for too much longer, assets bubble more, inflation rises - simple economics. But governments and central banks don't want to stop the QE until they've "fixed" lack of employment and growth, and are less concerned with inflation as a by product - UK under Carney may replace the monthly BOE inflation target (which is never met anyway) with something that looks at unemployment just as much, while in Japan, Abe's appointment of Kuroda and his two deputies has the specific goal of producing positive not negative inflation in the drive to growth.

So, I don't see the QE taps going off particularly soon - again, this general environment of QE around the world which is causing the very visible asset price rises, rather than specifically the UK elements of it which might (if the decent bits of economic news from this week continue) seem to be able to be scaled back a little perhaps.

As you say, there are some signs that QE might have started to fulfil its purposes and we might not need too much more of it to stay afloat. This week there was some new cause for cheer every single day, whether it was PMI manufacturing figures where nearly everyone in Europe released numbers ahead of expectation, including ourselves, or the improving trade deficit etc. But of course there are negatives here and there too, and all this needs to be sustained for some time before we are out of the woods.

Meanwhile, the world markets remain jittery and ready to drop on any mumurings of QE going away, creating perverse situations where good general economic stories cause price decreases because the market is afraid they'll give cause to turn the taps off a little.

dktreesea

Glen_Clark wrote: »

Do you think thats not happening in Britain? Oxfam estimates over half a million people in Britain reliant on charity food parcels.
http://policy-practice.oxfam.org.uk/publications/walking-the-breadline-the-scandal-of-food-poverty-in-21st-century-britain-292978


Meanwhile disabled people who don’t want to be reliant on food banks are being taught how to scavenge for free food in supermarket skips and dustbins The workshops are being run in south Wales by members of the Disabled Activists Network Wales (DAN Cymru). - (link to this story is behind a paywall.)

Homeless 62 year old woman goes to council and is offered a voucher to buy a tent
http://www.guardian.co.uk/society/patrick-butler-cuts-blog/2013/jun/03/homeless-pensioner-offered-tent-by-council

(Maybe the British are less extrovert than the continentals, and are too embarrased to complain about their poverty?)

Not to mention the tent cities in Northamptonshire:
http://www.dailymail.co.uk/news/article-2124465/Homeless-migrants-shanty-town-Northampton-shanty-town.html

http://www.itv.com/news/anglia/2012-04-13/homeless-migrant-camp-to-be-moved-on/
Apparently this particular camp has since been closed/moved on but the one near the abandoned power station is still there.

The only reason Spanish citizens are forced into this situation in Spain is that their version of social welfare has out of work benefits that run out after two years and no housing benefit.

I wonder how many trillions Britain will be allowed to go into debt before the government bites the bullet and starts really cutting back on social welfare.