U.K. Begins Quantitative Easing

Looks like half past inflation to me

Just to prove how distorted a given country's citizens' view of money, inflation, and intrinsic worth derived from currency can be, let's take a moment to see what's going on across the pond. This is especially important since our darling President and Timmy the Lonely Treasury Secretary are headed to London to come up with fresh and exciting ways to debase the currency. I'm sure PM Brown and his central bank will be able to offer plenty of advice.

Reuters on the UK's quantitative easing scheme:

The Bank of England stepped up its quantitative easing programme on Thursday, saying it would buy 5 billion pounds of gilts next week after investors eagerly offloaded 2 billion pounds worth on Wednesday.

The Bank has committed to buy 75 billion pounds of assets, mostly gilts, from investors using newly created money, to increase the money supply and encourage banks to lend more freely to firms and consumers and ease the recession.

The central bank said it would buy 2 billion pounds of longer-dated gilts with maturities ranging from 2020-2032 on March 16, and a further 3 billion pounds of shorter-dated gilts with maturities of 2014-2019 on March 18.

At its first reverse auction to buy gilts on Wednesday, investors wanted to sell more than 10 billion pounds of gilts to the Bank of England, five times what it was bidding to buy.

"I think what we saw yesterday was the BoE testing the water. They're comfortable enough to push the market a bit further next week," said Sean Maloney, a strategist at Nomura International.

No, Sean, what you saw yesterday was the BoE behaving recklessly in a race to the bottom. Ironically, the Bank of England also says that the public perception of inflation on that side of the water is strangely rosy. In fact, most "perceive" a drop in inflation. Further proof that the economic demolition teams imploding economies around the world with their harebrained schemes aren't the only ones drinking the Kool-aid.

Britons' expectations for inflation over the next year dropped to their lowest level in nearly four years, the Bank of England said today.

The Bank of England/GfK NOP inflation attitudes survey for February showed that the public's expectations for inflation over the next 12 months fell to 2.1% in February from 2.8% in November.

It also revealed that Britons thought inflation was 4.2% in February, down from 4.9% in November. This was the biggest quarterly fall in estimates of inflation since the survey started in 1999.

Yes, well, obviously the BoE has been discussing this with Helicopter Ben. Go, Zimbabwe, go!

Comments

[svkoho:]

Im confused about this quantitative easing. Is BoE printing money to purchase privately held bonds(gilts) or issuing bonds so they can print money? "Quantitative easing"....what a deceptive term!

Mar 13 09:44 AM

[Adrienne Go...:]

svkoho,

Fake paper for more fake paper. One version of the fake paper (which BoE is printing) will be worthless before too long, which is why they're using it to purchase other fake paper (bonds) which might at least have some value for the long term.

Mar 13 11:18 AM

[Dirk McCoy:]

The bank of England is buying bonds with newly created money. So the bank, instead of having bonds, will have cash. This puts more money into the economy, theoretically allowing banks to loan more and offsetting deflation.

Saying England is like Zimbabwe is foolish. England has much more productive capacity, and this move may make visiting London a bit more affordable so tourism will absorb some of this money (and this applies to other industries as well). Printing money doesn't automatically create a weaker currency, and a weaker currency doesn't automatically mean a weaker economy, anyone who claims otherwise is ignorant.

When purchasing power is so skewed between the UK, US, Eastern Europe, China, etc.- there are going to be currency valuation shifts, provided free trade allows countries to continue to produce and share their surpluses to the benefit of all.

Mar 13 02:25 PM

[arganx:]

Well the printing of the money itself of course does not weanen a curency - as long as it stays at the printers. If put into the open economy, it of course does weaken the real value of the currency. Now that currency might still move up or down relative to other currencies, but that says notning about its real value.

Mar 13 02:37 PM

[Adrienne Go...:]

Dirk,

Zimbabwe is a convenient reference to any attempt by any central bank to "stimulate" via the printing press. This does not imply that England will at all end up going the same route. But it does make one question what exactly the goal is here?

What happens when everyone debases their currency at once? Because we're doing it at home.

It can't lead to anything good.

Mar 13 03:43 PM

[charlesjt:]

OK, I;ll bite. What are gilts?

Charles

Mar 13 07:27 PM

[Dirk McCoy:]

The goal is to target inflation 1.5-3% (depending on the country). This level of inflation allows creates incentives for consumers to spend rather than sit on money while it passively gains in value. Another way to put this is the goal is to maintain velocity in the equation MV=PQ, and match M to Q.

Ask yourself this- if money (or credit) wasn't created, would we still be trading beads? Or working with the same amount of currency we had 200 years ago? If money supply has increased 1400% when GDP has increased 1600% in the same timeframe- doesn't that make sense?

There is no question that money (or credit) needs to be created as economic activity grows. The only question is how much.

One last point- we don't really live in a money economy- we live in a credit economy. The wild swings we see are driven more by Fed interest rate manipulations on this mountain of credit than money supply, per se. I believe we will see a growing consensus that the Fed needs to minimize its interest rate manipulations, especially in the attempt to pop bubbles.

And gilts is the British term for government bonds.


On Mar 13 03:43 PM Adrienne Gonzalez wrote:

> Dirk,
>
> Zimbabwe is a convenient reference to any attempt by any central
> bank to "stimulate" via the printing press. This does not imply that
> England will at all end up going the same route. But it does make
> one question what exactly the goal is here?
>
> What happens when everyone debases their currency at once? Because
> we're doing it at home.
>
> It can't lead to anything good.

Mar 14 10:56 AM

[Aristophanes:]

On Mar 13 03:43 PM Adrienne Gonzalez wrote:

> Dirk,
>
> Zimbabwe is a convenient reference to any attempt by any central
> bank to "stimulate" via the printing press.

The historical data suggests Japan is a more accurate reference.

Right now you get two opinions about inflating the money supply in this crisis in Western countries:

1) It will automatically lead to inflation, even hyper-inflation. This is an economic law. Buy real gold. Get a firearm.

2) It will do nothing, except maybe shave some deflation, as we saw with Japan. This is the historic reality. Germany did something similar when absorbing East Germany and the economic effects were not inflationary.

I go with the latter because that's what the data suggests. We've had enough theories gone wrong in this crisis, it's time to look at some facts. Comparing modern, Western nations to Zimbabwe or Weimar Germany is to miss decades of history and massive structural differences.

Mar 14 07:21 PM

[Bill Zielinski:]

It's tough to put lipstick on this pig.

The economists at the Bank of England will come up with elaborate theories and explanations as to why their money printing operation equates to sound economic policy.

Strip away the theories and the horrifying reality is that printing money was the Bank of England's last option other than default. The Bank of England's treasury is empty; if they could have sold debt to raise money they would have. Since they are broke and investors won't buy their debt, they are printing money in a desperate attempt to forestall default.

If the world economy recovers, maybe this tactic works with only moderate damage to the English currency and economy. If economic conditions continue to spiral downward, they default anyway.
2009 will be an interesting year for sure.

Mar 15 03:06 AM