so, this printing money malarkey, when its “printed” who is it given to?

Surely that if the objective is to stimulate the economy, spending and financial morale would it be better if it was distributed randomly via the electrol roll on say, every wednesday with payments capped per person of £200?

That would be one hell of a vote winner!

but would it work??

“Teh Tories” use the £££ to to invest in their secret baby robin liquidising factories, which are coincidently owned by their fat-cat paymasters.

Surely that if the objective is to stimulate the economy, spending and financial morale would it be better if it was distributed randomly via the electrol roll on say, every wednesday with payments capped per person of £200?

Yep.

Currently they just buy bonds from banks and the banks sit on the money. They then wonder why it hasn’t had the desired affect of stimulating the economy, so like a bunch of complete morons they just keep repeating the same thing again and again, no matter how many times it doesn’t work.

Well the banks need to hold more cash than they used to but they should be lending more out – so are mortgages easier to get now then a year or 2 ago? I think there are more products out there now.

Well the banks need to hold more cash than they used to

Doesn’t mean they actually lend it to anyone though.

http://www.guardian.co.uk/commentisfree/2013/jan/11/quantitative-easing-had-its-day

How about as suggested by op but not as cash, and with the proviso that it is spent within 1 week?

not as cash, and with the proviso that it is spent within 1 week?

Just like gift vouchers for any popular high street store – they could expire at any time!

The currency is now counterfeit and there is going to be a bond market/sterling crash.Weimar republic here we come.

The currency is now counterfeit and there is going to be a bond market/sterling crash.Weimar republic here we come.

Only if people lose faith in the currencies ability to transfer value between people and over time – which at this point it’s not doing, and as such, the wild changes which the Weimar experienced are a long way off – people are kept a lot more docile nowadays.

The banks were given the money with a proviso to lend it out, when banks lend money it is “new money” they lend – ie : that money is created out of nothing and if you asked to borrow £10,000 then that money did not come from reserves as such but straight off the printing press so to speak, the entire monetary system is not fit for purpose and as we are heading into a depression i imagine it’ll all go to shit over the next 10 years for those of us at the bottom end of the financial scale as goods will increase in costs while wages will stay static or lose value through inflation – learn a skill that will let you get paid in cash then you can tell the tax office to **** off.

”where does money come from” is a good book and explanation of why we are all ****

Bank take this money and Lend to more people – and at the same time keep more in reserve.
Also don’t get into the nightmare situation where we lent to loads of people who can’t afford it, but lend more, while keeping more in reserve.

Simple isn’t it.

Good question OP. in short, the money is not going where it is meant to for a very simple reason – the transmission mechanism, (the banking system) is still not functioning properly. There is a broad body of economic thinking (most politicians, central banks, bodies such as the IMF) who are promoting the same policies to remedy the current crisis caused by massive over-leverage throughout the UK/European/global economy – a combination of very loose monetary policy (ultra low IR and QE) and tight fiscal policy. The exception to is rule among major economies is Japan which has been trying exactly the opposite policy mix for a long time without success.

In economics there is the simple principle of a multiplier. Put crudely, if you put £1 in or take it out, the impact on the economy can be less, equal or greater than £1 depending on the size of the multiplier. Two things have taken the global policy makers by surprise – the fiscal multiplier has proved to be much larger than they all expected and the money multiplier much smaller. In other words, the negative impact of cutting government spending/raising taxes has been much bigger but the positive impact of injecting money into the economy has been much smaller. In the latter case, this is reflected in the differences between aggressive growth in narrow money and the lack of growth in broad money – the banking system isn’t working (so a little silly to be pressing ahead with so much regulation at the same time, but that’s another story).

The problem is that the global elite running things largely come from the same schools of economics (its too simple to say this is a Tory thing exclusively) and (a bit like climate change) are struggling to come to terms with the failure of their models to predict what is happening in the immediate future/short term. The Bank of England is interesting to watch. Mervyn King seems confused. The problem with monetary policy (QE) is that it is nothing more than a drug. It merely provides incentives for businesses and household to bring forward spending from the future to the present. But that reduces future spending! So when tomorrow comes, more and more stimulus is required (ring any bells, hopefully in an economic context not a drugs one!!!). King kind of gets this (there are limits to QE) but then carries on saying that we will continue to provide whatever stimulus is needed. The nightmare addiction syndrome.

