Political Promise

What is Quantitative Easing really all about?

In Liam Quinn on November 22, 2011 at 3:09 pm

The Bank of England do not think the Government’s deficit reduction plans are enough to stimulate economy, and have taken matters into their own hands again. Liam Quinn in a PP Economics special…

Quantative Easing is a phrase that the general public has become used to in recent times. Since the global crisis began in 2007/8 individual countries have tried different methods to attempt to revive their fragile economies. One strategy we have seen across the Western world has been to artificially keep interest rates low. The Bank of Engalnd, the Fed and the ECB have all stuck to this policy in an attempt to boost lending and reduce repayment costs.

Another tactic has been Quantative Easing (QE). QE has been sold to the public as “printing money”. This simplification is detrimental to the public, mostly because it is wholly misleading. But what is most annoying is that it isn’t just the public who have been suckered into believing this myth. Politicians and political commentators are falling for it, all you have to is watch Question Time in recent weeks if you don’t believe it. So where does the misconception come from?

They are in fact partially correct, the Bank of England does print more money. The last injection was £75bn’s worth. However, this is where people believe the story ends. It of course does not. If it did, then you could happily believe that the UK government itself should be spending this money on revitalising the economy. People have been calling for QE to be spent on improving the UK’s infrastructure or spent solving the housing problem. But anybody with even a grasp on Economics will tell you that this a ridiculous policy to proceed with. Printing more money in this form would add to the national debt, it could cause double figure inflation and would certainly undermine Britain’s bond yield prices on the global markets. If this is what was happening, a run on the UK would have already occurred and we would be in a similar boat to Greece.

What actually happens is that the Bank of England spends the £75bn buying long-term gilts. A gilt is a government issued bond (now issued by the Bank of England). The Bank buys these from commercial banks. The crux of QE is that unlike simply printing money, it does NOT add to the national debt. It instead alters the composition of national debt. National debt is a mix of either currency notes (money) or bonds.* The Bank of England is adding additional currency notes into the system, by taking away bonds. It is a quid pro quo system.

QE is an unconventional use of monetary policy. The prime aim of which is to encourage commercial banks to lend the extra money to consumers and businesses. The success of it can be debated at great length. However, it needs to be made clear that it is not simply printing money.

John Maynard Keynes had his own solution back in 1936: “If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines … and leave it to private enterprise on the well tried principle of laissez-faire, to dig the notes up again … there need be no more unemployment.”

*Plus assets (but this confuses the matter).

  1. It’s “quantitative” not “quantative” dumbass

  2. Cheers Tony. Sack the Editors.. 🙂

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