Quantatitive Easing is an affront to democracy
David Blackburn 1:09pm
Readers of the Spectator will know George Trefgarne’s work, and today he delivered an important report on the dangers of Quantitative Easing. I urge Coffee Housers to read the speech. It provides an interesting and relevant insight into historical precedents for the policy and how to manage it, and gives a balanced analysis of the current policy’s pros and cons.
Trefgarne concurs with Mark Bathgate’s critique. There is little evidence that QE has stimulated money supply, as banks are using the cash to re-balance their lop-sided books. QE is funding the government’s debt habit. The IMF estimates that QE has reduced the benchmark 10-year interest rate on government debt by up to 1%, currently standing at 3.5%. Regrettably, Gordon Brown now has the opportunity to borrow at a cheaper rate than any other British Prime Minister. Oh for the virtue of thrift because the probable costs of this policy are enormous.
An effect of QE is the reduction of interest and gilt yields, which have, theoretically, augmented pension deficits. Considering the scale of deficits prior to the crash, we will awake with a stinking pensions hangover somewhere down the line. More strain will be put on grievously overstretched public finances as the government funds the gap in public pensions; private pensions will have to fend for themselves. Other side-effects include a probable run on the pound – always a consequence of what is effectively currency debasement – and a likely hike in long-term interest rates. The risks are great and will escalate as the policy extends, especially as Brown seems intent on playing Micawber until the bitter end.
What can be done? Very little, as things currently stand, is Trefgarne’s answer, because QE was introduced without any parliamentary scrutiny. Incredibly, the only piece of legislation on QE is a statutory instrument exempting it from FSA authorisation. In other words, the executive introduced the policy arbitrarily and denied the need to regulate – hence why so little is known about its effects. If the policy turns out to be ruinous, you know who to blame.
The Bank of England has complete control of an aspect of fiscal policy worth £175bn. Parliament is by-passed and the policy and the Bank are not scrutinised. Trefgarne argues that this has enabled the government to hide the extent of the damage being done to the public finances, and therefore an indication of the success of its strategy. Truly, the mind does boggle – how much worse could it be? And, more importantly, why aren’t our elected representatives entitled to know? The current status quo is unacceptable. A Select Committee must be established immediately to assess this extremely risky financial policy.
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Patricia Shaw
November 6th, 2009 2:14pm Report this commentIts alright mate, so are you.
Frank P
November 6th, 2009 2:15pm Report this commentDoesn't the Fort Hood massacre and its implications trump another bout of the piebald Chancellor's prescriptive laxatives for the bloated bankers, as subjects for posts hereupon?
Or is that too difficult to address for fear of upsetting your Islamic readers and their Leftie friends who infest this blog?
Furthermore,I note a marked reluctance - nay a complete refusal, to address Obama's electoral set-backs of recent week, his war with Fox news and the belated use by Glenn Beck of all the evidence that Melanie and her commentariat adduced concerning Obama's antecedents and extremely dodgy Marxist associates during the run up to the US Presidential election.
I gather it doesn't suit the editorial policies of this blog or its Cameroonian mentors?
Frank P
November 6th, 2009 2:19pm Report this commentPS perhaps if you're too idle yourselves, you could reprint James Delingpole's piece in the DTel today.
http://blogs.telegraph.co.uk/news/jamesdelingpole/100015948/hmm-cant-imagine-what-major-malik-nadal-hasans-motivation-could-have-been/
h/t Joan (on The Wall)
Philip Walker
November 6th, 2009 2:24pm Report this commentThe Tories need to push the line on QE hard. Those hoping to join the blue rinse brigade should be told the truth in no uncertain term: QE is the government's way of keeping the yield on gilts down, which has the net result of decreasing their retirement incomes. Vote Labour to make pensioners poorer.
Michael Booth
November 6th, 2009 2:36pm Report this comment"Quantatitive easing is an affront to democracy"
In the light of the Chernyaev Diaries, so is Labour
davefromluton
November 6th, 2009 2:36pm Report this commentI 'studied' economics for all of 3 months some 50 years ago.
The only thing I remember was Gresham's Law that bad money drives out good. 50 years on QE seems remarkably similar to 'bad money'to me.
Chris Cook
November 6th, 2009 2:43pm Report this commentInteresting paper from George Trefgarne, but I'm not sure that it supports the thesis that the current bout of QE is inflationary.
