What happens to QE without an AAA?

Decant

In what sense has QE 'cost' £200 billion?

Decant

Also, yields did not rise at all after the US downgrade. I'm a bit concerned that some of the people who write for coffeehouse are not exactly specialists

Hugo Chav

Clarissa,

I think the likes of Ludwig Von Mises explain what happens when you print to finance the deficit.

The UK is in the process of being an Undeveloping Nation due to global wage arbitrage and finite resources.

Cars--->Scooters--->Bicycles.

Hugo Chav

Clarissa,

I highly recommend watching a video interview that Michael Platt did with Bloomberg last week, Platt is Britain's greatest hedge fund manager. This was his first TV interview.

Julian F

Clarissa,

I think you might be mistaken about the purpose of QE. You say it is based on the premise of bringing down interest rates. That is not right - open-market operations are intended to do that. The purpose of QE is to inject additional liquidity into the banking system and thus enhance banks' reserves. Keith Joseph would not approve, but it is a way of printing money, not manipulating interest rates. Of course, it may do the latter as well, but the evidence is mixed concerning how much of the reduction in long yields in the past year has been accounted for by the Bank's QE operations.

For bond yields, there is another consideration to which you don't allude - inflation. Possibly the most important one. If UK's growth falls to such levels as to prompt a downgrade, you can bet this will have significant deflationary implications and this effect would bear down on yields. So the outlook is not quite so straightforward.

xenophon

Is AAA an acronym? Most people pronounce it "triple A", so I suspect not.

Jeremy

Clarissa,

'tis the season to be merry,
Tra la-la-la-laaaa...la-la la laaaaa.

Happy Christmas!:)

Herbert Thornton

Cars--->Scooters--->Bicycles? Very Good!

But how about looking even further ahead -

Cars--->Scooters--->Bicycles-------->Penny Farthings?

Herbert Thornton

QE is like a very, very large cat chasing its own tail.

Spot on, Clarissa. It's a diversion, just like the cat's pretending that it's tail is a mouse. And if the cat keeps on doing it instead of catching real mice it will eventually realise that if it doesn't stop pretending it will starve.

Occasional Ostrich

xenophon 21st, 7:09pm

Nah, Clarissa's trawling for a pun about things stopping when one removes the battery...

Oops! I've gone an done it.

AAA

xenophon - Since you asked, AAA is a shot size (0.2" diameter) which is great for fox or goose. Also used in Malayan jungles to great effect against CTs. You'd probably now have to issue soldiers with non-toxic shot to protect the environment.

In2minds

If Clarrisa Tan has some details 'wrong' then she joins the 'experts'. The debate on QE has seen Liam Halligan and Tim Congdon on opposing sides. I've read all they have written and tend to go with Halligan.

Also @Julian F writes of QE - "it is a way of printing money". As I remember it Congdon does not like this form of explanation but thinks QE is wonderful. But I like the "very, very large cat chasing its own tail" comment from Tan. As I see it QE manipulates but does not fix the problem, so when, like the cat, do we quit?

Finally, George Osborne and - "his deficit-cutting and austerity measures". Austerity? If you say say so.

martin alexander

My understanding is that QE is simply deferred taxes....That money simply cannot be written off....Some can of course be discounted because of higher inflation...Could you comment Clarissa?

outsider

Dear Mr Chav, I have watched the Platt interview. Why is he giving it? Because times are hard for hedge funds and he needs a promo to keep/bring in funds. What does he want? Cheap easy money to supply his leverage and a clear trend on which to bet. What has this got to do with the real world? Answer: QE, like its new ECB equivalent, is a free lunch for the financial sector and inflation for everyone else.

tom jones

We've staked our reputation on keeping the AAA rating so we'd better bloody keep it or we're in trouble! Despite his Euro-fandom, maybe Ken Clarke should take over from Osbourne. Look what he achieved last time.

disenfranchised

when i saw how mario at the ECB is sleighting by way of calming the markets, the acronym QEL came immediately to mind.
quantative easing light. which is what he's effectively doing, and all designed to QEL the markets.
the press may think you're smart, mario, but i don't....

Dimoto

All of the newspapers have bigged up this "warning", but Moody's have us on "stable", (in case you missed it).

On the other hand, borrowing for November, (i.e. actual news, NOT speculation), which was another horrendous figure, but well below "city consensus estimates", was largely ignored, or just covered with an agency report, and not mentioned on TV news.

Brits love to wallow in their misery.

Cynic

@Herbert Thornton "Cars--->Scooters--->Bicycles? Very Good!
But how about looking even further ahead -
Cars--->Scooters--->Bicycles-------->Penny Farthings?" That doesn't go far enough ahead. After penny farthings you need Shanks' pony.

