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See also the glossary entries on quantitative easing and quantitative tightening.
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I had difficulties understanding QE so far but this helped a lot, thank you. 🙂
And your last sentence sums it all up nicely:
“Honesty about money creation would have been better.”
Most politicians of today (mostly from the right) would however not politically survive being that honest.
Because how exactly could they explain that they now all of the sudden don’t chase after weirdly dreamed up reasons anymore?
Thank you
Am I right that Corbyn wanted QE for the people? Was this just fantasy or was he on to something?
I wrote that
He adopted it
We have been in touch recently.
There can be no more moral, ethical or valid reason for QE than ‘for the people’.
By way of example this ‘from the trenches’ account of our deplorable, totally dysfunctional, inhumane care system forces to front-of-mind what we are overwhelmed by and, like Palestine, should be enraged by and shouting from the rooftops.
https://open.substack.com/pub/bylinetimes/p/care-the-cost-of-petty-politics?utm_source=share&utm_medium=android&r=1v0a6q
How interesting!!
I would like to put up an argument for discussion that overall no new money was actually created by QE.
Negative equity of the Government creates the positive equity of non-Government sectors dollar for dollar. This positive equity is held as reserve balances with the Bank of England. Bond issuance by the Government soaks up the reserve balances swapping reserves held at call for a term deposit (the bond). This operation is done with already created money. If the Bank of England buys the bonds, it will need to go into negative equity to do so (money creation) but the net effect when both government entities (the Government and the Bank of England) are combined is that the already issued money stays as an increase in the balance of reserve accounts held at call. The negative equity of the Government is merely swapped with the negative equity of the Bank of England – so no actual net new money creation.
However, this increase in reserve account balances was the whole idea of QE. Money would be placed at call to stimulate economic activity with the intention that it would be put to productive use. Instead, as you point out, the money went into the unproductive financial economy and resulted in asset price inflation.
You are right that when we consolidate the Treasury and Bank of England, QE is fundamentally an asset swap. The government has previously spent money into existence and then issued bonds. QE subsequently replaces some of those bonds with central bank reserve balances.
But I would not therefore say that QE created no new money.
Before QE, the private sector held a government bond. After the Bank of England bought that bond, the private sector held additional money instead. The Bank of England created new central bank reserves to make that purchase. Those reserves did not exist beforehand.
The important point is that the private sector did not become wealthier simply because of QE. One government-backed financial asset was exchanged for another. Its portfolio changed considerably, but its net financial wealth did not increase by the amount of the QE transaction.
I would also avoid describing this primarily in terms of the Bank of England going into “negative equity”. Central bank money creation does not depend upon the Bank first having equity available to finance it. It creates a reserve liability and acquires the corresponding asset.
Where I agree with you is about the consequences.
QE transformed hundreds of billions of pounds of longer-term government debt into immediately available central bank money. The theory was that this would encourage lending and productive economic activity.
But there were inadequate controls over what happened next. The resulting liquidity helped support lending and speculation in housing, shares and other assets. The consequence was substantial asset-price inflation and increased inequality.
So I would put it this way: QE created new money, but it did not create equivalent new net financial wealth. It changed the form in which existing government-created financial wealth was held.
Reference Item 7
Why on earth are we paying interest on money we gave them !!!
Whoever agreed to this should be held to account, and this interest repaid back by the banks
Can you please fit the ensuing austerity we suffered and are still suffering into this explanation?
I assume the QE ‘expense’ it was all an political excuse to dismantle the post war welfare state…
To do that, I will have to do quantitative tightening
Maybe….
Inforgraphics like this help a lot to clear the muddy waters around unhelpful terms like quantitative easing.
This convoluted process is clearly something that has evolved from the obsolete remains of the past rather than a shiny new process designed to suit the new situation. Rather like trying to turn the Flying Scotsman into a Saturn-V by a process of step-by step modifications.
Thank you