In his first and final - wartime - examples (the first in the Napoleonic war) there was plenty of fiscal stimulus going on. ie the credit=money created was very much being spent, and on ultimately destructive expenditure rather than on productive.
I am not familar with the second example, but I suspect that the QE was necessary to replace the credit destroyed in the collapse of a leveraged bubble.
The reason why the City was jittery at the outset of the First World War, and why QE was necessary, was that the City was hugely invested in German and other continental debt, which went into de facto default on the outbreak of war.
So the QE was necessary - as now - to replace credit flows which had ceased or been destroyed.
In my view, QE used to replace credit haemorrhaging from the system can only be inflationary of asset prices - where institutions redeploy funds in acquiring them - since it is never spent into circulation.
Spending requires either lending by private banks for consumption, or direct fiscal stimulus.
Bocephus
November 6th, 2009 2:48pm Report this commentDid anyone see Obama's unbelievably crass behaviour last night when he talked about Fort Hood? I have to say I was astonished. I am however not surprised the media are covering it up by not replaying all his comments. Hollering out to the audience when he walked up to the podium, the tone he set was one of complete indifference. If it had been Bush it would be looped on the news 24/7.
Chris lancashire
November 6th, 2009 2:50pm Report this commentThis policy does need stringent examination - although whether by McFaul's toothless Treasury Select Committee is open to question.
Two almost certain downstream effects are even higher Govt debt (Brown is like a heroin addict who can't quite break the habit) and uneccessarily high inflation which will require higher interest rates.
Even at this late stage of his Govt. - or maybe because of it - Brown manages to make a terrible problem into a complete mess.
Walsingham Ghost
November 6th, 2009 2:52pm Report this comment"A Select Committee must be established immediately to assess this extremely risky financial policy."
And who would be responsible for choosing who might sit on such a Selesct Committee?
No solace to be found in this suggested action, I'm afraid...
WG
DavidL
November 6th, 2009 2:53pm Report this commentThis is an important point. We had a Civil war because a King thought he could raise taxes without the approval of Parliament. This policy means that the Bank of England has created more cash than the total taxes raised in the Budget without any oversight or even involvment of politicians. This money has been used to fund Government borrowing that the markets would otherwise not have supported.
This is where these insane ideas of everything important being taken out of politician's hands ends. It ends with a sham of democracy.
Walsingham Ghost
November 6th, 2009 2:57pm Report this commentFrank P [2.15pm]
I think we all realised that when Fraser lost his 'cojones' over the Neather issue...
WG
TomTom
November 6th, 2009 2:59pm Report this commentQE is working as intended. Those who designed it for Brown were bankers like Shriti Vadera and it was banks that had the influence especially Goldman Sachs with Brown and Balls.
The City basically hi-jacked The Exchequer to enhance its own status just as The Bankers' Ramp in 1931 saw Labour stiffed by bankers.
The fact that Milton Friedman proposed a helicopter suggests he did not think banks were the best conduit
michael
November 6th, 2009 3:25pm Report this commentMortgage tomorrow to scrape up and cover today's mistakes then sell up to a royal Saudi.
Football club economics.
"lot one ... bunch of islands, good heritage, encumbered by a curious provenance and a disgruntled populous...who will start the bidding, no reserve."
AngloWelshDragon
November 6th, 2009 3:26pm Report this commentWhat Frank P said!
chris as usual
November 6th, 2009 3:30pm Report this commentCan one of you experts tell me what will happen to the yield on gilts when QE ceases please?
Pramston
November 6th, 2009 3:37pm Report this commentWhy should they care? It's too complicated for the average voter and by the times the chickens are home to roost they'll be able to blame the Tories. Labour have only ever ruled for Labour regardless of the damage they do to the country.
oldtimer
November 6th, 2009 3:38pm Report this commentThe rules on Bank of England disclosure were changed earlier this year. It caused a bit of a stink at the time (among those who saw the implications - like John Redwood who,I believe, blogged about it at the time).
The whole Bank rescue operation mounted by Brown/Darling seemed to me, at the time, to have a sinister smell to it. I said so at the time here on CH.
