Quantitative Easing. Who pays?

[longjohn]

Anything, be it government or management must preside over a governable entity. When we are confronted with twenty-four hour banking, across time zones, with transactions coming under different national laws at different geographical stages of the process, it comes impossible to regulate or scrutinise. Ninety-eight of the top 100 UK companies in the footsie, are registered in tax havens. The Inland Revenue tries to negotiate with them in order to reach some tax agreement. Vodafone has been given a complete exemption from corporation tax for this year. TNCs' know perfectly well that they are beyond reach. Every western country has similar problems; their legal frameworks do not allow the powers available to make much difference. Bank reforms can only affect the general taxable population, or small corner shops, to the TNCs' they are largely irrelevant.

The Germans were angered yesterday when PIMCO (large investment house.) has said that it will not make any more sovereign loans to the EU until Germany acknowledges its obligations to the indebted eurozone. That is hitting below the belt; that may be an effective method to force Germany into becoming the lender of last resort. Isolating the EU from the global financial markets, as China has already decided; plus threats to EU exports, may be kind of discipline Britain, the USA and China will assert until they have persuaded Germany to comply with their wishes. Germany may become totally intransigent, but a price for that obduracy will be extracted.


The financial system has a long history of crises; the existence of a crisis is nothing unique. What we can say is unique is the existence a unified global market which is now able to circumvent national laws and any central supervisory authority. In the late 19th.C, for example, Britain had a serious problem resulting from poor investments and loans to Latin America. That resulted in a massive outward flow of gold down the proverbial 'black hole'. The Bank of England had to stop that with some urgency.


Despite protestation from some concerning QE, that will be with us for many more years. Sir Mervyn King intimated only last night that more can be anticipated in the U.K. The Federal Reserve Board in the USA has said that they could be doing likewise. If banks need recapitalising they either borrow the money from institutions which have often borrowed the same from other institutions, or produce their own, which does have the advantage of keeping interest-rates low. That is unfortunate for investors, and pension funds, but it is still better than a global default on private and corporate debt. If war broke out, for example, the national debt would rise, and purchasing fluidity would be produced from QE. It may be that Germany will see QE as a means by which the ECB can be the collective lender of last resort, thereby removing much of liability from themselves.

Much of what is discussed in the BDF's economics section may often be of interest to students of moral philosophy, or those who try to segregate subjects into political left/right divisions, but the immediate need is for an economic/financial system relevant to the circumstances of our time. That is the constant in this debate. Much inflation is a statistical abstraction; don't see if it is hiding under the sofa, it won't be there. Such speculation is in the same league as asking, 'What law makes the law, law?' or 'If everything has a first cause, what cause caused the first cause? Expel them to the literature department to read metaphysical poetry. Don't let them become decision-makers in the real world.

All very interesting and you make many good points but how will the £350 billion be repaid to the BoE?

[Roland]

Anything, be it government or management must preside over a governable entity. When we are confronted with twenty-four hour banking, across time zones, with transactions coming under different national laws at different geographical stages of the process, it comes impossible to regulate or scrutinise. Ninety-eight of the top 100 UK companies in the footsie, are registered in tax havens. The Inland Revenue tries to negotiate with them in order to reach some tax agreement. Vodafone has been given a complete exemption from corporation tax for this year. TNCs' know perfectly well that they are beyond reach. Every western country has similar problems; their legal frameworks do not allow the powers available to make much difference. Bank reforms can only affect the general taxable population, or small corner shops, to the TNCs' they are largely irrelevant.

The Germans were angered yesterday when PIMCO (large investment house.) has said that it will not make any more sovereign loans to the EU until Germany acknowledges its obligations to the indebted eurozone. That is hitting below the belt; that may be an effective method to force Germany into becoming the lender of last resort. Isolating the EU from the global financial markets, as China has already decided; plus threats to EU exports, may be kind of discipline Britain, the USA and China will assert until they have persuaded Germany to comply with their wishes. Germany may become totally intransigent, but a price for that obduracy will be extracted.


