Quantitative easing?

If QE is used as a measure to stimulate the economy, but the banks are then reluctant to lend to provide the stimulus would it be possible to divide the QE amount up and distribute it to UK tax payers? I would imagine getting a large lump sum each would stimulate the UK economy, but what would the downsides of this be?
(Not sure I really understand economics and was just curious?)

Get people to dig holes, bury the money, then dig it up and spend it. There you’ve both created jobs and stimulated the economy. (NB. I was not the first person to think of this.)

In short, yes – Japan did this a few years back. Google “helicopter money”. I bought myself a new pair of SPD sandals with the money, fat lot of good they are now I’m in Yorkshire! Downside is risk of inflation, but this doesn’t always happen (same as the UK version of QE really).

would it be possible to divide the QE amount up and distribute it to UK tax payers? I would imagine getting a large lump sum each would stimulate the UK economy, but what would the downsides of this be?

It’s something that was mooted by a few economists, give everyone a lump sum that they can either spend or pay off debt. Downsides are some inflationary pressure (not necessarily a bad thing given it’s current levels, and reduced debt levels held by banks thereby reducing their potential profit.

All in all it’s not actually the worst idea in the world.

sounds good to me. I’ve got a house extension I need to find the funds for.

I would imagine getting a large lump sum each would stimulate the UK economy, but what would the downsides of this be?

The problem with that is… all but the poorest would just squirrel it away for a rainy day. So much of the money would’t be stimulating the economy or if it did it would be on a slow burn. A fair sized chunk of the people who got that kind of lump sum and could afford not to have to spend it on just getting by and didn’t feel the need to save it for the future would probably just spend it on a holiday. So what mechanism would you have to stop QE being used to stimulate foreign economies rather than ours.

I suppose the intended benefit of delivering QE through lending is businesses would only borrow money that they intend to spend. The lack of lending that has resulted is perhaps as much the sense that QE being an emergency measure make borrowing that money seem unwise – so its not so much a problem of banks not lending as businesses not borrowing.

The best way to get money into the economy is via the poorest – because theres more of them and because out of necessity of being poor they spend all their money and they spend it locally. As counter intuitive as it seems to a Tory government increasing means tested benefits would be the best way to get money out and circulating. This was the thinking of the VAT cut to 15% back in the day that a larger percentage of the spend of lower earners would help buoy up business

…doesnt work if corporates and households are paying back debt ( deleveraging)

The problem with that is… all but the poorest would just squirrel it away for a rainy day

Maybe make it as an Amazon gift card? Everyone wins except the taxman 😀

…doesnt work if corporates and households are paying back debt ( deleveraging)

There is still a benefit here. Not long after the financial crisis banks were tasked with reducing the debt to capital ratio. The way that this was achieved was to increase the amount of capital that they held, but it could just as easily have ben done by reducing the amount of debt. Whilst deleveraging won’t provide a quick stimulus it would provide a long term benefit.

The problem with that is… all but the poorest would just squirrel it away for a rainy day.

Maybe 20% would save it all, but most people would spend it.

There are a lot of people with very tight cash flow in the UK who would welcome an injection of free money.

Or you could use the money to build houses, roads, improve infrastructure and big publicly funded projects. Get money in to the economy that way and improve the country at the same time.

There is still a benefit here.

No there isn’t, that’s the point. QE is an impotent policy response when the household and corporate sectors are deleveraging. That’s the lesson from Japan

Not long after the financial crisis banks were tasked with reducing the debt to capital ratio. The way that this was achieved was to increase the amount of capital that they held, but it could just as easily have ben done by reducing the amount of debt.

Not quite – it was the capital held against their risk-weighted assets, but I take your point, In practice? They did both – raised equity and reduced RWAs

Whilst deleveraging won’t provide a quick stimulus

It won’t, true. It does the opposite especially if the government is doing the same. Fortunately, ours isnt despite nicknames like Austerity George etc

it would provide a long term benefit.

Its a necessity in the long term, but we remain addicted to debt so the process is very slow.

Hence QE is merely pushing string….

