Since 2009 the Bank of England has put £375 billion into quantitative easing. In general I've supported this move: it has in effect, cancelled more than a third of government debt meaning that the vast majority of the impact of this recession will not fall on future generations, despite all Tory fear mongering to the contrary. The simple fact is QE cancels government debt by printing money, and that exercise has had no impact on inflation and as such that debt will never be reissued. The whole process has been neat, effective and to a very large degree successful.
Well, successful in macro-economic terms; that is in keeping debt under control and the money supply working. In micro terms the story is very different. Banks ended up with most of the QE cash. They haven't lent it on: they've used it to bolster their balance sheets. And they've also used it to speculate, which is one reason why we had commodity prices booms and inflation in 2010/11. That resulted in a remarkable recovery in bank profits and a return of bank bonuses would no one would have expected that to happen so soon after the crash.
To put it another way, he benefits of QE went pretty much one way: to the most rich. Pensioners suffered to some degree as interests rates and pension annuity rates crashed (although I'd add, low interest rates always pay an economy and requiring high rates to pay pensioners is absurd; state pension provision should cover that job: that's called predistribution in current jargon). But most of all, the gap between richest and poorest increased. Those on minimum wage have seen no benefit from QE. Public sector employees on pay freezes must wonder where £375 billion has gone and how it passed them by.
And they'd be right to do so: QE has missed them altogether. And until we change QE so that it provides the finance to get the economy going again it will continue to do so. That's possible. I called the alternative Green Quantitative Easing. There's more on it here. The demand it would create would increase real wages, and that's exactly what our economy needs right now.
QE worked for some few at the top: now it's time to do something for everyone else.
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QE does not result in the debt vanishing as it merely replaces government debt in the form of gilts with government debt in the form of bank reserves. If you look at the BoE balance sheet, you will see that the liabilities have gone up £375bn since QE started which is largely reserve balances owed to the banks. The only thing that has happened is that net cost to the government has gone down from around 4% to the 0.5% base rate paid on the balances, saving around £13bn per annum. Once the economy recovers and base rate goes up, this funding advantage will disappear.
Banks in generally have little incentive to participate in QE and the BoE specifically said it was aimed at non-banks. Banks generally hold gilts as part of their liquid asset requirements, which are cash/near cash assets to offset demand deposits. Banks can also hold central bank reserves as part of the liquidity portfolio. So no rational bank would want to sell gilts that earn it 4% in order to receive central bank reserve that earn it 0.5%.To put the amounts into perspective, the liquidity portfolios of RBS, Barclays and Lloyds are over £425bn. Banks currently hold around £100bn more in gilts than they did when QE was first announced, which indicates that instead of lending money into the economy they are actually financing government debt, partially due to higher liquidity portfolio needs but also indicating how risk averse they are to lending.
The remarkeable recovery in bank profits has been down to lower bad debts, the domestic banks like Lloyds have actually seen bank interest margins narrow as their cost of funding have gone up. If QE was so profitable for banks they would be lobbying government for more! I don’t doubt that some of the non-bank sellers of gilts under QE have ploughed the money into commodities fuelling the price boom. But the banking system as a whole can’t, as it has to hold the QE money, it can’t get rid of it unless the BoE buys it back.
As ever you concentrate on form, not substance
Cash is technically a liability: that’s true.
But having a liability that never has to be paid is not a liability at all
A little realism would help discussion