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Sir Mervyn King: Quantitative easing is reaching its limit

24 October 2012

9:43 AM

24 October 2012

9:43 AM

Quantitative easing isn’t an eternal elixir of economic health. That was the admission from Bank of England Governor Sir Mervyn King last night at a speech in Cardiff. Sir Mervyn said there were limits to the BoE’s policy of printing money to buy bonds, which could not ‘continue indefinitely’:

‘One thing we can see clearly is that the recovery and rebalancing of the UK economy are proceeding at a slow and uncertain pace. At this stage, it is difficult to know whether some of the recent more positive signs will persist. The Monetary Policy Committee will think long and hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready to inject more money into the economy.

‘Printing money is not, however, simply manna from heaven. There are no shortcuts to the necessary adjustment in our economy. The problems in the world economy mean that we shall have to be patient.’

The Governor also warned that banks still have insufficient capital to deal with losses on bad loans, saying ‘I am not sure advanced economies in general will find it easy to get out of their current predicament without creditors acknowledging further likely losses, a significant writing-down of asset values and recapitalisation of their financial systems’.

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As Fraser reported in August, research by Sir Mervyn’s own organisation found that the richest tenth of the population benefit from QE while the poorest lose out: the graph below, from the original post, illustrates that starkly.


The Governor did touch on this in his speech:

‘Although this unprecedented degree of monetary loosening has prevented a depression, it has caused pain to those dependent on interest income. And we have not been able to avoid a sharp rise in youth unemployment.’

It’s unlikely any of this will be repeated in the House of Commons chamber, though. As QE does George Osborne a big favour by keeping his borrowing costs low, the government will be reluctant to acknowledge that, even in the Bank’s eyes, this policy has its limits.

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Show comments
  • bloughmee

    This will end badly. The next crash isn’t going to be pleasant and carefree like the recent one.

    Time to invest in guns, ammo and gold?

  • Hexhamgeezer

    King has 1 notion ( or is that 1.5?)
    QE, then more QE, then a bit more QE. Occasionally he bleats to the banks to ‘come clean’ on their debts/assets (that’s the .5). Come clean on bankruptcy to the nth degree? Some hope.

  • ButcombeMan

    Arguing with telemachus is pointless.
    Excahnges here should stick to what is important and increases understanding

    What is the Governer saying that makes a good point ?

    He makes reference to “write downs”.

    I suggest the Banks are not making write downs because many of their clients are not making write downs. QE has been masking the pain. The economy and many people, including Osborne & Balls, are still not facing up to or properly explaining the reality.

    There are vast write downs still to occur, in private & commercial property.

    Commercial property, particularly retail commercial property, is vastly overvalued in most of our towns and cities thus creating rents that prevent business prospering- the so called “zombie businesses” .

    These over valuations, from the Big Brown Mess, need to be unwound.

    We are going to bump along the bottom for some time yet, QE will stop, but the pain will increase. QE has been a sticking plaster. The wound underneath remains infected.

  • Heartless etc.,

    Absolutely sickening that this man, together with the others that contrived, conspired, connived, or stood by – during the debacle – are now able to mouth off, dressed in the garb of eminent people, instead of in prison fatigues.

  • Daniel Maris

    Isn’t it remarkable to hear the Governor of the Bank of England admit to “printing money” as a matter of public policy.

    Both Osborne and King should go.

    The graph shows why the QE policy is not working well. Money going to the upper middle classes is quickly siphoned off into foreign holidays, foreign investments and French cottages.

    QE should be used to (a) improve the welfare of pensioners and other poor people who will spend the money within the domestic economy and (b) increase disposable income through energy investment (leading to reduced energy bills) and (c) invest in innovation.

    • dalai guevara

      well said – the last round of QE (brought to you by the chaps who only follow orders given by the BoE owners) was a reported £50bn.

      That could buy you two Tescos or seven M&S’s. Not a shop on Kensington High Street, the entire stock market listed company!

      People have lost sense of reality of what £50,000,000,000 actually means. That’s more than two grand for every full-time employed UK taxpayer. In countries like China, you could live off that for a year.

      • Daniel Maris

        Quite – and where has it gone? To pay for a tax cut from 50-45% amongst other things?

