Thursday, 9 February 2012

Quantitative Easing - I just don't get it...

Do you understand Quantitative Easing?  I don't.  It is printing money in all but name and I look at it as a measure already discredited.  We have have in the UK the lowest ever bank base rate (0.5%) set by the Bank of England's committee for almost 3 years now.  Also in 2009 the bank first used Quantitative Easing in the UK economy pushing first £75bl into the economy and by the end of that year the total as £200bl.   Today as I say near 3 years later the bank is pushing in another £50bl.   How's it do this?  It buys up things like bonds that banks have - so the banks have lent money to someone and have a bond that they'll get it back at some point.  That is an asset for the bank but they can't do anything with it.  Someone comes in and says "Can I borrow a bunch of money?" and the bank looks under the table into a drawer full of bonds (i.e. IOUs) but no cash and says "Sorry can't help right now".   So the central bank buys the bond from the bank and fills the drawer back up with cash which they can then lend to the guy (or the next one in the door) we just mentioned.  In theory this then stimulates the economy back into growth.  In theory as we've been doing this since March 2009.

Right then with this new £50bl we've injected £325bl into the British economy in the last 3 years.  Fantastic we can all feel the effects of that can't we?  Well generally no - if the £275bl to date has done pretty much nothing I'm not convinced that this will do much and also - the country doesn't have that money to just give out.  This is just another step towards Britain looking like Greece - btw we owe as a nation, per head of population, far far more than the Greeks you know - the only difference is that somebody (the ratings agencies) believe we will pay it back!  However we are told we need growth... from where... oh yes Quantitative Easing.

Now Britain has an ageing population - that is why we're all hot under the collar about pensions and all that at the moment, now the pensions crisis has nothing to do with all this economic nonsense currently, we had it before that and it would have been a painful realisation sooner or later... well later as we'd been putting off fixing that one for too long the government du jour is just using the economic crisis as a good excuse to push through painful reforms that had to come anyway.  But get this... if you are not on a final salary scheme (like most in non public pension schemes) the Quantitative Easing will hit the value of your pension.   Because as you buy up these bonds that reduces their value in the market - the central bank is there wanting to buy them and people clamour to sell them in "reverse auctions" i.e. the bank buys at the cheapest price.  Hence all bond values fall and bonds form a lot of pension fund assets and so if you retire this year your pension will be less than before this announcement.   But we need growth from people with money to spend... people like retired people ... oh ...

See now I'm not an economist but... can we stop looking for growth, stop pumping money we don't have into an economy that isn't going to grow as inflation has been for some time 400% the average rise in salaries and pension values are shrinking due to the governments policy to bring growth back to the economy.  Everybody is hunkered down not looking to spend money as it is precious right now, what I do have in the bank I may need next year as who knows if they will have a job come this time next year? The govt doesn't want/need you to do this as it wants ... growth...   You know there is a point where I just don't get it anymore...

Just one other observation - the guy from RBS was upset the public was on his case about his bonus - then admitted that the £45bl we, the tax payers, gave his company to bail itself out for a self inflicted hole has pretty much all gone!   WHAT?! and the guy thinks he deserves a bonus?!!   I think if I'd "lost" £45bl I'd not be suggesting to my boss I was due a bonus!  When he has paid back the £45bl maybe then we ought to think about a bonus.

1 comment:

  1. I had no idea what that term meant...and actually my eyes glazed over a little...

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