“…quantitative easing – printing money by another name – is the last resort of desperate governments when all other policies have failed.”
George Osborne, speech January 9 2009
The Bank of England announced today that it intends to do a further £50billion round of Quantitative Easing. Quantitative Easing involves pumping money into the economy in an apparently futile – it hasn’t yet been shown to work – attempt to stimulate the economy. There is a problem that there is very little to show for so many billions after billions that have already been squandered on Q.E.
It appears that it’s austerity for the vast majority and rolling in lolly for the rich elite. No money for the NHS for the plebs, plenty of billions to stimulate the markets for rich multi-millionaire traders and bankers to get yet richer.
There is an argument that the poor would stimulate the economy far more – since they would have to spend the money.
Quantitative Easing is stimulating commodity trading, not the real economy
As the economy slides towards recession, the Bank of England today announced today it was creating a further £50bn worth of ‘quantitative easing’ (QE).
If you read articles on the topic in the media, you will see statements like “the Bank is ‘printing’ money” or the Bank will “pump a further £50 billion in to the economy”. Both these statements are misleading.
QE actually involves the Bank of England buying financial assets – usually government bonds – belonging to institutional investors and sitting in Banks. The Bank buys these assets with newly created central bank reserves. These reserves can only be held by banks – they do not and cannot go to businesses the real economy.
As explained in nef’s Where Does Money Come From?, central bank reserves are used by commercial banks to settle payments with each other.
By ‘pumping’ more reserves in to the intra-bank clearing system the idea is that banks will feel more confident about making loans to the real economy because they will know that other banks are in a stronger position to settle with them.
In addition, by buying up ultra-safe government bonds in vast quantities and thus pushing down the yield (the interest received on holding) on these assets, the central bank hopes to encourage investors to buy higher yielding corporate bonds – which again provides money for real businesses.
QE may reduce long-term interest rates, but there is little evidence it has stimulated commercial banks to start lending more to businesses, in particular small businesses, or soften the conditions banks are attaching to loans.
In fact the most recent figures published by the Bank show that net lending – the amount of loans minus the amount repaid – to small businesses has contracted by six per cent in the year to November 2011. And this despite the banks being given small business lending targets by the government through ‘Project Merlin’. Not much wizardry there then.
The hard truth is that commercial banks are still in a process of ‘de-leveraging’, more keen on getting their loans repaid and building up their capital base than making new loans to productive businesses in what is perceived to be a risky real economy.
Evidence suggests the additional funds provided by QE are more likely to be used by banks to create more speculative credit, not least commodity speculation, that provides shorter term returns. As a result, the money supply in the real economy is contracting just at the point where new investment is most needed.