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BoE's Quantitative Easing Strategy Proves its Worth - Less than Zero

 If more evidence was needed that the Bank of England’s quantitative easing (QE) program was wholly ineffective in its efforts to generate real economic growth, it arrived by the truck load this week on confirmation that Q3 GDP contracted and the UK economy is still officially in recession.

In fact it would take a vivid imagination or a deep misunderstanding of financial markets to think that the BoE’s purchase of £175bn worth of government bonds, bought with printed money, would do anything economically productive at all.

Investment banks and other financial institutions happily sold the Gilts to the BoE and received the cash in return. Those institutions then proceeded to either shore up their balance sheets or speculate with the cash buying equities and other risky assets.

Add into the equation the fact that some of the Gilt sellers were non-UK based banks and therefore much of the proceeds of the £175bn injection left the country, you have yourself a very silly UK economic recovery strategy indeed.

Ask yourself these questions:

How can £175bn’s worth of financial speculation, the buying and selling of financial instruments create real jobs or real economic growth? It can’t, but it can boost bonuses in the City and give institutional traders money to play with.

And considering which companies got us into this economic mess is there an industry less deserving than the banking industry for such a cash injection? Many people think not.

It is this type of financial insanity; speculation with cheap money, that prompted Matt Taibbi to describe a certain investment bank as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

So whilst the UK struggles through its longest recession since records began and unemployment continues to worsen fairly considerably, UK equities have bounced 50% since the trough of the bear market. Those facts sum up why the BoE’s recent contribution to the creation of real jobs and real economic growth is so small it’s barely visible to the naked eye. But their chums in the City are sure to receive a cracking bonus at the end of the year after speculating with the quantitative easing program’s cash.

For the record UK GDP contracted 0.4% in the June to September quarter. The economy has now been in recession for six consecutive quarters. Year-on-year contraction now stands at 5.2%. Industrial production over the same period has fallen by 10.4%. UK economic output in Q3 totalled £347.50bn compared to Italy’s £350bn (Source; Citigroup). Admittedly the report of a 0.4% contraction is preliminary, and could be revised upwards, but it’s equally possible later revisions could downgrade the data.

Leading commentators have suggested the BoE and the Government with its equally clueless approach to the economy should be “embarrassed” by the latest data. I think ashamed would be a more fitting emotion.

Alistair Darling, the Chancellor of the Exchequer, responded to the GDP news and predicted hopefully "Growth will return at the turn of year”.

Unfortunately, Darling, hope is not a strategy.

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