        If we had used it to build a green energy infrastructure – we could all be enjoying much lower energy bills on a permanent basis.

        • dalai guevara

          Ah, don’t get me started – we do not have the vision in th UK to truly take the development of green tech forward. There is an incredible opposition towards this game changing technology, and we are missing the boat big time.

          It is mostly due to our political system – the way in which the Green Parties have virtually transformed the way people think in Northern Europe and Scandinavia is second to none. It is based on a deep-rooted mistrust of nuclear and now is equally supported across all age groups.

  • dalai guevara

    A shocking graph. Further proof that inequality in QE-obsessed nations is on the rise.

    • HooksLaw

      A graph with no evidence to support it save extrapolation.

      • dalai guevara

        Understand Stiglitz if you want to learn more.

  • james102

    The whole western economic model is based on debt. If you add in unfunded pension liabilities even the strongest economy, Germany, comes out at 250% of GDP.
    The fact that the Eurozone could even think of asking China, with an average income per capita of not much over $4k to loan money to countries that averaged $32k and where 1 in 5 of its population is paid many, many times the Chinese average income to stay at home and watch daytime TV shows our political class have lost the plot.
    How do we get off the QE drug? It is reported that a sixth of public spending is being financed with it.

    • TomTom

      China is way ahead of the West in dodgy banking with zillions of dodgy credit invested in deadbeat firms like solar panel producers – there are shady banks and shady loans and lots of “entrepreneurs” running off with millions and billions to launder in Canada or London. China is headed for Major Implosion which is why the CP is sabre-rattling with Japan for diversion

      • james102

        Because they are bad does not mean they are not going to come out on top.
        The west just seems to be living in a make believe world where if you want something to be true then it must be true.
        We, and the US are as bad as Europe ,can’t continue to live on debt and push the problem towards future generations: particularly as, at least in Europe, our future population is smaller and smaller.

    • Daniel Maris

      If you owe it to yourself is it debt? If I owe myself £1000 do I really “owe” anything at all? The issue surely is how much we owe to other economies where the benefit of the repaid loan will not go to UK citizens.

      • TomTom

        So Daniel borrow from your future….pledge your pension in return for a new car – that’s borrowing from yourself

        • james102

          Or from the taxes of the yet to be born.

          • Daniel Maris

            Well PFI was the worst scam and that didn’t even appear as borrowing did it?

            We certainly need to be ethical about borrowing. We mustn’t overload the future.

        • Daniel Maris

          That’s what many of us do in effect. We’ll borrow now knowing we will get a pension lump sum or be able to sell our houses to pay off the loan in due course. If my house is worth £400,000, I still owe £100,000 on the mortgage, and I borrow £60,000 it doesn’t sound too good if my income is say £40,000 – I am borrowing 4 times my annual salary. But ten years later I might have paid off the mortgage, and be able to pay off my loan from the sale of the house.

          I think we need to be grown up about borrowing.

      • itdoesntaddup
  • TomTom

    Mervyn King is a man out of his depth. He shared an office with Bernanke at Harvard and is set on the same coordinated crazed path to prop up Zombie Banks in a way he would not for the steel industry or coal mining. The costs to the wider economy have been disastrous and will destroy the future. We have fewer banks when we should have newer banks with clean balance sheets to do a proper job as intermediaries not principals. King cannot admit the past 5 years has been wasted by a failed policy which has imprisoned the population in a cage for bankers to poke sticks in. It has brought Western economic life to a standstill and placed the economy in run-off. The country is a giant Equitable Life and the population has been treated like locked-in policy-holders whilst management creams off bonuses.

    We need a New Start – and probably totally fresh people in charge at all levels. King is hapless like Eric Daniels

    • telemachus

      It is Osbourne that is out of his depth.

      One reason for QE is that the Coalition is committed to massively
      cutting public expenditure.

      Osborne won’t acknowledge that it is crazy for the government to take money out of the economy during a slump.

      Instead he is relying on the Bank to keep things afloat.

      It is madness to pump money in with one hand, and remove it with the other.

      The Office for National Statistics estimates that Britain’s economy shrank by 7.1% between the end of 2007 and mid-2009 and has stagnated since.