So why not just spend our way out of trouble (Uncle Ed)? Isn’t that what Keynes would do? Well not quite and this is the second problem that Balls and others fails to mention. Keynes did not simple advocate raising government spending. He argued that in good times governments should spend less than they receive and build up surpluses. When things turn down, they can reverse this pattern and spend more than they receive (run deficits) in order to help the economy recover. But our great leaders (even those like Balls who claim to be Keynesians) screwed this up by a drug fix of another kind. Instead of building up surpluses during the boom they became addicted to the gov spending fix resulting in exactly the opposite scenario to the one that Keynes would advocate. The result, very high levels of both debt and deficit (at the start of the crisis) that also constrain policy responses to it.

So where does is leave us? Both the monetarists and the Keynesians are puzzled right now as their policy mixes aren’t working (this is being a little harsh on the latter since Brown and Balls screwed the Keynesian message up in the first place). The bottom line is the global policy makers are in a mess – neither their models nor their policies a working right now. Like climate change, the question is whether the breakdown is short term or is it more fundamental than that……?

(apologies for the over-simplification of both theory and practice in the above!)

Pretty good precis THM – fancy popping over Gideon’s place and drawing it in nice simple pictures for him. Then take the whiteboard round to Ed balls house and use it to beat him to death.

is still not functioning properly.

It never has.

Trust Greg Preston’s petrol vouchers.
Watch the original Survivors. It has all the answers.

Teamhurtmore says it well, but also dont forget that Governments want to get voted it by voters – most of them dont understand any economics and the vote comes round ever few years.

Its a recipe for disaster fulled by a media looking for headlines that can be digested by the same short sighted idiot voters.

this is how banks create money
i actually did this, went to my bank and asked what happens to this £1000 i’m depositing?
“well mr chantler, we’ll take that £1000 and loan it out with interest to other people.”
“so what happens if i want to withdraw my money after a week? does the other person have to pay it back?”
move your money to a independent building society or the co op bank.
we are being screwed.
i am wearing a foil hat (in an ironic sense)

Teamhurtmore says it well, but also dont forget that Governments want to get voted it by voters – most of them dont understand any economics and the vote comes round ever few years.

Its a recipe for disaster fulled by a media looking for headlines that can be digested by the same short sighted idiot voters.

To be fair to the “idiot voters”, 1000s of well-paid and presumably intelligent economists working full-time for governments worldwide don’t seem to understand (or manage) the economy, either.

QE is working perfectly well. The state is providing funds, and paying for the interest involved in creating those funds, not to mention the infaltionary pressures, to the private banks to use to short-term speculate on the stock and commodity markets. It has nothing to do with helping the real economy.

To be fair to the politicians (grttted teeth here) people want to believe in fairy stories and only/mainly want to hear good news. People tend not to vote for the bearers of bad news and your are in big trouble if your are in power during an economic downturn. The reality is that the extent of over-leveraging in most economies (and structural failing in Europe 😉 )means that economic growth will be modest at best for some time yet. Second, politicians and their advisors are humans and often reflect what the rest of us are doing. Society gets what it deserves?. So Brown’s follies were being matched by most individuals who created their own micro-mirages of well-being based on the folly of borrowing to excess levels.

DD – good question about the banks since they are at the heart of it and there are great ironies there are well. The whole idea of the “transmission mechanism” is that banks are in the middle of this process but the inherent, albeit different type of leverage, that is at the core of the system, means that they greatly magnify the good and the bad. So yes, they are easy cannon-fodder for the haters (and often rightly so) but the truth is that they are largely magnifying underlying trends. But the ultimate irony of all, is at the heart of the so-called capitalist/free market model is an industry that embodies such much of the Marxist ideal. How many industries have been able to transfer so much money over such a sustained period from the capitalist shareholders to the workers! And largely get away with it!!! 😉

Au contraire! I see the transfer going in the opposite direction.

There was a pivotal weekend shortly after the run on Northern Rock and others as a result of Leahman Bros caving in back in 2007. Senior politicians, the Bank of England and key people of several failing banks spent a weekend around the table just trying to fathom out each bank’s exposure to toxic debt and what to do about it. Without intervention, the entire system could have collapsed causing global economic meltdown. It was Gordon Brown and his lot who presided over this and it was he who claimed victory in saving the economies of western world. How arrogant and hypocritical!? It was his party who deregulated and allowed banks to engage in risky practices.

