Comments on: Quantitative easing in the U.K.

By: Edward Harrison

Edward Harrison — Wed, 11 Mar 2009 03:07:49 +0000

I saw that. Funny, huh? I put it in the news feed. The long and short of it is: printing money is the definition of inflation. The only reason one won't see inflation is because the velocity of money is decreasing.

By: Stevie b.

Stevie b. — Tue, 10 Mar 2009 22:07:27 +0000

Ed – coincidently, this just appeared right on topic:

http://www.telegraph.co.uk/finance/financetopics/recession/4967505/Inflation-will-kill-the-gilt-rally-in-the-end.html

By: Stevie b.

Stevie b. — Tue, 10 Mar 2009 20:58:20 +0000

Ed – thanks…and thanks for the link that i’ll try and digest.
Of course, UK govt borrowing going forward is going to be a big figure – and then maybe they need to sterilize on top of it all and on top of all that there’s going to be a General Election – so there aint going to be any real tightening before that, even if there needs to be….

By: Edward Harrison

Edward Harrison — Tue, 10 Mar 2009 18:46:01 +0000

Steivie, the BoE are just another market participant in the Gilts market where Gilts are bought and sold daily. So if there are 10 participants that might bid for a bond at a given price, now there are 11. So, at the margin, the BoE should have relatively little impact on price.

The problem you note of course is if the BoE issue a wall of money, say trillions of pounds of QE money. The degree to which the BoE need to get into the market and buy Gilts is a lot greater there and I am sceptical as to whether they could mop up the excess liquidity before rates and inflation start to rise.

So, on the whole, dovish types tend to think the BoE can do it — they can mop up the excess liquidity. Those like you and me are more sceptical and believe higher inflation and higher interest rates will be manifest in short order AFTER the economy rebounds.

Also, take a look at this Wikipedia entry:

http://en.wikipedia.org/wiki/Open_market_operations

It’s on the Fed but applies here as well.

By: Stevie b.

Stevie b. — Tue, 10 Mar 2009 18:39:17 +0000

Ed – thanks a lot for this response, but I’m really slow on the uptake so please humor me. Yes, the BoE don’t need to worry about gain or loss and they print money in exchange for gilts sold to them by let’s say “anyone”. When the time comes for sterilization and for “anyone” to relinquish some of the extra money they got, why should they? Yes, as you say, the Bank can sell in the market, but why should “anyone” be on the other end buying at anything other than very distressed prices, as selling by the Bank would mean “job done”, inflation’s back. So rates would need to back-up a lot for “anyone” to start buying again. If this means the Bank makes a whopping loss, wouldn’t that mean the Bank has to print even more to cover it? I’m feeling my way in the dark here and any light you can shed would be deeply appreciated as understanding all this seems the key to the economic future and I can’t get a proper explanation anywhere.

By: Edward Harrison

Edward Harrison — Tue, 10 Mar 2009 17:48:40 +0000

Stevie, I see what the BoE is doing as easier to control than what the Fed is doing – not that easier is 100% advisable. But the BoE print money in exchange for gilts. If and when the economy responds, they can sell those gilts in the market as anyone else would do. They don’t need to worry about gain or loss because the BoE can print money at will.

The problems I see are that they may react too slowly to mop up the excess money, Sterling dives or inflation picks up. Contrast this with the Fed which is buying potentially toxic assets and you do have a problem as to where the willing buyers will be for these assets.

By: Stevie b.

Stevie b. — Tue, 10 Mar 2009 07:24:15 +0000

Ed – please – help me out here. QE means falling rates along the curve as the BOE buys Gilts. When the eventual time comes to sterilize and the Bank needs to sell Gilts, who in their right mind is going to buy (anything other than short-term Bills) knowing they’ll be sitting on a certain loss as inflation picks up? If this is true, what do you think are the ramifications of this?

By: Edward Harrison

Edward Harrison — Mon, 09 Mar 2009 19:25:57 +0000

Tom,

You make a good point. The U.S., I feel, is a bit different given its role as a safe haven and the reserve currency. Were the U.K. to have been in the U.S.’s position, things might have turned out differently. That said, I reckon the U.S. has been much more aggressive than Europe in looking to fight this thing and that makes the U.S. more attractive as you indicate.

In the end, this is one grand experiment, and I am waiting to see how things unfold because it is far from clear what the medium-term implications will be.

Thanks for your insight, Tom.

By: Tom Lindmark

Tom Lindmark — Mon, 09 Mar 2009 18:30:40 +0000

Ed,
Theoretically QE should produce the results you project but so far the experience in the U.S. has been the opposite. The currency and interest rates have increased. The relative state of other economies and their willingness or ability to engage in QE might have some implications.

In other words to the extent QE strengthens a sick economy while others continue to slide it might perversely result in a stronger currency.