The financial system has a long history of crises; the existence of a crisis is nothing unique. What we can say is unique is the existence a unified global market which is now able to circumvent national laws and any central supervisory authority. In the late 19th.C, for example, Britain had a serious problem resulting from poor investments and loans to Latin America. That resulted in a massive outward flow of gold down the proverbial 'black hole'. The Bank of England had to stop that with some urgency.


Despite protestation from some concerning QE, that will be with us for many more years. Sir Mervyn King intimated only last night that more can be anticipated in the U.K. The Federal Reserve Board in the USA has said that they could be doing likewise. If banks need recapitalising they either borrow the money from institutions which have often borrowed the same from other institutions, or produce their own, which does have the advantage of keeping interest-rates low. That is unfortunate for investors, and pension funds, but it is still better than a global default on private and corporate debt. If war broke out, for example, the national debt would rise, and purchasing fluidity would be produced from QE. It may be that Germany will see QE as a means by which the ECB can be the collective lender of last resort, thereby removing much of liability from themselves.

Much of what is discussed in the BDF's economics section may often be of interest to students of moral philosophy, or those who try to segregate subjects into political left/right divisions, but the immediate need is for an economic/financial system relevant to the circumstances of our time. That is the constant in this debate. Much inflation is a statistical abstraction; don't see if it is hiding under the sofa, it won't be there. Such speculation is in the same league as asking, 'What law makes the law, law?' or 'If everything has a first cause, what cause caused the first cause? Expel them to the literature department to read metaphysical poetry. Don't let them become decision-makers in the real world.

So you don't know who pays then.

[Geoffrey Collier]

All very interesting and you make many good points but how will the £350 billion be repaid to the BoE?

longjohn: It can result from many sources. (1) Toxic debts should mature in time, QE is not wholly devoid of collateral; that is one of the attractions. Only central banks would be prepared to sit on sub-prime assests of the kind which were imported from the USA, private institutions could not (2) Inflation will dissipate some of the loss. (3) QE, despite certain problems which it causes, can keep interest rates low. That is an advantage to businesses and, particularly those with a mortgage. Providing the economy doesn't get too bad, government expenditure, (the national deficit) should be lower than would otherwise be the case. Banks weren't nationalised because they were solvent, they were nationalised because quite the opposite was the case. Some people tend to wander off on some mental excursion, and have a nasty habit of mistaking the hole for the doughnut. Despair not, we are still economy number six in the world. We must have some talent, even if it is well disguised on occasions.

[BCG Jason]

GC, I see it differrent possibilities and think I am in danger of repeating myself but will continue none the less:

Firstly what is the tangible output from QE in terms of jobs?
Very little
Secondly what is the tangible output from QE in terms of Bank Lending?
Very little

I think instead of QE we should be spending a few billion on a national project like a water grid and employing local people up and down the country. What a great way to get jobs and cash into local economies.

Next if Europe is a solid political group they should dictate to the corporations using veiled threats of measures to ban them access to markets in Europe if they do not pay their fare share of tax this would require propaganda to make them appear publicly to be 'crooks' to get the public to accept they can't have the latest 'Vodafone' Ipod model for example. I think this would work because some Corporations would see the chance of getting market share the others would lose, IMO

I expect you say will the US will not support this yet we will not know until we try.

[longjohn]

longjohn: It can result from many sources. (1) Toxic debts should mature in time, QE is not wholly devoid of collateral; that is one of the attractions. Only central banks would be prepared to sit on sub-prime assests of the kind which were imported from the USA, private institutions could not (2) Inflation will dissipate some of the loss. (3) QE, despite certain problems which it causes, can keep interest rates low. That is an advantage to businesses and, particularly those with a mortgage. Providing the economy doesn't get too bad, government expenditure, (the national deficit) should be lower than would otherwise be the case. Banks weren't nationalised because they were solvent, they were nationalised because quite the opposite was the case. Some people tend to wander off on some mental excursion, and have a nasty habit of mistaking the hole for the doughnut. Despair not, we are still economy number six in the world. We must have some talent, even if it is well disguised on occasions.