Regulation at that time meant that banks had a very low Tier 1 ratio (amount of actual capital they had in their coffers versus the money they had out in loans) and they had of course bought debt from other banks. In the event of a default caused by the knock on effects of Leahman’s collapse, (or any other bank), how would a bank meet it’s liabilities? Indeed, how would they even know what their exposure to toxic debt would be until their debts turned bad. Government had stepped in to shore up several banks already at that stage, but would be unable to keep doing this as the they had already spent all of the reserves built up by the previous administration. In fact, the reserves were long gone and government borrowing was escalating exponentially. They really had made a spectacular mess of th nation’s finances. Our grandchildren will still be paying off their profligate spending splurge long after we have gone!

The uncertainty of the situation meant that banks were scared to lend to each other. The markets reacted and banking stocks slumped. After this big powwow meeting, it was decided that a banks Tier one ratio should be doubled from 3% – 6%, to better equip the bank to meet its own liabilities. How on earth would banks find the money? They were exposed to untold liabilities that they didn’t yet know about. They still don’t know about!

So it was decided by government to print money to prevent the banks going bust. This then happened across the western world. The overall effect was to devalue our currency, to inflate our way out of debt. This is still ongoing and I believe we have a long way to go yet. So expect more quantative easing and much more inflation to ease this situation ( we import too much from countries little affected by national and personal debt). As the other Western economies are doing the same, we haven’t really felt a huge change between the currencies of the US and the Euro.

Gordon Brown and his lot, seemingly naively suggested that all the freshly printed money they had just given to the banks would be passed on to us in the form of loans and that this would stimulate the economy and get us out of the rut. Alistair Darling and his mate Gordon appeared to have written a blank cheque to the banks, but without getting any commitment as to how the banks might help the wider economy and the people who had saved them. They then proclaimed that everything was sorted and patted each other on the back. The merchant bankers had a bonanza and paid themselves record bonuses, just like the cheating gamblers that they are – scumbags!

Several years later and we are on the umpteenth lot of quantative easing, with more still to come.

I believe that many British banks were going to gradually discover that they were bust as they discovered the bad debt they had taken on from the US sub-prime bubble of the early 2000’s. I think this is still going on and each time a bank runs into trouble, is when they go cap in hand for some more QE.

I therefore conclude that the politicians were telling us a big fat lie when they said that all this money given to banks was to eventually benefit us. In effect, tax payers are funding the extortionate and enduring rescue plan for banks. This is galling when you consider how they have never given us such a shockingly raw deal as they do now! As you know, interest rates are 0.5%, but they are typically charging more than 4 percentage points above this for loans. I have friends with tracker mortgages taken out before 2007 as low as 0.45% over base. 1% was commonplace. So banks are charging four to ten times as much to lend money as they did pre 2007. The amount of capital you need has increased massively and you righlty now need to be creditworthy, rather than self-certify. Savings rates are derisory, rarely meeting or exceeding inflation.

What a monumental travesty of justice? Politicians tend to blame casino banking, but it was clearing banks that lent too much as well (and to the wrong people). Governments presided over deregulation of the banking system. They wanted the additional taxes from all of the resulting economic activity produced from opening the floodgates. Ultimately, the blame rests with those in charge: politicians, mostly Labour politicians! And still the ignorant people vote Labour do so because of the free stuff they get and because they misguidedly believe the Labour party are still the party for the common man.

I refer you all to Ben Bernanke and his infamous helicopter quote

He referred to a statement made by Milton Friedman about using a “helicopter drop” of money into the economy to fight deflation. Bernanke’s critics have since referred to him as “Helicopter Ben” or to his “helicopter printing press.” In a footnote to his speech, Bernanke noted that “people know that inflation erodes the real value of the government’s debt and, therefore, that it is in the interest of the government to create some inflation.

As for the reality of QE there is some uninformed comment above. The ‘printed money’ buys bonds, that in turn raises the price of said Bonds, the implied knock on effect is that these bonds become undesirable to investors and other forms of investment are pursued. The effect of an injection of cash at the top is that cash flows down to other forms of investment i.e. investment in company bonds / equity etc is a result and these in turn use the cash raised to invest directly in the economy (buying stuff and hiring people etc) and through this mechanism the additional liquidity floods the market from top to bottom.

Direct cash injections to Banks is something altogether different.

Ah, the old trickle-down theory!