Gordon and Alastair did this a few years ago during the financial crisis when they moved an increase in the personal tax allowance forward by six months – basic rate taxpayers received a £60 reduction in their September pay packets.

I spent mine on beer and bike parts.

Or you could use the money to build houses, roads, improve infrastructure and big publicly funded projects. Get money in to the economy that way and improve the country at the same time.

I think that’s a far better idea, with inflation effectively at 0% and the rest of the world thinking we’re just crazy enough to shoot ourselves in the foot it might be a perfect time to spunk a load of made-up money into some redevelopment.

Sadly, Westminster is more likely to do so on something like a 3rd runway for Heathrow rather than something to create jobs in the North, Wales, Scotland, well anywhere that’s not in the SE.

The shopping vouchers idea isn’t a bad one, perhaps not Amazon as the money would simply pour out of the UK to whatever tax haven they claim to be based in these days, but somethign like that.

I have to say imo QE was effective in the US and UK whilst German resistance meant it was not introduced into Europe until far too late and the continent is suffering as a result.

Giving cash to people doesn’t have the same effect imho. The banking system was broken / under severe pressure so needed help and lots of it.

The cut in oil / petrol prices has provided a huge boost to consumer spending power. Also QE is a loan not a gift.

As above infrastructure spending should be part of our responce, social house building and urban regeneration in particular

Or you could use the money to build houses, roads, improve infrastructure and big publicly funded projects.

Only, central government doesn’t do these any more – that’s what PFI was invented for: to take these projects off the balance sheet.

I have to say imo QE was effective in the US and UK whilst German resistance meant it was not introduced into Europe until far too late and the continent is suffering as a result.

EU-bashing aside, this just isn’t the case.

QE has been largely ineffective in the UK, UK, Japan and EU.

It has created some wealth-effect and the stimulus provide by competitive devaluations. So things have not got worse.

But it is the wrong policy and the wrong time. The basic transmission mechanism is only partly working (wealth effects, weaker FX ) hence demand remains weak. growth below trend and inflation well below target. At the same time, asset markets are deliberately distorted and mis=priced and investors are robbed of their correct returns.

What happened the last time that the world was flooded with liquidity at a time of ultra low interest rates?

I might be misinformed.

But isn’t QE still in the form of bonds? The difference between it and government or corporate bonds is the BOE is buying them from the banks, not the other way arround. It’s not free money, it’s just a loan of new money to the banks rather than just the same money recirculating?

Will there be a measurable QE effect when (well if, really) Mastercard inject £19bn of real money into the economy?

🙂

It would effectively be the cash handout suggested in the OP

That MasterCard article is an odd one. There’s no such thing as a class action in the UK(?). Also is the complainant accusing MasterCard of overcharging on fees (difficult to prove and more of a competition issue), or some form of regulatory consumer detriment?

If the latter, I doubt any of the period in question would be in scope for the FCA.

PS you are correct re being like helicopter money, exactly what has happened with PPI claims.

There’s no such thing as a class action in the UK(?)

I think they were introduced last year as part of the The Consumer Rights Act

I think whats slightly odd about it is Mastercard was overcharging and it would be Mastercard customers that would receive the payout – but the point of the case is that everyone in the UK would have been paying the increased costs whether they were customers of mastercard or not

Interesting article re the OP’s QE question:

http://ftalphaville.ft.com/2016/07/19/2170198/koo-why-us-quantitative-easing-worked-better-than-other-qes/

Couldn’t they just send everyone some money by PPG? Just make sure it’s non withdrawalable (might not be a real word).. and everyone goes on an online shopping bonanza

It’s a very pertinent question.

Distributing cash to households is going to lead more quickly to economic activity than buying bonds, lowering interest rates and stimulating asset prices.

In theory, lower interest rates persuade companies to invest. In practice a small percentage difference is marginal. Investments are predicated on high rates of return so a small change in cost is irrelevant when the business climate is poor. Under these circumstances investors bid up low risk assets such as bonds and property and there is little impact on the real economy.