Everything that has emerged since suggests that this was very carefully thought though by Brown and co so that he could:
(a) pose as "saviour of the world"
(b) get control of the banks
(c) print money at will for a sustained government spending spree
(d) stuff the Conservatives with the line "Labour investment vs Tory cuts"
(e) borrow money on the cheap
(f) screw the pension funds yet again with low gilt rates - but not the Bank of England pension fund which spotted what was happening and switched to index linked
(g) and win the next election
Chris Cook
November 6th, 2009 3:43pm Report this comment@TomTom
I think that either there is Machiavellian genius going on, or Messrs Darling, Vadera etc have stumbled into the nice little earner called 'seigniorage'
http://en.wikipedia.org/wiki/Seigniorage
What QE has achieved is that the Bank of England is:
(a) sitting on a £175 billion pile of Treasury 'gilts' paying (say) 3.5% per year; and on the other side of their balance sheet
(b) paying 0.5% pa to the banks in respect of their (mainly excess) reserves.
In other words the BoE is making a profit for the taxpayer which reduces funding costs by £5bn pa. Or another way of looking at the net effect of this is that the Treasury is currently part-funding itself - through the agency of the BoE - with an interest-free £175 billion overdraft at 0.5%.
If anyone can point out where my analysis is flawed, please do.
I think the government is cannier (or luckier) than people realise, and they are essentially relying upon the fact that virtually no-one has any idea about what goes on under the Central Banking bonnet......mainly because such financial pornography is never published in decent newspapers.
Probably because if people knew, they'd be out with the torches and pitchforks....
Moraymint
November 6th, 2009 3:43pm Report this comment" ... this has enabled the government to hide the extent of the damage being done to the public finances ..."
Yes, as I munched my toast and marmalade this morning, this headline in my local rag leapt out of the page at me:
http://tinyurl.com/ykqyf5g
Just after reading the article I stood in the street of my village and chatted as I do to the "Village Officer": he's the local Council employee, who lives in the village, and keeps the village streets clean. He's an absolute star. But, he was seething; absolutely seething.
He has been told that his hours and, therefore, pay are being cut. He works in the Council's "front line", but - guess what - he's the first to take a hit. An easy target. He must be one of the lowest pay grades in our society but, nonetheless, he's fair game for a bit of cost saving. I could go on to explain what he told me about what his managers and councillors get up to with public money (like using council transport to get to and from work, like hiring cars to go to meetings instead of using private transport and claiming mileage, etc, etc), but you can probably guess what's going on.
I fear that the mass of British citizens have still yet to grasp the scale of the economic carnage that has been wrought on this nation after more than a decade of unreconstructed Marxism, political deceit, taxpayer robbery and gross administrative incompetence.
I'm also in the front line of this economic war (I own/run a small business) and I can assure those people in the ranks behind me that it looks like hell ahead from where I am.
Small wonder that Gordon Brown is doing everything he can to deceive the British people about the socio-economic disaster that is now bearing down upon us, which he proudly masterminded and from which we shall now be struggling to recover for a generation or more.
Anyone who seriously thinks we're about to climb out of recession is deluded. The recession has barely started. As all of the crutches and props are removed in the coming months (money printing stops, Stamp Duty goes back on, VAT goes up, cash for clunkers is withdrawn etc, etc) don't be surprised to see all the recovery leading indicators turning the wrong way again.
The Labour Party must be put to death for what it has done to this country. Its key players - the likes of Blair, Brown, Balls, Mandelson, Harman et al - must be reviled in history.
The Labour Party is now bestowing the mother of all hard times on the British people whilst grabbing wealth and security - from taxpayers - for themselves and their banking mafia friends.
They simply must not be allowed to get away with this.
BC
November 6th, 2009 4:28pm Report this comment"The Bank of England has complete control of an aspect of fiscal policy worth £175bn."
Err...two problems. One is that it is monetary policy not fiscal policy. And pretty much everyone on the planet who has two brain cells directed towards the world of economic policy agrees that it is crucial that monetary policy is independent of political influence. So you're argument doesn't really stack up there.
Also, just to quibble. You complain about the pension implications of yields falling as well as the prospect of future interest rate hikes. However, if the latter occurs surely it will soothe the effect of the former? Or is your attitude a scatter-shot critique that doesn't care if two of the negative points actually cancel each other out....
Bathgate's points about the money being used on govt debt rather than directed into the corp. sector are legitimate. Unfortunately, yours on oversight and "democracy" are misguided. I don't think you'll find many people who argue that monetary policy should be decided "democratically" so it is pretty much guaranteed to always be an affront...
General Zod
November 6th, 2009 5:04pm Report this commentFrank P what exactly does that have to do with QE?
You and others make an utter nuisance of yourself posting irrelevant crap in topics.
And as for the swearing, use it occcasionally for effect instead of shotblasting threads with obscenities. You are not Malcolm Tucker. He is funny.
