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Quantative easing

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devonwoody

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Why does QE not produce immediate results, the government has got £50bil. to spend, surely that means all business should be going for it?

(Remember they have already had 250bil?)
where did that go?

P.S. I am off to painting so see you later.
 

Boatfixer

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A friend of mine works for a road building company. They have kept a lot of people in work upgrading on the A1 and M1 with quantative easing money, but ultimately the company is French owned so profits go direct to France.....
 

9fingers

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Yebbut the jobs go primarily to Brits who pay tax back to HMRC and retain self respect though working.

Bob
 

Jake

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It doesn't (directly) give the government any more money, as the BoE buys pre-existing treasuries in the market.
 

StevieB

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When a bank takes in money from savers (corporate and private, including pension funds) it doesn't stick it in a vault under the floor, it lends it out in the form of loans or buys assets with it. In some banks it also uses it to effectively play the stock market. This includes buying bonds (government IOUs or loans) shares and in some cases mortgages. Before 2007 some banks held as little as 2% of their money in readily accessible cash for day to day business. This means that if the value of that banks shares fell by over 2% it was technically in the red. It also meant if more than 2% of its book was required it was in trouble. These low capital assets were common across banks, and alot of their business was in lending large sums of money to other banks in short term loans (overnight in some cases). It gets interest from these loans, so it makes money, and this is how alot of banks carried on their day to day business.

Then came the crash, which had a number of consequences. Regulators required banks to hold more capital in case of future problems (up to 7% of their assets, the UK wants banks to hold more), banks are less willing to lend money overnight to each other (they now tend to stick it at the European Central Bank overnight at a pitiful interest rate, because at least they know they will get it back the next day), as the value of assets, shares and securities has fallen banks have to absorb those losses, and banks are now becoming more risk averse, which means they are less likely to lend, or charge a higher rate of interest to do so.

And so to QE. When banks stop buying government debt in the form of bonds, countries cannot function. Countries do not have huge reserves either, and rely on the financial markets to supply cash by buying government IOUs (bonds) that pay interest and are cashed in over longer time periods (up to 10 years or more in some cases). Without this supply of money countries cannot function (see Greece) or Governments have to pay alot more interest to get banks to buy their bonds (see Italy). What QE is specifically designed to do is to buy government debt. But rather than buying it from the government, it buys existing bank bond holdings, so banks a) have more cash to meet their 7% reserve requirement, and b) have cash to lend more to businesses and individuals. Banks are obviously taking this money in the form of selling bonds, and then sitting on it to improve their books. So although more money goes into the economy, it doesn't filter down to individuals in the form of cheaper loans or mortgages. This is why Project Merlin was set up - to ensure this some of this money was lent to small businesses.

Of note, although the UK has a huge debt burden, a large amount of the bonds we have issued are long terms ones. This means we are not at immediate risk of having to refinance those loans yet, and are somewhat insulated by the poor trading conditions. Countries such as Italy and Spain have imminent refinancing to contend with, which is why they have low credit ratings and real immediate concerns. It is hoped by he time we need to refinance a large proportion of out debt the crisis will be over and growth will have re-emerged. This is why we still have a triple A credit rating, not because we are financially prudent, but because we are somewhat insulated from immediate refinancing. We are still spending more that we are taking in in tax, hence the deficit is growing. The governments current aim is to equalise spend with income and stop the budget deficit growing. Time scale for this was the life of this parliament, although this has shifted a bit now in light of slow growth. Once we do this we can begin to trim the £1 trillion deficit - the numbers involved in this are astronomical. Even now, with all the spending cuts, we are still spending more than we are earning.

So to answer your question, QE is only open to existing bond holders to sell those bonds back to the Bank of England. Its not a current account that anyone can withdraw from, and doesn't do alot other than keep banks solvent so they can continue to underpin government spending!

Steve
 

brianhabby

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StevieB":3kp0cfw1 said:
QE is only open to existing bond holders to sell those bonds back to the Bank of England. Its not a current account that anyone can withdraw from, and doesn't do alot other than keep banks solvent so they can continue to underpin government spending!

Steve
I can't claim to understand a lot of what is going on but it looks to me like my somewhat tongue-in-cheek comment in my previous post was not too far from the truth

regards

Brian
 
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