A good thing about studying economics is that new issues crop up. A year ago, few people would have heard of quantitative easing, but, now it is has become an important part of UK monetary policy. Because it is relatively untried, there is a degree of uncertainty how it will work and whether it will actually help.
The Bank of England has already created £112bn of electronic money (not actually printing money, but a similar effect)
At the last monthly meeting, the Bank kept interest rates at 0.5% and announced a pause in their policy of Quantitative Easing. They have another £125bn they could create if they felt it would help.
- Banks and financial institutions have benefitted from Quantitative easing because they have been able to raise cash from selling gilts to the Bank of England.
- However, it is debatable how much of this extra cash has been lent to business. It seems banks need this extra cash to fill shortfalls in their balance sheets.
- 99% of the extra money created has been used to buy government gilts. It means that half the gilts sold this year have been bought by the Bank of England. In effect 50% of government borrowing has been financed by creating money so the Bank of England can buy government bonds.
- In the US, 10% of gilts have been bought by the Federal Reserve.
- There is also a concern that foreign investors have taken advantage of this policy to offload their holdings of gilts. This means a significant proportion of the money created has leaked out from the UK economy.
Since there has been no sharp increase in bank lending and significant leakage from the UK economy, the feared inflationary impact of quantitative easing has so far been limited. However, like interest rates, the impact of increasing the money supply will take between 6 and 18 months for its full effect to be understood.
The Bank of England may well resume its policy of quantitative easing in the autumn, but, they would really like to have more signals and information about its impact.
It is common to describe describe quantitative easing as “printing money”, but I find this misleading.
Q.E. consists of government creating money out of thin air and buying assets with that money. The Bank of England’s Q.E. over recent months has consisted almost exclusively of creating money and buying gilts, as I understand it. This simply amounts to swapping money for something which is so near money that it is debatable as to whether money is created at all.
Gilts are large denomination bits of paper paying interest. “Money” is smaller denomination bits of paper (e.g. £20 notes) which pay no interest. Is there a big difference?
I predicted on my web site last December that Q.E. would not have much effect (http://printingmoneyisgood.blogspot.com/). Lo and behold the B.of E. is disappointed with the effect.
Perhaps the phrase “print money” should be reserved for where a government literally prints more money (paper or electronic form) and does NOT buy anything with that money: it simply expands current spending without raising taxes.
What if government printed the money – avoiding borrowing and paying interest – and if necessary sold securities or raise taxes to control inflation? Why they don’t do that? How is it different from selling securities to the FED?
So the forces that be are creating money and using it to fund our insane national debt by purchasing GILTs. At the same time demand for GILTs is kept artificially high. Oh what a cunning plan.
I assume the government is paying interest to the BOE? Is this right and how much is the interest?