The great QE backlash

6th July 2012

In a widely anticipated move, the Bank of England announced another £50bn of quantitative easing . The Bank justified its actions by saying that the UK economy had barely grown for a year and a half and the Eurozone debt crisis was weighing on confidence.

But this official version of events is increasingly being questioned. Mindful Money spoke to DRF, a regular poster on Mindful Money and one such naysayer:

"(QE) is put forward officially as a form of realising a Keynesian stimulus to the economy.  The truth is that it is no such thing, mainly because it goes directly to the banks and thus has no immediate stimulating effect to the real economy.  The banks use the QE money to speculate and buy assets, particularly essential assets like oil, minerals and food assets.  This drives up the price of these things on ordinary markets, causing hardship to ordinary people in their cost of living."

"Its real purpose is to save insolvent banks and governments from the natural result of their profligacy and recklessness.  QE is a relatively new gambit and nomenclature. It was invented by left-wing economists as a clandestine means to "save" essentially Socialist economies which were inevitably failing due to the stifling effect of the Socialist tax burden on the economy generating the real wealth, where the public sector then over-halls the private sector."  

Azad Zangana, European Economist at Schroders, also believes that QE is likely to fail in its stated goal – to stimulate the economy: "In our view, the additional £50 billion of purchases will do little to stimulate the economy. Gilt yields are close to record lows, leaving little room for a further discount to feed through to banks and households. In addition, banks are still under tremendous pressure to deleverage, restricting the amount of lending they are prepared to do. Moreover, because of the huge uncertainty caused by the Eurozone crisis, there is little appetite for businesses to take new risk and invest in the economy."

That said, a number argue that QE would be OK if politicians were willing to implement it in full. Keynesianism demands a compensatory paying off of debt in good times. It is this that has been the stumbling block .

DRF says: "Politicians need to get re-elected; to redeem the borrowed value in the money supply on the upturn requires an increase in taxation and/or increase in government borrowing.  This has to be paid for eventually by taxpayers, who do not like this additional burden, so politicians always shy away from that phase of supposed Keynesianism.  Thus true or full Keynesianism is never practiced, because politicians do not want to commit political suicide….they leave the permanent debasement in place, so that they get the benefit of their profligacy without the pain of having to ever repay the debt."

The question is therefore whether banks and governments are learning from their ‘profligacy and recklessness'. The austerity packages in place suggest that governments are trying to address over-spending. The banks have controversially reigned in lending, but it is less clear that they have tackled the profligate bonus culture. QE can only go so far. 


More on Mindful Money

Will the Bank of England's new round of QE boost the economy?

Should investors give up on the UK?

How can we restore faith in Britain's banks?

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