Why didn't quantitive easing result in higher inflation?

[Dave]

Why didn't quantitive easing result in higher inflation?

[wedgetail]

didn't it?

[Maz]

Dunno.

It's a good question that I bet has an easy answer.

[eaglejez]

was it expected to ? Did anyone really know what was going to happen especially given we are in pretty unchartered territory

[mik59]

Is it because the following cycle has not reached its end point? Nominally the process should be that financial institutions use cash from selling their gilts to buy shares and bonds, and the companies selling pay into their bank accounts, thus boosting banks' funding for loans. But if banks haven't been lending, including because of depresssed demand, then the cycle isn't completed with reduced brrowing costs being translated into increased spending.

Ros Altmann, director general at Saga Group, has pitched in on the debate raised by prospect of more QE. She believes the damage to pensioners' income through QE is likely to have a bigger impact on spending than the freeing up of money in the economy. She said: "There has been no official assessment of the damage done by QE to corporate and consumer spending via its impact on pension deficits, annuities and income drawdown.

"QE has forced firms to fund their pension schemes and forced over a million pensioners to buy much lower retirement incomes. Low interest rates, high inflation and deteriorating pensions have lowered growth and employment, but the Bank has so far failed to quantify the effects."

[Adlerhorst]

I think what you should be looking at is what would have happened to the money supply had we not had QE. Most sensible estimates I saw said it absent QE money supply would have contracted 10-15%. Which is frightening.

[strawberry mivi]

It's funny but seeing the words 'financial institution' and 'guilt' in the same sentence...

[eaglejez]

Originally Posted by strawberry mivi

It's funny but seeing the words 'financial institution' and 'guilt' in the same sentence...

why

[weltklasse]

Originally Posted by eaglejez

why

total whoosh

[OscillateWildly]

Part of the point of QE is to ensure that inflation stays at the 2% target - without it you would be in a deflationary situation.

That the inflation rate is still low despite QE shows how bad the situation is.

[Dave]

Originally Posted by OscillateWildly

Part of the point of QE is to ensure that inflation stays at the 2% target - without it you would be in a deflationary situation.

That the inflation rate is still low despite QE shows how bad the situation is.

Yes, I think this is along the right lines.

So, let's print a **** more money?

[SE25 exile]

Originally Posted by OscillateWildly

Part of the point of QE is to ensure that inflation stays at the 2% target - without it you would be in a deflationary situation.

That the inflation rate is still low despite QE shows how bad the situation is.

Precisely! We now have old fashioned Tory stagflation!

[selhurstparkflyer]

The easiest explanation is the Fischer Equation (which is a truism not a theory)

PQ = MV (Price Level x Output = Money Supply x Velocity of money)

Monetary Theory states that Output and Velocity are fixed so an increase in the Money Supply leads directly to an increase in the Price Level: inflation.

Trouble is with bank confidence down hugely and consumers increasing their savings rate, the fall in velocity of money has outweighed the increase in the money supply. And inflation rises are due to the cost of imported goods, not domestic demand, which is something else that Monetary Theory forgets to account for.

Hope that helps.

What also must be remembered, is that rather than lending out the cash they have been given (which would increase domestic demand) they have used it to boost their balance sheets, including buying bonds and shares, which partly helps explain why the FTSE 100 and American S&P Indices are at levels that don't make a lot of sense, given the dire straits of the US and UK. In other words, its a bubble.

[eaglejez]

Originally Posted by weltklasse

total whoosh

Er, not really....

[eaglejez]

Originally Posted by selhurstparkflyer

The easiest explanation is the Fischer Equation (which is a truism not a theory)

PQ = MV (Price Level x Output = Money Supply x Velocity of money)

Monetary Theory states that Output and Velocity are fixed so an increase in the Money Supply leads directly to an increase in the Price Level: inflation.

Trouble is with bank confidence down hugely and consumers increasing their savings rate, the fall in velocity of money has outweighed the increase in the money supply. And inflation rises are due to the cost of imported goods, not domestic demand, which is something else that Monetary Theory forgets to account for.

Hope that helps.

Like it

[DANGERMOUSE]

Originally Posted by SE25 exile

Precisely! We now have old fashioned Tory stagflation!

The Bank of England started this policy in 2009, however.

[OscillateWildly]

Originally Posted by Dave

Yes, I think this is along the right lines.

So, let's print a **** more money?

The BOE argue that the mechanism by which QE injects money into the system avoids the inflationary effect of simply printing money. In one sense, QE doesn't atcually increase the money supply (at least not in the traditional sense of the word.)

But, there could well be a situation where, as the economy recovers, the target is over shot and IRs have to be raised to pull back.

As it stands, that would be a lovely problem to have to deal with.

[weltklasse]

Originally Posted by eaglejez

Er, not really....

if you say so....

[selhurstparkflyer]

And Mik, Ros Altman has one agenda: increasing Saga profits, which is why she paints every policy that dampens pensioner incomes in the worst possible light.

What she fails to consider is that for the current malaise we have, even with falling annuity payments (which affect the richest pensioners most by the way), the over 65s have paid far less than everybody else.

[selhurstparkflyer]

Originally Posted by OscillateWildly

The BOE argue that the mechanism by which QE injects money into the system avoids the inflationary effect of simply printing money. In one sense, QE doesn't atcually increase the money supply (at least not in the traditional sense of the word.)

But, there could well be a situation where, as the economy recovers, the target is over shot and IRs have to be raised to pull back.

As it stands, that would be a lovely problem to have to deal with.

Not quite.

It does increase the Money Supply as banks now have cash rather than bonds, which now sit on the BofE's books and against which our money is guaranteed.

Where it differs from simply printing money is that, should the BofE want to reverse the process, it can sell the bonds it bought (and more if needs be) thus sucking money out of the system and increasing the supply of bonds, which will raise long term interest rates. The worry about this is that it could create a run on bonds, such as happened in 1994 and 1999 and lead to severe spikes in interest rates. It's a fine balancing act.