However central banks are doing this because politicians are absent. There is no co-ordinated fiscal response. Despite low interest rates governments are unwilling to invest in their economies, which should be profitable.

Hence dishing out free money to the people is a better solution.

maccruiskeen – Member
The problem with that is… all but the poorest would just squirrel it away for a rainy day.

Feel like i’m stating the obvious here, but why not just give the money to the poorest then!

Yes but QE isn’t free money, it’s the BOE buying government bonds from the banks so they can improve their liquidity and leand more.

Doing that with the population at large would require some sort of consideration in return for the cash, for example the BOE could offer to buy 10% of everyone’s house. But at some point they still have to sell it back to you.

It’s the same as when they buy and sell other financial assets in the short term to keep rates at their base rate target.

thisisnotaspoon – Member
Yes but QE isn’t free money, it’s the BOE buying government bonds from the banks so they can improve their liquidity and leand more.

Doing that with the population at large would require some sort of consideration in return for the cash, for example the BOE could offer to buy 10% of everyone’s house. But at some point they still have to sell it back to you.

It’s the same as when they buy and sell other financial assets in the short term to keep rates at their base rate target.I’m not talking about QE in isolation though, just making the point that if you put more money in the hands of the poorest end of society, it will stimulate the economy more. You can do that many ways.

Reduce NI and corporation tax for small business? Tax holiday?
More in the pay packet and less to the treasury..
More investment in small business, plant and equipment and better productivity.
No lump sums to spend abroad.
Most of the guys who I work with would pop a lump sum in savings account for a deposit..so I guess we should be building homes too.

Spending on infrastructure has the benefit that you have a useful asset that help productivity in future. But as above, government doesn’t want to do this as it increases public sector debt.

I’ve never understood PFI (other than it being a way to give money to the politician’s friends). One (arbitrary) measure health of the economy is assumed to be government debt – so government cheat by putting the actual debt in the private sector (who pay more for it) and the public body has an ongoing liability greater than the interest would have been, as well as losing control of the asset.

You can tell I’m an engineer not an economist – the other thing I don’t understand is that recent recessions (Brexit apart) have been blamed on too much debt – so the solution is to encourage more borrowing??

the other thing I don’t understand is that recent recessions (Brexit apart) have been blamed on too much debt

Not exactly. More lending too much to people that shouldn’t have been given credit in the first place (self cert, liar loans, inability to pay beyond fixed rate period etc), then horrendous repackaging of sub prime mortgage bonds within the financial markets

Re helicopter money, I wonder if there’s some scheme going on btw BoE and the retail banks re PPI – it’s a nice way to put some cash into peoples’ pockets…

£24bn has been given out in PPI so far – which is the equivalent of £600 per UK adult. £32bn is apparently the total amount set aside.

No way of knowing where that money went but it’s a nice little addition to the economy where median household income is £25k. Being happy little consumers who liked using their credit cards I suspect most people spanked their little gift on more shiny stuff rather than saving it.

Interestingly, today the news is that the FCA wants to put a deadline of 2019 on PPI claims. Forecasts are expecting inflation to pop up to 2-3% next year from the fall in the £ so we don’t want too much extra money being spent as it’ll send inflation up higher, force interest rates up, with the ensuing collapse in house prices and general consumer spending power (and possibly the whole shebang)

Or maybe I’m just getting too cynical, who knows?

Hence dishing out free money to the people is a better solution.

Money cannot be free. If its free it’s worthless. if you give people helicopter money there is no guaranty it will not be spent on a foreign holiday which is of zero benefit to the UK.

@broones PPI was a misselling scandal, its not (imo) a “deal”

We have via ultra low interests (and cheap oil) a very big economic boost, thats putting a lot more money in most people’s pockets (pensioners / those living on interest excluded). Higher tax free personal allowance. All helping

@ jambalaya

We have via ultra low interests… So what’s the problem then?

You can tell I’m an engineer not an economist – the other thing I don’t understand is that recent recessions (Brexit apart) have been blamed on too much debt – so the solution is to encourage more borrowing??