A pensioner

"Still, it’s hard to avoid the impression that QE is like a very, very large cat chasing its own tail. It’s highly uncertain it’s going to get us anywhere." Since it's debasing the currency (almost akin to coin clipping) it will get us to massive doses of inflation. Good for the feckless who've racked up debts, but disastrous for the prudent who have savings and those on fixed incomes. I've been there in the '70s and it was not nice.

Heartless P.

QE and Merv - Funny Money printed by a recluse hiding in his lair.

It's all false, all weird, all suspect, and all harking back to the Great Economic Pretender and the Ship of Fools that the Hero of the H2B launched.

And still, in spite of everything, idiots pay heed to greedy shysters, prattling politicos, and bombastic self-deluding little twerps like the little frenchperson and the Teutonic HousFrau.

(oh, and I suppose I should say congrats to all those who benefited from the latest Solar Panel scam), - or as the H2B would say, 'vote Blue - get Green'. Ugh!

Hugo Chav

Outsider,

Without QE the banking system will implode and deficits will be totally unfunded.

Chris Ciovacca did a brilliant video, European Debt Crisis Explained, you'll find it on YouTube.

QE will lead to a mega bust, politicians will kick the can as long as possible, hence QE to Infinity. Platt is a trader, volatility is good for a trader, he has no money in banks because they are insolvent. It is guys like him who are driving down the yield curve. The system is worse than in 2008. I think Platt is very concerned, as are many money managers.

michael

"if Britain"... you mean 'when Britain'

'If' we can keep our heads seems eminently more sensible than keeping our AAA.
When all about us are losing both. -
-(e.g. Sarkozy)

Fex Urbis

Osbourne and King don't exactly inspire much confidence.

Herbert Thornton

Since people are asking what QE is, it seems a suitable time to yet again play this explanatory video.

Like the recent Der Speigel cartoon showing Cameron mooning Sarkozy & Merkel it presents truth dressed up in clowns' clothes - but truth nonetheless -

*ttp://www.youtube.com/watch?v=j2AvU2cfXRk

MorrisOx

Clarissa, we can all play ifs, buts and maybes, and everybody has been doing it on a thousand useless blogs. Shouldn't happen here, though - more heavyweight reality and a little less Birkbeck, please.

daniel maris

Inflation could be the bout of fever that cures us of the infection.

outsider

Dear Mr Chav (9.50), provided that the B of E remains ready to act as a central counterparty for the interbank market (and it would be criminal negligence if it were not), I see no reason why UK banks should "implode".
Deficits would continue to be funded but at a more rational rate of interest, say 3-3.5 per cent for the UK.
You say that volatility is good for the trader but many underperforming hedge funds are blaming excessive volatility. Traders love volatility around a trend or one way bets (which some still see in Greece) but cannot cope with total uncertainty.
As you so rightly say, continuing QE is bound to lead to another bust - I would guess around 2016 if not before, but in any case way beyond the horizon of hedge funds, which are not really interested in UK real incomes in three years time, let alone starving Greeks.
Even so, the proposition that someone stuck in a hole should keep digging for ever is, to say the least, unusual.

It doesn't add up...

If you believe that our gilt yields are driven by our Moody's credit rating, have another think. France's yields on government paper reflect a rather different reality. Ours are driven by the fact that the Bank of England is buying more gilts than the Debt Management Office is issuing to finance the government deficit. That is, the market is a net seller of gilts and is delighted that the BoE is prepared to pay top prices.

It doesn't add up...

As soon as the QE game ceases to appear even remotely credible, expect yields to soar regardless of what Moody's, S&P and Fitch say. The Chinese in the form of Dagong aren't fooled at all: they downgraded the UK to A+ with negative outlook from AA- back in May after it became clear that Osborne wasn't really going to cut spending.

Heartless P.

Mr Thornton @10:58 - thank you. You Sir, have shared with us the Mother Lode of sound learning.

Would that Merv could watch this, - or perhaps he has.

TomTom

The AAA rating is predicated on Growth but there is none, so they use QE to try to stimulate some form of growth through monetary policy but it will not work. Taxpayers know they will have even higher taxes and user fees in the future so cut back on spending.

We are approaching the End of the Money Economy because it is no longer available to people who spend to live; it is held in abundance by those who control banking systems and corporate treasuries.

The whole System is now in a gigantic Liquidity Trap and it will not budge without breakup of Cartels and a more competitive economic structure to replace Oligopolies

Dean

@ Daniel Maris

'Inflation could be the bout of fever that cures us of the infection.'