A wee bit harsh spongebob but agree largely with the sentiment. QE could have worked in the correct conditions (and has had some positive effects nonetheless) but the (largely hidden) distress of the banks themselves, and the imposition or well-intended but poorly timed re-regulation made that very difficult. But going forward you make an excellent point about our savings. We face a long period of financial repression where interest rates will be below inflation/nominal GDP as this is the most likely solution to reducing debt levels (UK 40s-60s broadly). So the financially prudent will be screwed for some time yet.

Ohnohesback – we are talking about slightly different things. I accept your point but I was talking about the longer term business model that saw bank operating cost-income ratios of 50-60% (and much higher in the crisis). How many industries survive by paying 50-70p of every pound earned (ie revenue not profit!) in operating costs of which salaries are the main bit? There is a good saying that it is far better to work for a bank than to own it. The odds massively favoured the workers over the shareholders!

Uwe- r, good point! The media present QE in a very misleading manner.

Sorry spongebob, my comments should have been edited. You made the same point about the introduction of regulation (higher capital ratios) but I slightly missed that on first reading. Sorry!

Are mortgage rates likely to remain high for the foreseeable future?

I’ve done very badly out of this situation. I bought in early 2007 after being advised that the market was likely to continue going up and up. Obviously complete horseshite in hindsight.

Now i find myself ready to move again, no equity in the property, savings earning shit all in the bank and the mortgage rates have gone up massively! 👿

I would expect mortgage rates to remain as they are for the foreseeable. If base rates go up, as they inevitably will at some stage because they can only go one way, so will the cost of a mortgage.

I’m looking at property right now and am finding it difficult to find anything I can afford without a mortgage. My current circumstances dictate that borrowing is out of the question. A few years ago I could have self-certified and borrowed what I like, regardless of income.

There is not much choice of stock at my price level and the stuff worth having sells quickly. Many people are staying put because of the high cost of moving (stamp duty being one of the biggest offenders), others are buying to invest, so there’s a bit of a shortage, yet prices are flat. Makes no sense to me!

retro83 – Member

Are mortgage rates likely to remain high for the foreseeable future?

4 or 5%* is not high.

(and i’ve been looking at mortgages around 3%)

Ta

I’ve done very badly out of this situation. I bought in early 2007 after being advised that the market was likely to continue going up and up. Obviously complete horseshite in hindsight.

Now i find myself ready to move again, no equity in the property, savings earning shit all in the bank and the mortgage rates have gone up massively!

But its people using their houses as a cash machine, expecting a never-ending rise in property prices, and thus equity, that have been responsible for getting us into this whole bloody mess in the first place! Why should you expect to effectively earn an additional income just because you’ve bought property? We have to seriously address this kind of mind-set! Or the whole sorry cycle will just repeat itself again!

ahwiles – Member
4 or 5%* is not high.

(and i’ve been looking at mortgages around 3%)

Appreciated I just meant it’s relatively high in comparison to the one I already have (1% currently I think) and much more than I get back on my savings. My worry is that the interest rate could rise massively like in the 80s and cause some serious problems.

binners – Member
But its people using their houses as a cash machine, expecting a never-ending rise in property prices, and thus equity, that have been responsible for getting us into this whole bloody mess in the first place! Why should you expect to effectively earn an additional income just because you’ve bought property? We have to seriously address this kind of mind-set! Or the whole sorry cycle will just repeat itself again!

I didn’t expect to earn from it, just not lose 20k.

We have to seriously address this kind of mind-set!

but historically nothing does better than property, it is just that, like many markets, it see-saws and people get caught out.

Biggest problem with housing, to my mind, is stamp duty.

It is too expensive to move house so everybody extends, so the housing stock of more affordable family homes just gets depleted.

Spongebob, THM,

While you can point out that Brown continued the deregulation of the the money industry, you should probably also point out that he was continuing a general trend that goes back to the 80s at least (depending on how you count it starting).

You could point out that he didn’t learn from the mistakes of earlier governments (September 92 anyone?).

You cold also point out hat his response to the crisis was probably better that the current cretins.

retro – i would never give advice to other re financial decisions but you may find these two links helpful. The first relates to House Prices and Affordability, the second relates to short and medium-ish trends in mortgage rates (interesting) and the outlook on rates according to some forecasters (take care!). I hope they help!!

http://www.lloydsbankinggroup.com/media1/economic_insight/halifax_house_price_index_page.asp

http://mortgage-x.com/

IMO, its a tough call on rates. If the policy makers get it right (?) then we may well see IR stay low in absolute terms and in relation to inflation and GDP. That would be good news for you. If they get it wrong (and monetarists are correct that, in the LT, ‘inflation is always and everywhere a monetary phenomenum”) then the massive expansion in base money may well feed through into inflation and considerably higher interest rates. 🙁

Crystal ball time!! But seriously, just a reminder never to over extend yourself?

