LETTER: Quantative easing

I AM responding to Frank Neal’s letter regarding the differences between quantitative easing and borrowing money.

Perhaps you will allow me to share my confusion with Mr Neal.

I, too, struggled with understanding quantitative easing until I came to realise that central banking is essentially a conjuring trick, a world of Alice in Wonderland where one wouldn’t be surprised to hear Sir Mervyn King and his courtiers exclaim: “Why, sometimes I’ve believed as many as six impossible things before breakfast!”

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It’s an illusion and the only thing supporting it is belief.

Quantitative easing is part of what Sebastian Lyon at Troy Asset Management has described as the Faustian pact between HM Treasury and the Bank of England. The Treasury engages in austerity while the Bank maintains zero interest rates coupled with quantitative easing as and when required.

As I understand the matter, the Bank simply is creating money out of fresh air to buy government debt (gilts), and thus funding “borrowing”. Needless to say if a citizen in Pendle copied this trick, they would be jailed for fraud.

In short, the Bank is inflating the currency to monetise the debt and as Sebastian observed, the Bank is buying gilts that no one would buy, at prices no one would pay.

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The impact of the easing is that gilts yields are being held artificially low with all the attendant distortions that this is causing among other asset classes.

Sir Mervyn King has said he has absolutely no doubt that when the time comes to reduce the Bank’s balance sheet (reversing and thus neutralizing quantitative easing), this will be “a whole lot easier than we did when expanding it”. Some observers doubt this and Robin Angus at Personal Assets Trust plc has remarked with his customary wit: “It is like saying that after an orgy of Christmas guzzling it will be easier to shed those few extra pounds than it was to gain them”.

Quantitative easing can be reversed by selling the gilts into the market. That should be interesting.

When the gilts reach expiry the government of the day will redeem them using devalued currency.

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I realise this may not be of much help, for we’re dealing with smoke and mirrors but as Spock might have said to Captain James T. Kirk: “This is borrowing Jim, but not as we know it”.

KEVIN HEY

Castle Road, Colne

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