I assume that you mean inflation reduces the value of debt (and savings. As 'pensioner' has already posted, this is great for the debtors but very, very unfair on anyone who saved.

Julian F

TomTom: the AAA credit rating is not based on an assumption of growth: we have sustained the rating through many economic cycles in the past. It is based on our sovereign ability to pay back debt, part of which is accounted for by the freedom to print money. It is all part of the monetary management process. The risk to the rating is posed by meltdown in the Euro or another exogenous shock: the point about growth is that, without it, the UK economy would be less well-placed to weather such a shock, thus compromising the ability to meet future coupon and redemption payments.

The economic downswing is likely to last a little longer than usual because of the unhealthy levels of debt in the system, but this in itself is highly unlikely to pose a systemic risk to debt management.

Everyone - by which I really mean the dismal scientists - need to calm down a bit. Economies, especially broadly capitalist ones, are marvellously self-correcting and we will get through this without Armageddon!

daniel maris

Dean -

Well lots of things are unfair. It's unfair that bankers can walk away from the car crash and award themselves huge bonuses for doing so. Generally speaking people with lots saved up tend to be better off. They've generally done pretty well out of exploiting peasants in far away Totalitarian China over the last 30 years.

Inflation is not to be desired but it can often be tolerated better socially than deflation. Remember as well if you have public sector wage freezes it's the quickest way to cut public expenditure.

TomTom

"TomTom: the AAA credit rating is not based on an assumption of growth:"

That is indeed remarkable since the Government projections of Debt Reduction are predicated upon ECONOMIC GROWTH. I really don't see how else they intend to service the Debt Mountain - unless you think they intend to expropriate the pension funds as in Portugal

TomTom

"Economies, especially broadly capitalist ones, are marvellously self-correcting and we will get through this without Armageddon!"

You must be smoking or injecting to write such unalloyed drivel. No nation with 950% Debt/GDP has ever managed to avoid collapse and Britain is no longer able to use fiscal repression

TomTom

"If UK's growth falls to such levels as to prompt a downgrade, "

Yes Julian F at 7.02pm 21 Dec cf 22 Dec 1.42pm

Dimoto

It doesn't add up ;

Dagong is mostly staffed by that nasty breed, returning Chinese, who learned their anti-Brit sentiments, at their (well connected Communist party) parents knee, and had them reinforced at the usual suspect US campuses.

Don't feel obliged to take Dagong seriously.

Dean

Daniel

It's certainly wrong that Goodwin, Applegarth et al walked away with their fat pensions. But it's also wrong that ordinary people who put their money away in a building society every month should be sacrificed now.

Lots of savers aren't 'well off' and aren't remotely guilty for the plight of the chinese.

Martin C

@Decant
Unfortunately the government cannot snap its fingers and create wealth out of thin air; if only it were that easy.
What QE does do is allow the government to buy its own debt, thus finance its continued spending without having to borrow mre or raise taxes.
But if QE does not create wealth - and it doesnt - just where does the money come from? I hear you ask.
Answer: from savers and pension funds. QE dilutes the money held in savings.
If you are public sector then you are fine because the state does not have any savings fund with which to pay the generous pensions it has promised to its employees (a finance director of a private company would be thrown into prison for doing that btw). But a private company will have to put even more into its pension fund to make up the difference, and you, if you have a private pension, will have to contribute more, or be content with less when you retire. That missing wealth is being stolen by QE.
And pensions are enourmous. Given that the size of the public sector unfunded pension liability is several times the size of our GDP, it would be fair to describe Britain as a public-sector pension scheme with a small country attached.

Julian F

TomTom: Well done for spotting the apparent inconsistency in my two posts. But I don't think you understand my second. My point was not that a catastrophic downturn would NOT lead to a downgrade. I dare say, if we saw a 10% contraction in GDP, we would be downgraded - but it would take a pretty serious exogenous shock for that to happen. Conversely, the AAA rating is not PREDICATED ("based on") an assumption of growth. If the economy were to fluctuate within normal boundaries, and in the absence of shocks, we would probably retain the AAA rating regardless of specific GDP growth figures in any one quarter or half year (or even year, frankly). I suspect you are spending a bit too much time listening to the more hysterical economists: worth remembering that they are usually wrong in their predictions.

Kevin

TomTom's attitude to debt is correct. A debt is a legal obligation. If you are unable to meet it, there will be legal consequences, unless there is a breakdown in law and order.

Steve Tierney

We just have to live within our means. No borrowing, no printing, just raising taxes and spending the amount raised. That's as true of a nation's budget as it is of a household. Inventing complex terms and policies to get around that doesn't work - it just delays the inevitable.

Matthew Tysoe

Most people still think that QE means Queen of England