You cold also point out hat his response to the crisis was probably better that the current cretins.

Not everyone agrees with you…

[video]http://www.youtube.com/watch?v=51-Jfh6ADH0[/video]

[video]http://www.youtube.com/watch?v=BotyxdQyQaA[/video]

😆

Cross-post – yep, IGM would have sympathies with your first few points but MUCH less with the last one. The main difference in my mind was that Brown/Balls were dealt a good hand that they played very badly (cashed our winners/trumps far too early), whereas Osborne/Cameron were dealt a very bad hand (null points) which they are also playing badly. Its a subtle but important difference. The frightening thing is that Balls is a self-confessed Keynesian and while lambasting his party for failing to communicate K economics correctly (his Fabien Society speech), then screwed it up himself in practice! I would merely place O/C in the same class as most of the economic/political elite determining the global policy mix at the moment. They are holding a normal screw driver when a Phillips one is required! Apologies for the mixed metaphors!

THM – as I recall, and I’ve been wrong before, we we just starting to come out of recession and grow again around the time of the general election (agreed we’ll never know if it would have been sustained). Osborne pursued a stated policy of cut to the bone and let European growth create a market we can sell into cheap, missing the facts that a) Europe wasn’t growing, and b) by cutting to the bone you can end up pushing up your welfare bill significantly.
Now we have an economic record worse than the depression of the 1930s on our hands.
The google public data miner gives some lovely graphs from the European office of statistics (Eurostat I think) of both deficit and debit, in absolute terms and percentage GDP. You could read them to suggest that the real issue is we allowed ourselves to become too dependent as a nation on the financial sector.
Having spoken to the odd FD who knows Osbourne the suggestion is that he’s not fit to run the school tuck shop.

As for the Icelanders, I have sympathy with them but they were complicit in getting themselves into the situation in the first place. And even then he says not introducing austerity measures helped Iceland back into growth.

It’s like medieval doctors seeing the bruised and battered patient and saying “I know, let’s let some blood”. Don’t run up further debts, agreed, but do invest where you can. Which belatedly appears to be part of Osbourne’s plan B which he keeps claiming he doesn’t have – of course the IMF would like him to go further.

Well there is no doubt that Osbourne has made mistakes, but whether these are unique to him is another point since there was little discernable difference between the Labour and Tory plans or between what was happening here and the policies proposed at the time by the IMF.

But what has gone wrong? His Plan A had two main assumptions and a few extras. First that the deficit needed to be cut faster than previously thought due to market pressures and the threat to yields/UK funding costs. Second, that fiscal consolidation would only have a small impact in growth (and some advisors were saying it could be positive 😯 ). In addition, they did not expect the European recession to be as deep or as prolonged and they expected private sector job creation to compensate for public sector job losses. On the first assumption, we can never know. On the second, with hindsight the models/he have proven to be wrong. Advisors like the IMF believed that the fiscal multiplier was somewhere in the region of 0.5 whereas it has turned out to be at least double that in the UK and elsewhere. So basically, he probably scored 1.5/4 with the 1 being for the labour market being better-than-expected. If you let him off about the size of the fiscal multiplier then maybe at a push that could be 2/4, but not more!!

There is no doubt that the economic record is bad, but the whole triple dip stuff is frankly a statistical red-herring. Balls is right to bang on about flat-lining – this is a much better analogy, ie bugger all growth albeit not much better for any of us. Good for headline writers though. But we a suffering from a chronic lack of aggregate demand and a debt overhang. Consumers are still de-leveraging (really only starting), and investment is hit by a total lack of confidence and a banking system barely out of intensive care. One of the few bright sparks is the fact that corporate restruturing has taken place and many companies are sitting on reasonable amounts of cash. But, and its a big but, they need a catalyst and confidence for them to put the money to work especially with storm clouds still sitting over our biggest export market. And sadly, Osbourne is not giving them that for sure!

2/5 then?

I think we are in something approaching agreement. And yes there is a lot of cash out there uncertain places – I work for a certain Mr Buffet and I’ve heard he got a postal order at Christmas that he could buy a European country with (problem is which one is worth having – ok Germany but its pricey).