The Bank of England or the Federal Reserve in the US, creates money by effectively issuing itself money, electronic money. The Central Bank then uses this money to buy what a bank calls assets i.e.debt in the market. In 2009, when the Bank of England carried out over £200 billion worth of QE, the BoE bought almost entirely Government securities i.e. debt of the Uk Government.
In this scenario there is one benefit and only one…….
The Government deficit can be funded without impacting interest rates. That’s it!
Remember politicians and civil servants (they are rarely blamed although John Prescott, the Minister in charge of the project, made an exception here this morning about the IT project that went from £100m budget to £500m without him being aware – click here for story ) have built up such a mountain of Government debt that any increase in interest rates would be disastrous. This is a very key point so please weigh it up. Can you imagine the situation if our Government were forced to take massive austerity measures to avoid defaulting? The riots were nothing to what would be seen in this country if that happens.
So please, when you here anyone talk about QE as an attempt to boost the economy, please! The banks just go out and buy more Government debt with the money so there is no impact on the economy. QE is a new name for monetising the Government debt. Simple as that.
QE is about avoiding a sovereign default. The real problem is that it is no cure, just a plaster. The wound however is festering. The Government is broke and still spending and banking sector was bust years ago. I suspect that the next wave of QE will be more focused on buying what will be termed “investment grade assets” from banks. This is effectively turning the BoE into the “bad banker of last resort”. Oh my God. The thought of Mervyn dressed as the Bad Banker of Last Resort is too weird…..
I urge the UK Government to cleanse the banking system in coordination with the major powers by nationalizing the solvent commercial and retail banks and letting the the rump go into liquidation. Our mortgages will remain, we will be able to get cash from the local dispensers, our credit cards will work, companies will have overdraft funding and loans and the world for all of us will be a better place without a mountain of casino debt.
Anyone interested in the evolution of the BoE’s balance sheet (or do I mean metamorphosis) then look no futher than below