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Quantitive easing?? How does it help?

(29 Posts)
AfternoonsandCoffeespoons Thu 06-Oct-11 13:37:05

Just watching the news that a few billion pounds is being/has been printed today. I understand (thanks to a thread the other day) how this is bad in the long term but I don't understand why its good in the short term. Where does the money actually go? Who spends it and on whta? <confused>

CogitoErgoSometimes Thu 06-Oct-11 13:48:42

It buys government bonds (assets) which means putting more money into the system in the form of central bank deposits (rather than actually printing more money). It increases the value of the assets being bought and reduces long-term interest rates which makes borrowing & investment a little easier. The downside is that it could increase inflation... something the BofE is meant to keep down.

AfternoonsandCoffeespoons Thu 06-Oct-11 14:38:13

confused oh. God, I'm obvioulsy thick as shit - you might as well be speaking a foreign language, Cogito. Thanks for trying though.

CogitoErgoSometimes Thu 06-Oct-11 16:25:12

Less abstract. How about imagining banks with vaults of diamonds (assets) that they have bought but which they can't sell or generate a profit from because there is no demand? So they're holding onto them until demand picks up and, in the meantime, the cash tied up in diamonds can't be lent out to businesses. The Bank of England ups its own balance electronically and starts buying the diamonds, putting the cash in the banks' accounts as payment. Now there's some buying going on, the market perks up, diamond-selling is profitable, the banks have more cash to lend out, and the theory is that the wheels of commerce will start turning again. It's an alternative to reducing interest rates which, as you know, are already rock-bottom.

(Disclaimer... it's probably not a very good example smile )

said Thu 06-Oct-11 16:31:36

It's like having an exhibition of your crappy paintings and only your family and friends buying them to help you raise some cash.

mycatsaysach Thu 06-Oct-11 16:34:15

yes said and with virtual cash too

AfternoonsandCoffeespoons Thu 06-Oct-11 17:24:25

Ok, slightly clearer. I don't think I'm ever going to fully understand it tbh. I can't even formulate the questions I want to ask in relation to the explantion! I understand it on a basic level now, though, I think. smile

CogitoErgoSometimes Thu 06-Oct-11 18:14:25

It's a long-shot. There are pros and cons and it's not something that's been tried too often before. So, if it's any reassurance, I don't think it's just you that doesn't fully understand what happens next... I think the experts aren't 100% sure either. There's a danger that the instutions in receipt of the extra money won't lend it on but keep hold of it. Sterling already dropped a little after the announcement. Inflation will probably go up again this month. But, while the Eurozone is still faffing about, interest rates are rock bottom and there is low growth elsewhere in the world, there are very few monetary tricks remaining.

edam Thu 06-Oct-11 22:20:46

So what else could/should the government being doing? I'd back Plan B - don't cut public spending dramatically in the middle of a financial crisis that is far more than a 'normal' recession. But focus that investment in things that boost economic activity in the private, charitable and voluntary sectors, such as housebuilding. Cut fewer public sector jobs while the private sector is in no shape to expand - keep people in work and paying taxes, and therefore supporting private sector employment in every firm that depends on those wages (from supermarkets to the cafe that sells lunchtime sandwiches to the stationer who supplies the school or hospital etc. etc.).

smallwhitecat Thu 06-Oct-11 22:24:53

Message withdrawn

CogitoErgoSometimes Fri 07-Oct-11 06:33:58

@edam... the trouble with the 'don't cut public spending' route is that it means 'increase public borrowing'. The UK balance sheet is still negative but it's currently believed to be a responsible deficit... unlike other countries that have got the balance wrong. I agree with you about moving more money into capital projects rather than paying for current expenses, however if we borrow more in total we risk being downgraded, having to pay more interest, and confidence in the UK could fall. Then the impact on all of us would be considerably worse than it already is. @smallwhitecat. It's an earlier and bolder move than expected which, if international reaction is anything to go by at the moment, is being taken as a positive.

