LETTER: Clear explanation on “Quantitive Easing”!

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FRANK Neal answers his own question with regard to “Quantitative Easing” (Letters, December 21st). Our regular economic expert correspondent, Kevin Hey, gave us a clear explanation last week.

Since the global financial crisis in 2008, the Bank of England has used the policy of quantitative easing (QE) to try to revive consumer spending and economic growth. As of September, 2012, the Bank of England had committed a total of £375 billion to QE.

Usually, the central bank tries to raise the amount of lending and activity in the economy indirectly by cutting interest rates. Lower interest rates encourage people to spend, not save.

But when interest rates can go no lower, the only option in capitalism is to pump money into the economy directly. According to the BBC Business News section, the way the Bank of England creates QE is by buying assets – usually government bonds – using money it has simply created out of thin air. The institutions selling those bonds (either commercial banks or other financial businesses such as insurance companies) will then have “new” money in their accounts, which then boosts the money supply.

Economists argue that QE is the same principle as printing money as it is a deliberate expansion of the central bank’s balance sheet and the monetary base. Under QE, a central bank purchases government bonds from private sector companies or institutions, typically insurance companies, pension funds and high street banks.

This increased demand for the government bonds pushes up their value, thereby making them more expensive to buy, and so they become a less attractive investment. This means the companies who sold the bonds may use the proceeds to invest in other companies or lend to individuals, rather than buying any more bonds.

The hope is that with banks, pension funds and insurance firms now more enthusiastic about lending to companies and individuals, the interest rates they will charge fall, so more money is spent and the economy is boosted. There is little evidence to show that businesses and individuals have been able to access these low interest loans. This anticipated stimulus to the economy is not working.

One of the detrimental effects of QE is to push up the market price of government bonds and consequently to push down the yield they give investors. For instance, anyone retiring and trying to buy a private pension in the past year or two has lost potential income they will never get back.

According to the Maastricht Treaty, EU member states are not allowed to finance their public deficits by printing money. That is one reason why the Bank of England has been buying government bonds from financial institutions, not directly from the government.

The Bank believes this form of QE is different because it is “printing money” as part of monetary policy – to prevent deflation. The Bank of England expects to sell the government bonds back into the market when the economy recovers. Fat chance!

So yes, this printed money will have to be eventually paid back. In the meantime, both corporately and as individuals we are getting deeper into debt. The number of extortionate high interest loans from high street and on line lenders, such as Pay Day Loan Companies, is alarming and immoral. As we enter a New Year, it looks as if the economy is far from recovering. The economy may lose its triple “A” credit rating status and drop into a triple dip recession, depression and slump. We cannot spend our way out of debt.

The dreadful economic mess we are in raises a fundamental question. We cannot go on striving after infinite growth in a world with finite resources – the two are incompatible. In a global and local economy, we must learn to live within our means and resources – a simpler, shared and more sustainable lifestyle.

DAVID PENNEY

Noyna Street, Colne