Thursday, 5 March 2009

The long term NOT quantitatively easy

Not much blogging yet on the implications of Quantitative Easing. Well, it does take some head getting around.

The Yanks have been doing it for some while as Reuters has explained in some detail. The DT lays out the UK version a little more simply here.

As you will no doubt now understand very well, the purpose of the UK's quantitative easing is not so much to inject £75 billion or £150 billion potential spending into the economy as to achieve, by so doing, the lowering of long-term interest rates.

This is because, unlike short-term interest rates, the BofE normally has no influence over long-term rates at all.

Why doesn't the Treasury simply buy back gilts in market operations as it would normally do? Yes, you got it, the Treasury is somewhat overdrawn on £trillions of our loose change already.

The government's loss of control over the economy - through monetary and fiscal policy - is alarming. It is taking the bribe of up to £150 billion more (this time of phantom money) to try to influence confidence in future market conditions. And there is no certainty it will.

Banks and others could still just pocket these funds. And as I have said below, stimulating market activity into self-sustaining growth requires more than giving banks and businesses money. It requires a return to confidence by our consumers in their long-term economic future.

The public's love affair with borrowing is gone and their inclination to unnecessarily spend is over. The long-term debts the government has placed on all our heads may have a more significant impact on our economy than even quantitatively eased long-term interest rates.

1 comment:

Wrinkled Weasel said...

I am certainly not an economist, but I have not borrowed money for five years, and it is enormously liberating. Meanwhile, it appears that Gordon has been borrowing on my behalf, and accordingly, enslaved me, my family and probably my grandchildren. Wonderful.Bloody Wonderful.

(Thanks for visiting WW)