      By comparison, during the slump of the early 1930s, the economy shrank by 7.6% percent but recovered more quickly.

      People aren’t spending. and Osbourne is doing nothing to encourage them

      The banks are still still loaded down with debt and bad loans they made during the boom, despite being saved by bailouts now 5 years ago.

      QE puts more money into the banks but they hang onto to it to rebuild their finances.

      Hence ongoing complaints by small businesses about their inability to raise loans.

      So when is Osborne actually do his job?

      He needs to both require lending to SME’s and Stoke Growth (build for growth-now just where did I hear that?)

    • telemachus

      It is Osbourne that is out of his depth.

      One reason for QE is that the Coalition is committed to massively
      cutting public expenditure.

      Osborne won’t acknowledge that it is crazy for the government to take money out of the economy during a slump.

      Instead he is relying on the Bank to keep things afloat.

      It is madness to pump money in with one hand, and remove it with the other.

      The Office for National Statistics estimates that Britain’s economy shrank by 7.1% between the end of 2007 and mid-2009 and has stagnated since.

      By comparison, during the slump of the early 1930s, the economy shrank by 7.6% percent but recovered more quickly.

      People aren’t spending. and Osbourne is doing nothing to encourage them

      The banks are still still loaded down with debt and bad loans they made during the boom, despite being saved by bailouts now 5 years ago.

      QE puts more money into the banks but they hang onto to it to rebuild their finances.

      Hence ongoing complaints by small businesses about their inability to raise loans.

      So when is Osborne actually do his job?

      He needs to both require lending to SME’s and Stoke Growth (build for growth-now just where did I hear that?)

      • TomTom

        You cannot mix the 1930s with now – British Banks were stable in the 1930s – and Chamberlain was spending on rearmament from 1935 in the industrial areas and had already financed industrial estates in Salford and Manchester area and abolished The Poor Law. You really do jump around with no thread of coherence. It is a string of slogans. You really must think clearly – the Slump in Britain came in 1922

        • telemachus

          I think what you are saying is that Chamberlain was “building for growth”

      • Archimedes

        Oh right, because QE would of course be much more limited if the government was spending more money, yes?

        • telemachus

          If you do not believe me see Nadine Dorries in the Huffington post
          *
          “We won’t win an election while George Osborne is in a key position in the Conservative party… I think George Osborne is a pernicious influence on the economy, on our political strategy, on our campaigning, on David Cameron personally and on the Number 10 operation.”

          • Archimedes

            What has any of that got to do with your writing crap, about the relationship between government expenditure and QE, in your first post?

            Is Dorries some sort of reliable source of information for where the Conservative party should be heading? She is as annoying and unpractical as a LibDem.

            • telemachus

              She has the pulse.
              She hit the nail on the head about Osbourne.
              The man prints money to give himself credibility on interest rates while choking off economic growth
              He just cannot see that he is destroying our economy

              • telemachus

                Further Sir Nicholas MacPherson Osborne’s own top Civil Servant told MP’s at the Public Accounts Committee: “When we set it up we didn’t anticipate that quantitative easing would last quite as
                long as it has nor did we anticipate that quite such a large fund would be built up.”

                Richard Bacon, a Conservative member of the committee, said.

                “I was horrified by your description earlier where you basically said, first of all that you didn’t anticipate that it would be going on this long, that it’s an experiment and we won’t know the results for many years and you can’t say for sure how much of the benefit is actually coming through to the UK.”

                An experiment to pump in money to counteract the stupid cuts while screwing pensions, savings etc.

                • TomTom

                  William Pitt The Younger told MPs in the House of Commons: “When we set it up we didn’t anticipate thatIncome Tax would last quite as long as it has nor did we
                  anticipate that quite such a large fund would be built up.”

                • telemachus

                  Pitt only taxed the super rich- those earning £60 or above
                  Less than 10% of the population
                  Osborne reduced tax for these folk

                • TomTom

                  The comment pertained to a temporary measure rendered permanent

                • telemachus

                  Yes but the point was the fairness
                  He did not give a tax break to the rich.

