Wednesday, 10 November 2010

Quantitative Easing - a modern con

I read this article by Peter Jones in yesterday's Scotsman. Although it's behind the paywall, I have the paper version.

Here's a key quote:

On certain mornings, the government's Debt Management Office will sell hundreds of millions of government bonds. The buyers include banks. That same day, the Bank of England will buy bonds from, yes, you've guessed it, the banks, giving them cash with which the Bank and the government hopes they will use to lend and stimulate the economy.
Mr Jones then says:
And since bank lending is not rising, the idea that banks are sitting on heaps of cash is plausible.
When asked, the Royal Bank told Mr Jones that they didn't have any of this cash and that it was "out there in the economy".

When I read this article something didn't seem to add up. Surely one reason for the banks not having any of the cash from selling the bonds in the afternoon could be because they had laid out the same cash to buy the bonds in the morning. But of course it's certainly possible for the Bank of England to buy in bonds already in circulation and held by investors other than banks.

I began to think through the series of double entries required in this game. Again, something didn't make sense until one realises that, unlike all of the other participants, the Bank of England purchases second-hand bonds by writing a cheque drawn on itself, not on a commercial bank.

Quantitive Easing does involve an increase in the money supply. The original purchaser of the bond transfers buying power from his own earnings to the Debt Management Office and on to the government to be spent on warfare, welfare or whatever. The final buyer of these bonds is the Bank of England, like the DMO another part of UK PLC. Instead of transferring real earned wealth back into the real economy, the government simply creates more "cash" out of thin air. The purchasing power of all existing savings is thereby reduced. The holders of those savings are the ones who are really paying for the extra government expenditure. It's all a con.

Jones concludes his article by saying:

Something must be done. But what, please, what?
We know the answer.

1 comment:

David Farrer said...

Comments made on previous template:

David Farrer
Sorry, Mr O'Reilly. No more paper. No more ink.

14 November 2010, 08:10:41 GMT
– Like – Reply

Colin Finlay
Pompous Bank Manager (to put - upon Irish customer) : "Now look here, Mr O'Reilly, I'm afraid the bank simply cannot honour your cheque."  
O'Reilly : "Ah now, why moight dat be sorr?"  
PBM : "Insufficient funds"  
O'Reilly : "Well sorr, couldn't youse get some more?"

13 November 2010, 23:41:35 GMT