TrevorsDen
November 6th, 2009 5:45pm Report this commentThe bank of England job is to fund govt debt so its not surprising its hitting QE. Darling is upset it seems that the BoE are not buying up corporate bonds so that suggests that QE is not doing what he wants.
But the hints are the BoE are winding QE down over the coming month so the election will be fought against the backdrop of the consequences of that.
Frank P
November 6th, 2009 6:41pm Report this commentGeneral Zod
What myopic pricks like you don't seem to appreciate is that the sell-out to Europe does affect everything, including financial ex-lax for bankers that hasn't cleared the back up(I suggest gelignite btw). And when I run out of words that I think are appropriate to describe the arseholes who have their sticky thieving fingers on the levers of power in this benighted nation, I won't bother to consult you, I shall turn to the Victorian Lexicon of Scatology, you sanctimonious mealy-mouthed mother. As for Malcolm Tucker, who he? His name might come in handy for an addition to Cockney Rhyming slang. Thanks for drawing my attention to it - and for winding me up. Unlike QE, it clears my tubes of odious fury and frustration. :-)
Moraymint
November 6th, 2009 7:09pm Report this commentFrank P
Stay calm and carry on. It's going to get much worse than this old fruit.
.... .... ......
November 6th, 2009 9:13pm Report this commentCameron KNOWS there is a new world order.
It is ASIAN countries we should be looking toward.....OH YES the world HAS changed.
America is trillions in debt, MASSIVE unemployment,bankrupt cities,and two failed wars.
The UK is now part of Europe which WILL implode in the next five to seven years.
Cameron is playing a VERY canny game and while the media play labour's old stale,
blame the Tories for everything record,
Cameron is touting Britain's worth to the NEXT world powers..without wars, threats,
we're BIG your small rubbish.
Cameron does NOT have to make headlines every day like Labour think they have to.
Cameron is a NEW politician who TALKS to the right people about the right things at the right time...precisely what I EXPECT of my Prime Minister.
Just because it's NOT on the telly or in the papers DOES not mean he is doing nothing.
While Labour were running smear campaigns in Brown's office, Cameron was going round the country ANSWERING the VOTER'S questions.
Do you honestly think Cameron is bothered what Brown or Mandleson spew out?
He knows, that Labour knows,that he knows
that we know Labour minsters are liars.
COOL YEAH?
General Zod
November 6th, 2009 10:32pm Report this commentFrank, I gave you the chance to show you are more than an embittered, if obscenely articulate failure in life, but you were unable to meet the challenge. I must conclude therefore that you are simply an underachiever who blames everyone but himself; Muslims, Labour, Cameron, bankers, The EU etc, etc.
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November 7th, 2009 6:54am Report this commentFrank P.6.41
There are three reasons for your shameful post.
You do not have enough knowledge of diction or intellect so fill in the gaps with swearing and insults.
You feel you are 'losing the argument'so resort to swearing and insulting.
You are simply a nasty person.
The best place for you would be with the other sewer mouths at Sky disscussions where the post are usually right up your street.
As for Malcolm Tucker...GOOGLE IT BEFORE adding another inept comment.
Maybe sticking to the theme of the topic being disscussed would also be a good thing.
How did General Zod 'wind you up'? Is he there with you?.....No!....Well then, it would appear you wound yourself up.
How odd is that?
Frank Leader
November 7th, 2009 10:13am Report this commentInflation is Labour's stock in trade. Everytime they have left the Country in a mess. This is the biggest mess of all.
Even in 1945 they managed to ration Bread and Potatoes. Both these items had not been rationed throughout the war. It took a Labour Government to manage this. Always have been utterly useless. I was a very disillusioned teenager then.
Frank P
November 7th, 2009 2:08pm Report this commentWhat a silly Malcolm you are, Dotty!
Rob
November 8th, 2009 4:38pm Report this commentHe's doing a Mugabe. Runs out of money so prints some more. It will result in inflation which is stealing from the future - in this case the Tories will have to deal with it so Brown doesn't care about that. The idea that we are short of money is nonsense. We are short of wealth because it has been squandered on investments that have gone wrong, blown money we do not have on the public sector employment and pensions and all the rest. The solution is the same as I would do if I overspent and was in debt. Stop spending. Increase income. Invest if I have kit but only in dead certs. For the government, it is privatise as much as possible, remove all restrictions on the tax paying private sector, invest in education and safety net welfare and whatever is done simplify and reduce wherever possible.
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