What You Are Not being Told About Britain’s QE

28th June 2018 / United Kingdom
What You Are Not being Told About Britain's QE?

By Graham Vanbergen: Investopedia defines quantitative easing thus; “central banks target the supply of money by buying or selling government bonds. When the economy stalls and the central bank wants to encourage economic growth, it buys government bonds. This lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, at which point banks have to implement other strategies to kick-start the economy. Another strategy they can use is to target commercial bank and private sector assets in an attempt to spur economic growth by encouraging banks to lend money. Quantitative easing is often referred to as “QE.”

I hope you understand QE like an expert now! If not, read on.

 

There are some problems with QE. First up, let’s not forget, it is a desperate financial instrument to prop up an economy in dire need of CPR to keep it alive. The last time something like this was needed was in 1976, when a Labour government borrowed the largest single amount of money (at the time) from the IMF to save the pound from sinking, a loan of $3.9 billion. QE is definitely a last resort prior to calling the IMF – and the IMF is known as the ‘lender of last resort.’

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QE is like any life support, it should be short-term whilst a diagnosis of the problem is identified and solutions applied to the patient in the hope of a full recovery.

Only five central banks adopted QE around the world – The US, UK, EU, Japan and Sweden.

What you might not know is that the Bank of England has so far spent £435 billion propping up the British economy. This is a far cry from the $3.9 billion borrowed from the IMF in 1976 – even inflation adjusted. And, what you probably also don’t know is that unlike all other economies using QE – the US, EU, Swedish and Japanese central banks, the Bank of England is now the only major central bank where a QE programme is still in operation.

Worse still. With an environment of rising interest rates, QE should immediately be abandoned or at least tailed off as they have done in these other countries. Why not with the UK?

 

What happened across the world was that all QE really did was to prop up ‘asset prices.’ In fact, so much money was floating that’s just about all it did.  Typically, stocks, shares, paintings, fine wine, vintage cars and quite a few other products that the vast majority of the population can’t afford rocketed, including property of course, which only added to the housing crisis as averages wages simply couldn’t keep up.

 

Generally speaking, QE causes a devaluation of the currency by inflating its supply – good for exports, bad for imports and also bad for inflation as you import it in – but then again, QE was designed to stop deflation in the first place.

Still with me?

 

So what has the effect of QE actually been in Britain other than inflating asset prices? Many say the jury is out because as yet, QE has not stopped. I would tend to suggest it’s more clear-cut than that.

Just for a start off – QE gave the Cameron/Osborne government the excuse to attack the poor – the ultimate wet dream for the more right-wing element of the party. The theory went that if the government had to raise all this money to save the economy, they would have to cut back on expenditure.

 

National public net debt from 1692 to 2020 – chart via ukspending.co.uk

Just as Thatcher said there was no such thing as society, ‘austerity’ was the tool to carry that concept through. As it turned out ‘austerity’ was a distasteful euphemism for more evenly distributing the pain amongst the least able to defend themselves from an economy that was essentially being crushed by the weight of irresponsible policy – or more accurately, extreme neoliberal capitalism.

As you can see from the chart, UK net debt is nothing like what it has been in the past. Just so you know, today, the national debt is about £1.78 trillion, or 86.58%(as at Q1 2018).

Here is a quick history lesson of the UK’s debt from ukspending.co.uk:

“in stark detail, this is the story of the British Empire. It was built on the National Debt. Throughout the 18th century, the National Debt grew and grew, from nothing at the end of the 17th century to about 60 per cent of GDP by the end of the War of Spanish Succession in 1715.

In mid-century the Carnatic Wars in India, the Seven Years War against France and the American War of Independence caused another ratchet in National Debt up to 156 per cent of GDP in 1784.

But that was just the beginning. The Revolution in France and the subsequent Napoleonic Wars led to another explosion in military spending and the National Debt rose to 237 per cent of GDP in 1816 after the battle of Waterloo. The rest of the 19th century was spent drawing the debt down, to a low of 25 per cent of GDP in 1914. That was just before the outbreak of the Great War in Europe.”

 

As you can see, from 1692 to 2020, that is 328 years, there have only been about 90 years in total where Britain’s national debt has been lower than it is today and all other times it was higher were caused by fighting wars, not saving banks. So, austerity, in a time of emergency, was simply not needed. Britain was very used to high debt and paying it all back over time.

Another side effect of QE over such a sustained period is that savers have lost about £80 billion from artificially reduced interest rates and over three-quarters of Britain’s private pension schemes are in effect insolvent. This government-induced transfer of the national wealth from ordinary hard-working people has been very damaging – not just to pensioners, but to the next generation who have yet to pay it all back.

 

I would tend to suggest that during the chaotic Brexit negotiations, the last thing the Conservative government could cope with right now would be falling asset prices, especially property prices – hence, the continuation of QE. Falling property prices typically signals the start of a recession and the Tories would be blamed for causing it – just as the world economy is showing signs of growth. That growth is signalled by rising interest rates elsewhere – so QE and rising interest rates combined is a clear hint of even more desperation. This would then suggest that the Tories are using continued QE at taxpayers expense to prop up themselves – not the economy.

 

 



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