This is because the powers that be do not understand the nature of the the current recession and hence are (1) talking rubbish eg, you can’t solve the current problem with more debt (see below) and (2) relying on the wrong solution ie, QE

It is correct that the current malaise is the result of too much debt at all levels – household, corporates, governments etc. But this is a very different type of recession to normal. It is a balance sheet recessssion in which households and corporates switch from being profit maximisers to debt minimisers. Unfortunately, such a recession doesn’t not exist in economic textbooks and is not taught, hence central banks and politicians do not know how to respond.

In short, the worst thing you can do in this type of recession is to have households, corporates and governments all deleveraging at the same time. That creates a deep recession. It is correct that households and corporates play down their debt and this is what is happening and hence why QE is a failure – cash flows are being used to reduce debt and hence the level of interest rates is irrelevant. So what needs to happen is that governments should do exactly the opposite of households and corporates as counter intuitive as this may sound. Govermnets need to run deficits in current times to offset the financial surpluses of the household and corporate sectors. Unfortunately, the current mantra is for them to do exactly the opposite – well that is the rhetoric except for the poor people in Greece who have the false IMF solutions forced in them. Fortunately, the reality is different in the UK and even Austerity George was (unintentionally) running deficits which helped offset the deleveraging of the private sector. He didn’t know what he was doing but he did the right thing in the end!

We have via ultra low interests (and cheap oil) a very big economic boost, thats putting a lot more money in most people’s pockets (pensioners / those living on interest excluded). Higher tax free personal allowance. All helping

No it’s not. QE is simply a grotesque tax on savers and the financially prudent. It is also delaying investment not encouraging it as people understand that it is distorting investment decisions / making them very hard to judge. And we haven’t starting in the problem of unwinding it.

Gov get away with it by dressing it up in fancy language ie QE which most people do not understand. This allows them to hide the fact that they are simple stealing off people in a clandestine manner that few recognise.

there is no guaranty it will not be spent on a foreign holiday which is of zero benefit to the UK.

There’s a lot of costs associated with a foreign holiday that would make it to the UK. The flight (easy jet) for example may be a UK comp. All the stuff you buy for the trip, the tour operator is likely to be a UK one, insurance etc. Sure some of the money ends up abroad…

I take your point but I think on balance in a consumer driven economy we need consumers. I think most would end up in retail.

@thisisnotaspoon

Yes but QE isn’t free money, it’s the BOE buying government bonds from the banks so they can improve their liquidity and leand more.

Doing that with the population at large would require some sort of consideration in return for the cash, for example the BOE could offer to buy 10% of everyone’s house. But at some point they still have to sell it back to you.

The BoE could hand out £1,000 to every household funded by debt. In the US it’s called a tax rebate, but exactly the same process. The result is more government debt and more consumer spending.

@jambalaya

there is no guaranty it will not be spent on a foreign holiday which is of zero benefit to the UK.

Sterling can only be spent in the UK, so when you go on holiday someone has bought your Sterling in exchange for their foreign currency. The question then is to what extent they save it, by investing in UK debt, or spend it on UK goods and services which stimulates the UK economy. The fall in Sterling should also be stimulative.

Government could ensure that the money is spent in the UK, by borrowing and investing in the UK, but politicians set their faces against that, and the public agreed.

@teamhurtmore

Balance sheet recession… doesn’t not exist in economic textbooks and is not taught, hence central banks and politicians do not know how to respond.

Irving Fisher, debt-deflation theory, Econometrica 1933 theorised about this; Ben Bernanke (ex-Chair of the Fed) whilst in academia sought to formalise Fisher’s theory and in office has acted on it: Out of Keyne’s shadow The Economist

Gov get away with it by dressing it up in fancy language ie QE which most people do not understand. This allows them to hide the fact that they are simple stealing off people in a clandestine manner that few recognise.

Do you take the same view of taxation?

No, very different, although you could argue that QE is simply a tax on savings. IMO that is being generous 😉

You are being kind to Bernanke – he was very late to understand as my old-colleague who (claims to have invented the idea) writes about the sequencing in his books.

Fischer’s debt deflation and Koo’s Balance Sheet Recession are obviously related