8 Oct 2011

Quantitative Easing for Dummies

The Bank of England has announced that it will inject £75 billion into the economy using Quantitative Easing. Some would describe this as printing money. Others describe it as handing even more money to the banks with no strings attached. You can download a pamphlet from the Bank of England's website where they attempt to explain what it involves. They've even done a nice little propaganda film to convince people that it is a wonderful idea. Here's a figure that makes it all clear

It all seems wonderful. When the Bank of England hands over the £75 billion, they say that they will avoid giving the money to the Banks directly. Instead they will will buy gilts from places like pension funds, insurance companies, and other "firms". I imagine that this include hedge funds.  The pamphlet then says "The sellers of the assets have more money so may go out and spend it. That will help to boost growth. Or they may buy other assets instead, such as shares or company bonds. That will push
up the prices of those assets, making the people who own them, either directly or through their pension funds, better off. So they may go out and spend more"

Lots of conditionals there. They "may" go out and spend more. As the figure shows, there is absolutely nothing that constrains those who have been handed the money to use it usefully. They are perfectly at liberty to send the money to a tax-haven in the Cayman Islands. Or they can use it to speculate on the foreign exchange markets. Or buy Credit Default Swaps. Or CDOs. In fact they can do precisely what they like. I think we can safely assume that they will just do what they always do - maximum their profits. There was no analysis of what happened to the previous £200 billion of quantitative easing in 2009-2010. There doesn't look like there will be anything more serious this time round.

Many people are been asking the obvious question - why not just  hand 1200 pounds to every man woman and child in the UK? Why not indeed.


  1. "They are perfectly at liberty to send the money to a tax-haven in the Cayman Islands."

    How? What does that mean? It *always* ends up as an increase in the reserves of banks and always ends up as bank deposits...because it can do nothing else.

  2. OK - I simplified a bit. Allowing banks to increase their reserves frees them up to do whatever they like with the extra margins that they get. The main point is that there is absolutely no way that QE allows the central bank to direct where the extra resources go.

  3. There are no resources created.

    As gilt sellers deposit their cheques, their bank balances rise. The banks hold higher reserves. Whatever people do, that will not change (unless people decide to pay down bank debt with the increased balances). The changes in the central bank are not relevant.