Sunday, 20 October 2013

Home truths on QE

I see my old boss in the BoE given a big goodbye spread in today's Sunday Telegraph , front page headline, "Economic recovery proves QE working says Paul Tucker". It proves nothing of the sort. There would have been an economic recovery without QE. There always has been in the past and like the tide economies rise after a fall. Tim Congdon is another who makes this sort of claim about QE. Well as rabid proponents of money printing thay would has to say that.  It does not make it true.

It was good to read Tucker has acquired a Belgian wife, a new addition since my days in the BoE, and I wish them both well at Harvard.

So what if anything has QE achieved? Claire Jones wrote a good piece in yesterday's FT headlined, "Did QE only boost the price of Warhols?", which I borrow heavily from. When an economy turns down central banks cut interest rates to encourage people to spend money. When you get to zero and the economy is still flat lining what do you do? Easy you just print more money which you either drop by helicopter as Greenspan once suggested or lend to the banks secured by illiquid worthless collateral as under the BoE Act of 1861 the BoE cannot lend unsecured. The crap they are currently taking as collateral you would not wish to wipe your bum with.

So its perfectly obvious that QE has pumped up asset price bubbles in housing, land, fine wine and paintings. In short anything that is in short supply and marketable.

Who has benefitted. Those who already own assets usually called the rich, Dave and Gideon's chums. Who has lost? The young seeking to get on the housing ladder. The old who have seen the income on their savings dwindle. The current crop of retirees who cannot buy a decent pension or annuity with their pension pot as QE has pushed interest rates on gilts down and down inexorably.

QE must end as all things come to an end. Even the rumour of the US stopping QE was sufficient to raise 10 year US bond rates by 1%. So when interest rates have to go up it will be hard on those sucked into buying houses which they need to live in at inflated prices. Its a bad time to be young in the UK!

Unless Mark Carney is the second coming he will be able to do nothing except collect his huge inflated salary. He is one of the few winners.

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