Submission to Treasury Committee on QE

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Ben Dyson has made a Submission to the Treasury Commission on their call for further evidence on the effectiveness of Quantitative Easing and how it could be made more effective.

He has addressed three points:

  1. The effectiveness of QE so far undertaken by the Bank of England, and how effective it would be if the programme were to be further extended in the future.
  2. Should other unconventional policy measures have been used by the Bank of England?
  3. Should unconventional policy measures be used from now on?

Read the submission here

 

Here are some extracts from the submission:

“…whilst QE was seen in the press as being the start of reckless creation of money by the state, in reality  it was simply a case of the state taking over the (often reckless) creation of money that is normally  undertaken by private commercial banks through their lending.”

“There was a critical flaw in the implementation of QE. The money created via QE was intended to replace  the money that was disappearing from the real (non-financial) economy, as individuals and businesses  paid down their existing debts. But instead of re-creating the money and injecting it into this part of the  economy, the Bank of England injected the money into the financial part of the economy.”

“…by using newly created money to buy financial assets (bonds), QE has pumped new money into  the financial markets, where it has stayed circulating and inflating prices of financial assets (stocks,  bonds etc.). But it was not realistic to think that this newly created money would ever reach the real  economy or have an effect on employment, economic growth or inflation. The lack of any significant
improvement in economic growth, despite the creation of such huge sums of money, shows that the  money created has not reached the real economy.”

“If the money that was created via QE had been injected into the real economy instead of the financial  sector, then we would have been likely to see immediate economic growth. As an example, a total of  £375 billion has been created as a result of QE. If, over the same period of time, this money had been  spent directly into the real economy (which counts towards GDP and growth figures) rather than being spent into the financial markets, then GDP would have been boosted by up to 6% a year above the level that it has been at.”

“It is worth stating the scale of the wasted opportunity of QE. Over the last 5 years we have had unemployment levels of over 2.5 million i.e. 2.5 million people looking for a useful way to spend their time. We have also had numerous cuts to infrastructure and construction projects (such as the schools rebuilding programme) because of a ‘lack of money’. The £375bn created by the Bank of England was sufficient to employ 2.5 million people full time on the national average salary for approximately 5 years.”

Read the submission here

 

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  • Jack Sadie

    What a splendid submission !!
    It is so clear and to my simple mind incontrovertible.
    I can hardly wait to hear the responses to the questions for Mr Carney, that is of course if they are asked.

  • http://www.facebook.com/people/Gareth-Jones/709007291 Gareth Jones

    I’ve heard rumour that QE has been used to buy financial institutions toxic debt, rather than just bonds, in order to avoid another bank meltdown like we had in 2008. Do you know if there’s any truth in these rumours?

  • Simon

    Good job.

    I have seen several people with interest only mortgages, with no other means to pay the loan off, except for hoping that the value of their property will rise. At least a landlord carries out some repairs for his rent. Interest only loans should never have been allowed, although they seemed a good idea when “Carry on Lending” was in full swing in the early 2000s, driving up property prices. Not wholly relevant to QE.

    We have to get past the mainstream view that public creation of money is bad – “money printing”, therefore mega inflation, and that debt created money by the banking system is good and virtuous, without any associated problems like inflation, boom, and bust. As Ben says in this piece, the amount of debt free money created should be the same as debts that would be repaid, so there should be no inflation. This message needs to get through to the mainstream. Liam Halligan and Ambrose Evans-Pritchard in the Telegraph, and others, describe QE as “money printing”, which may unleash an inflation monster when they need to be pointed in the direction of this article. Ambrose correctly describes the debt deflation in the Club Med, as they are desperately trying to pay back insurmountable debts, but not the correct prescription for fixing it.

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