Tuesday, 22 May 2012

Hogwash from the Bank of England on QE.

I’ve just been through a BoE attempt to justify QE. It’s drivel.

After a few hundred words explaining what QE is, their first suggestion as to why QE might actually stimulate economic activity is that, “Direct injections of money into the economy, primarily by buying gilts, can have a number of effects. The sellers of the assets have more money so may go out and spend it.” (p.9).

“Can have”… “sellers of the assets… may spend it”??? What are they on about? The people running the economy ought to have a good idea as to whether “sellers of assets ACTUALLY WILL go out and spend”. Phrases like “May spend” and “can have” just aren’t good enough.

Plus I can think of a very good reason why “sellers of assets” WILL NOT “go out and spend”.

People hold Gilts (directly or indirectly as part of their pension fund) because that is a chunk of their wealth that they regard as their SAVINGS!!!!! Yes: S-A-V-I-N-G-S. If that chunk is converted to cash, the most reasonable assumption is that they will still regard said chunk of their wealth as savings. I.e. the WON’T go out and spend it. Doh!!!

The stock market.

The BoE continues, “Or they may buy other assets instead, such as shares or company bonds. That will push up the prices of those assets, making the people who own them, either directly or through their pension funds, better off. So they may go out and spend more.”

“May go out??” Why not look at the actual evidence here? This study found that in recent years consumer spending rises by one HUNDREDTH of a dollar for every dollar increase in a consumer’s stock market assets. So boosting stock market prices is an absolutely brilliant way of boosting consumer spending, isn’t it?

Moreover, even if boosting stock markets DOES significantly boost consumer spending, where is the justice in largess towards the wealthy, while the less well-off don’t get to increase their consumption of consumer goodies? Oh I forgot: politicians, central bankers and the wealthy are all in cahoots. Silly me.

The BoE continues, “And higher asset prices mean lower yields, which brings down the cost of borrowing for businesses and households. That should provide a further boost to spending.”

We’re suffering from the aftermath of a credit crunch caused by excessive and irresponsible borrowing, and all that central banks can come up with is trying to encourage more borrowing. Central bank staff clearly need psychiatric help.

Presumably central bank’s suggested treatment for someone just involved in a car crash would be to put them into another car and have them drive at 60mph into a concrete wall.


Next comes a real peach. The BoE claims “In addition, banks will find themselves holding more reserves. That might lead them to boost their lending to consumers and businesses.”

First, there goes that word “might” again: i.e. “we haven’t a clue”.

Second, anyone with a grasp of how the banking system works (and that evidently does not include central bank staff) knows that reserves are near irrelevant to commercial banks’ decision to lend. Or as Don Kohn (Former FRB Vice Chair) put it:”I know of no model that shows a transmission from bank reserves to inflation”.

Or as Vitor Constancio (ECB Vice President) put it: “The level of bank reserves hardly figures in banks’ lending decisions; the supply of credit outstanding is determined by banks’ perceptions of risk/reward trade-offs and demand for credit”.

As to the actual evidence, we’ve had an ASTRONOMIC and UNPRECEDENTED increase in bank reserve over the last two years. And the effect? Banks are more reluctant to lend then they were in the good old days when we had Captain Mainwaring type bank managers. What can you do in response to all this, but laugh?

Next, the BoE claims, “More generally, the Bank of England’s purchases of both government and corporate bonds also increase the total demand for those types of assets, pushing up their prices. This is another way in which the Bank’s actions will make it cheaper for companies to raise finance.”

No doubt QE does “make it cheaper for companies to raise finance”. But what in Heaven’s name is the point of boosting an economy purely via one particular form of economic activity, that is lending to companies? You might as well boost an economy just by boosting sales of cars, baked beans, central heating systems and massage parlours.

Central banks staff (and other smartly dressed economic illiterates mingling around the centres of power in the world’s capital cities) need to be reminded that the basic purpose of economic activity is the produce what the CONSUMER WANTS. That’s “what the consumer wants” either as expressed by consumers with their credit cards etc, and as expressed by consumer / voters at election time when they vote for a significant proportion of GDP to be allocated to public spending.

I.e. given a recession, what needs boosting is consumer spending and public spending. And the empirical evidence is that when consumers come by a windfall or their income increases, the do actually spend a significant proportion of the money concerned. See here, here, here or here.

Note that I didn’t use words like “may” or “might” or “can”. I cited EMPIRICAL EVIDENCE as to what consumers ACTUALLY DO.

As to public spending, if this cannot be increased quickly come a recession, then bureaucrats running government departments and local governments need to be given lessons on how to expand or contract their spending and the numbers they employ within a month or two. The actual SIZE of the increased spending does not need to be huge. 5% would do the job. 



 P.S. (same day). Error. When first putting the above post online, I said that the above mentioned study into the effect of a stock market rise on consumer spending found a one dollar rise in share prices gave rise to a thousandth of a dollar of extra consumer spending. The figure is actually a hundredth.

P.P.S. (25th May 2012). The above post is not supposed to imply that QE is useless: it’s just some of the BoE arguments for QE that I object to. The basic argument for QE is that it negates a weakness in fiscal policy: crowding out. That is, if government borrows and spends, the borrowing will tend to raise interest rates, which to some extent thwarts the desired effect of the spending. QE (or simply having the central bank keep interest rates constant when a fiscal boost is implemented) helps ensure that crowding out does not occur. Least that’s how I see it.


  1. It's complete crap isn't it.

    About the best you can say is that somebody who was about to sell some gilts may have sold them a few days earlier because the BoE was in the market and the price moved to the decision point.

    But those people who in the market to sell gilts have already made the decision to sell and have plans about what they are going to do next.

    There is *zero* evidence that anybody has been persuaded to change course because of QE.

  2. Regardless of which side of the Atlantic QE is practiced, the result is always the same.



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