                • TomTom

                  Of course he did unless you think 18th Century England was a Socialist Nirvana

                • telemachus

                  Utter piffle
                  He taxed only the rich
                  Osbornebgave the 5% pay rise to the super rich

                • iviv44

                  5% pay rise? From 40% under Labour to 45% now? Let on; you’ve been on the pills again haven’t you.

                • james102

                  We also don’t know what is going to happen to the gilts—something of a planning oversight I would suggest.

      • HooksLaw

        Rearmament fuelled a return to growth and any consequences were lost in the borrowing during WW2. We were heavily indebted by the end of the war and the then Labour govt saw fit to pursue a policy of austerity.

        • iviv44

          Which of course is what Labour would do in practice now – whatever their PR machine might put out. There is no sensible alternative to a bit of belt-tightening at the moment.

          • james102

            Exactly. The options are closing, it does not matter who is nominally in power they will struggle with economic reality verses electoral disaster.
            They will just have to make as much as possible renting each other flats and maxing their expenses for when they get thrown out.

            • telemachus

              James oh James
              Balls is different and has the courage to drive it thru

              • james102

                I’m not a believer in the “Great Man” school of politics. These are just former student activists with no senior track record of success outside politics. They are so hemmed in by political and economic considerations that their discretion is very, very limited.
                No one will notice if we had a LabLib, ConLib, Con or Lab government ,they are running out of options.

                • telemachus

                  O ye of little faith
                  Was not England glad of Churchill in 1940 to rescue us from the mire
                  For Thatcher in 1979 to rescure us from the clique of trade union leaders running us.
                  And for Blair in 1997 to rescue us from the selfish excesses of the Thatcher era.
                  i believe in the destiny of great men.

                • james102

                  I’m also not a fan of Churchill. Gallipoli? His rather questionable relationship with financiers such as Sir Bernard Waley Cohen and Sir Henry Strakosch also don’t get the attention they deserve.
                  Field Marshall Lord Alanbrook’s contemporaneous dairies are good on the difficulties of working with Churchill.

                • telemachus

                  Mattereth not
                  Charisma and leadership
                  That is also what Ed Balls will bring
                  (As would Boris-but he has a screw loose.

                • james102

                  Don’t you think most politicians; particularly political leaders have screws loose?

                • telemachus

                  I sometimes have these feelings when I see pop out eyes Farage on screen

          • telemachus

            This is a read my lips moment
            Ed Balls, the charismatic one, has clearly said he will build for growth.
            The payback will be as the tax receipts roll in for the growth.
            These clowns have got it the wrong way round

            • iviv44

              I know that’s what he has said. I also know it is not what he would do (which is completely consistent with my previous comment). As the old line goes – how do you know when Ed Balls is lying? Because his lips are moving.

              • telemachus

                Cries of unfair
                Balls is the only politician with policies to get uscthrunthis mess and the Charisma to take the nation with him
                All who doubt will live to rue their doubt

                • iviv44

                  As you keep claiming. Complete balls of course. Sadly if you repeat it enough times the more gullible might start to believe it — which is why you are paid to write all this nonsense, no doubt.

                • telemachus

                  Paid?
                  I would gladly give all I have to get us out of this mess
                  And there is only one plan

                • TomTom

                  If Ed Balls had been advising Gordon Brown none of this disaster would ever have happened…..

                • telemachus

                  Gordon started well
                  After saving the world banks he did in fact trigger growth until Osborne choked it off

      • Augustus

        “Instead he is relying on the Bank to keep things afloat.”
        He will be even more so if he tries to turn back on his deficit-cutting plans. If he looks like he might stop making an effort to deal with our debt he might get away with it in the debt markets for now – the Bank of England just ups QE further to keep gilt yields down. But we won’t be able to protect our currency,
        because pretty much every currency you can name has risen against the pound since the financial crisis began. Disregarding currencies such as the Syrian pound and the Burundi franc, the pound sterling has been one of the weakest in the world for some time.

    • james102

      Andrea Leadsom in the Telegraph earlier this week, posed the question:”What is the government going to do with the gilts in the long term?”
      I’m beginning to think “Long Term” is not a concept our political class understands, or at least not in the same way as much of the electorate.

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