From your reply you seem to suggest the same as Ron that inflation will in time kill off the debt. So you are also a believer in hyper inflation so if that is the case why do you think hyper inflation is coming. I agreed that interest rates will remain low while the BoE keeps using this practice even though my first thoughts were that it would take off and cause a run on the pound. It is at the end of the day very clever idea in the short term as the BoE must have insisted that the 350 billion be spend on the banks so maintaining the monetary system and nothing else, but what about the day of reckoning. These bonds will have to be paid back and I can’t see anyway round this. I have e-mail the BoE and my local MP who is a ******** called James Paice and I am waiting their replies.

[longjohn]

GC, I see it differrent possibilities and think I am in danger of repeating myself but will continue none the less:

Firstly what is the tangible output from QE in terms of jobs?
Very little
Secondly what is the tangible output from QE in terms of Bank Lending?
Very little

I think instead of QE we should be spending a few billion on a national project like a water grid and employing local people up and down the country. What a great way to get jobs and cash into local economies.

Next if Europe is a solid political group they should dictate to the corporations using veiled threats of measures to ban them access to markets in Europe if they do not pay their fare share of tax this would require propaganda to make them appear publicly to be 'crooks' to get the public to accept they can't have the latest 'Vodafone' Ipod model for example. I think this would work because some Corporations would see the chance of getting market share the others would lose, IMO

I expect you say will the US will not support this yet we will not know until we try.

I don’t think that QE was introduced for directly creating jobs and the banks are just sitting on the money to boost their assets as it costing so little to borrow it. Really we don’t want the banks to start lending like they did before because that is how we got into this position in the first place. I really would not like to be the person who has to make a decision on such matters now we are in this state. If one is in debt you don’t take on more debt to get out of the situation unless you can see that the situation has changed. All things are as they were, nothing has changed.

[Geoffrey Collier]

From your reply you seem to suggest the same as Ron that inflation will in time kill off the debt. So you are also a believer in hyper inflation so if that is the case why do you think hyper inflation is coming. I agreed that interest rates will remain low while the BoE keeps using this practice even though my first thoughts were that it would take off and cause a run on the pound. It is at the end of the day very clever idea in the short term as the BoE must have insisted that the 350 billion be spend on the banks so maintaining the monetary system and nothing else, but what about the day of reckoning. These bonds will have to be paid back and I can’t see anyway round this. I have e-mail the BoE and my local MP who is a ******** called James Paice and I am waiting their replies.

longjohn: I don't believe in hyper-inflation; but I do accept that inflation is a fact of economic life. When the nationalised banks are eventually sold, that should make the national deficit easier to manage. At the moment the major priority is to keep the system going, which is better than it all collapsing about us. In my lifetime the national debt as a percentage of GDP has been 240%, and we were able to live with that. There won't be a run on the pound; from where will that threat come? Money from the unstable euroland countries is pouring into Britain. As I have said previously, the real problem, not only in Britain but most western countries, is that economic activity which is both profitable and requires a large labour force. Give some thought to that one. Solve that economic problem, and most of the rest will be self rectifying. Economic book-keeping is something which we have had centuries of practice in perfecting. Jobs are the real problem.

[Jim S]

After £325 billion of QE and the banks are still not lending, what can Mervyn King try next?
http://www.bbc.co.uk/news/business-18448636

Employment is obviously the key to economic recovery; about 5 million well paid full time jobs
would just about do it, you recon?

[CB100]

As long as they are all private sector jobs that would be great.

We could also do with losing another million public sector jobs which would get us back to where we were prior to Labour in 1997.

Employment is obviously the key to economic recovery; about 5 million well paid full time jobs would just about do it, you recon?

[longjohn]

I sent the following e-mail to the BoE.

Sir,

If the Bank of England is buying government bonds with money from quantitative easing, then at some point the government has to replay the Bank of England when the bonds mature and any interest occurring on those bonds. Would I be correct in assuming this? If so when do the first bonds mature?

I have had the following acknowledgment from the BoE. I await their reply which should be interesting. Perhaps we can get to the bottom of this.
---------------------------------------------------

We acknowledge receipt of your e-mail dated 15/06/12 June (our ref FF 26775).

We will reply in due course.

If you have any queries please contact the Bank's Public Information and Enquiries Group on 020 7601 4878.

Public Information & Enquiries Group
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