AfternoonsandCoffeespoons Fri 07-Oct-11 09:01:04

This is actually really interesting. I do wish it made more sense. I did manage to explain quantitive easing to DH last night so some of it obviously went in!

ZephirineDrouhin Fri 07-Oct-11 09:19:28

Sorry to be a terrible pedant in the midst of impending economic catastrophe, but I can't help myself.

It's quantitative easing.

Some hope it will encourage lending/spending (although last time the banks apparently decided to hang on to the extra cash rather than lend it to business), others think it is as effective as pushing on a string.

edam Fri 07-Oct-11 12:18:54

Cogito - thing is, the government has tried the macho slash and burn 'we must cut public spending massively NOW' approach. And all it has done is stopped businesses and people spending and strangled any hope of recovery. Oh, and hit women and children and people with disabilities hardest, of course.

Any fool knows you have to balance deficit reduction with growth - you will never pay off your debts if your economy flatlines. Sadly the government is more obsessed with posturing and slashing public services (and taking lots of donations from hedge funders and bankers to for Tory party coffers) than with what actually works.

vincentvangogh Fri 07-Oct-11 12:30:50

I still don't really understand it. Are there going to be some individuals who get richer as a result of quantitative easing?

CogitoErgoSometimes Fri 07-Oct-11 17:33:13

"Any fool knows you have to balance deficit reduction with growth "

Any fool knows that the kind of paper/numbers growth we had under the last government is illusory and that slow growth, if it is sustained, is better than rapid bubbles that subsequently burst.

sue52 Fri 07-Oct-11 17:38:31

If I spent a few million pounds of counterfeit money, it would be a criminal offense. I can't quite see the difference if the government does the same thing. Doesn't t6here have to be something behind the paper money?

CogitoErgoSometimes Fri 07-Oct-11 17:42:49

The BofE can't produce counterfeit money. The BofE is the money.

smallwhitecat Fri 07-Oct-11 22:06:39

Message withdrawn

niceguy2 Sat 08-Oct-11 12:53:37

Sue, you have hit the nail on the head. There is no economic difference between you printing a few billion counterfeit notes and the BoE doing the same thing with real notes.

The only reason why it's not a criminal offence is cos the government says it's not (since someone has to print the money).

Economically it's tantamount to theft in my opinion.

amicissima Sat 08-Oct-11 18:02:34

If recession is caused by too little money chasing too many goods and services, presumably the idea is to have more money in the system.

The side effect is to increase inflation, which is a good thing from debtors' (including the government's) POV because the money they owe is worth less.

"Economically it's tantamount to theft in my opinion." It does seem as if the wealth of savers is being stolen (devalued + low interest rates) to pay for the debts of the borrowers.

Andrewofgg Sat 08-Oct-11 18:13:52

Exactly amicissima. The prudent and careful are being persecuted and punished to rescue the irresponsible banks and - it's not good trying to ignore this - the irresponsible borrowers. It takes two to tango and both sides of the lending are equally to blame.

QE should be stopped and interest rates increased to offer savers a fair return; who should also be offered inflation linked bonds without limit on how much they can buy, which would give HMT an incentive to keep down inflation at any cost. As it should.

bemybebe Sat 08-Oct-11 18:22:04

"The prudent and careful are being persecuted and punished to rescue the irresponsible banks"

Banks were not the only ones irresponsible. Plenty of bad debt is personal, don't you know it?

bemybebe Sat 08-Oct-11 18:23:22

oops, sorry, i reread and realized i misunderstood you the first time round andrew

edam Mon 10-Oct-11 22:42:10

why can't the Bank, or the government, put the money somewhere ruddy useful - directly into the real economy, rather than in the hands of the banks and just keeping their fingers crossed that the banks lend it to business? Investing in infrastructure projects, for instance? Something that provides stuff we need - new railway lines or power stations or there's a whole long list of things?

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