Bailout money is flowing abroad
Study casts doubt on the effectiveness of Bank of England’s ‘quantitative easing’ policy
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Independent Minds
Much of the new money the Bank of England has "printed" to stimulate the UK economy is ending up abroad where it will be of no benefit to UK households and businesses, according to an analysis of the Bank's "quantitative easing" programme.
The Bank is in the process of purchasing about £75bn of government securities, or gilts, over a three-month period, the first instalment of a massive £150bn programme. The Bank is effectively converting these government securities or gilts into cash and bank balances which, it is hoped, will be used to support lending and spending in the UK and boost the economy.
But City experts analysing the scheme for The Independent say large quantities of money will simply end up abroad because so many of the gilts are held by foreign investors. They fear that they will hoard the cash, which will be of no benefit to the British economy, or dump it in favour of safer currencies, which could cause a run on sterling. More than a third of gilts are owned by foreign entities, official statistics reveal, and there are doubts about how effective the policy will be if that sort of proportion of the new money is diverted abroad.
Colin Ellis, an economist at Daiwa Securities, said: "In principle, creating new money to pump into the economy is the right thing to do when interest rates are already near zero and further monetary stimulus is required. But the Bank of England may, possibly inadvertently, be buying up gilts from foreign investors – who, according to the latest data, held over £190bn, or 36 per cent, of UK Government debt. If the Bank is pumping its new money abroad, it is clearly not going to UK households and businesses, and will not help boost UK demand."
Even if relatively little of the cash leaks overseas there is a strong possibility that the banks, as with previous attempts to bolster them, may end up "hoarding" the cash to shore up their own beleaguered positions, with little extra lending to companies and first-time buyers.
Recent speculation suggests that many UK pension fund managers – large holders of gilts – are reluctant to sell up and buy riskier assets such as shares instead, given the current dire economic environment.
Last week, the Bank made a successful start by buying £2bn of gilts, having received offers for £10bn-worth. Next week, it is planning a further two auctions, of £2bn and £3bn. Yet the Bank does not necessarily know the ultimate fate of the money it is handing out.
Even if a UK banking group sells the gilts, there is no easy way of telling whether the bank is selling those gilts on its own behalf, or more likely, on behalf of a pension fund or institutional investor in the UK or abroad. This uncertainty about the ultimate destination of bank money makes the policy hazardous. Recently, statistics released by the Bank suggested a significant outflow of funds from London over the latter part of 2008, which amounts to some $1trn ($1,000bn), 15 per cent of total foreign deposits.
Sterling has lost more than a quarter of its overseas value since mid-2007, an indication of loss of nerve by investors, some of whom have openly talked about the UK being "bust" and following Iceland's unenviable example into insolvency – hence the jibe doing the rounds in the City that London may soon become "Reykjavik on Thames".
George Soros, the man who "broke the Bank of England" by helping to force sterling out of the exchange rate mechanism in 1992, has been selling or "shorting" sterling for much of the past year or two. The fall in sterling has not, as ministers and the Bank hoped, saved British exports, which are if anything falling as global demand and international trade flows evaporate.
Even Germany and Japan have recorded sharp deterioration in their trading positions – and some believe that if those champion exporters cannot sell abroad then there can be little hope for the UK.
Mr Ellis added: "There may be implications for sterling: for example, if foreign investors that have sold their gilts and then want to switch their funds into one of the two global reserve currencies, the dollar and the euro. All of this suggests that the Bank of England may well yet be forced back to the drawing board and may have to consider even more radical measures in order to stimulate nominal spending. Quantitative easing is easier said than done."
More radical measures might require the Government to inject more cash directly into the hands of consumers, and find ways of bypassing the banking system altogether as it becomes more desperate to get the economy moving and avoid the sort of deflation that floored the US and the UK in the 1930s and Japan in the 1990s.
Vince Cable, the Liberal Democrats' Treasury spokesman, warned: "This may be another failed and ineffective initiative, especially when set against the size of the economy. It might be better if the Government used its shareholding in the nationalised banks to get the banks to start lending."
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Comments
The whole idea of QE is to devalue money, so that people stop hoarding it. Best way to devalue something is to increase the supply.
So, it looks like Johnny Foreigner is the first to hand in his gilts for the new cash. So what? The supply of money will still go up, and the currency will keep on getting devalued bit by bit until we realise that hoarding cash at low rates of interest is pretty dumb and we ought to spend it instead.
When that realisation hits, lets just hope everyone doesnt just run to gold, cos then we will be in a fix for which there will be no monetary cure.
These super rich financiers, Rothschilds, Rockerfellers, secret societies such as Bilderberg, organizations such as Trilateral, CFR, World Bank, IMF, WTO and WHO; have played respective parts financing, creating and profiteering from war. Through their money control of governments commit Atrocities against humanity and actively embezzle, threaten, extort and are robbing the people of the earth of their homes, wealth and the natural resources of their countries. Furthermore they create boom and bust and are bent on further misery for the majority of the populous to consolidate property wealth and power. Their names must be exposed for they are the worst kind of criminals. This is without doubt absolute truth with damning evidence available, but not publicised.
Simliarly the Federal Reserve has nothing federal about it, but is yet another for-profit privately-owned institution, designed to fleece ordinary folk of their money.
Of course, once you have governments consisting of friends and allies of bankers, it becomes so much easier to facilitate money transfers from the poor to the obscenely rich.
The Government are suffering from a failure of imagination and backbone.
Our economy was a Ponzi scheme, one giant get rich quick scam. Only one third of the workforce is employed in any kind of sustainable industry.
Now the house of cards is collapsing, the government's response is a futile and exceedingly expensive attempt to patch up a flawed system. Such polices can only make matters worse and will delay a return to stability.
The fundamental issues go unacknowledged and unaddressed - no one wants to hear that we can?t go back to the way we have been for the past few years.
However, the bulk of the population has been cleverly brainwashed (via neuro-linguistic programming) into believing that consumption is good. Hence consumption will probably continue until there is nothing to consume or the environment becomes so degraded nobody can live.
Alas, dude, that isn't the case. Tax cuts are more likely to be saved than they are spent/re-invested. Now, that is a good thing in the long term, perhaps, but in the short- to long-term it's disastrous. If this is a demand-side problem, and I think its inane to argue it's not, the only effective remedies invovle direct spending by governments--they take up the slack when investors, firms and individuals cannot.
Check out this concise chart: <http://www.economy.com/dismal/graphs/blog/mz_012208_1t.gif>
These figures are from the States, but the general principles are the same. A $1.00 increase in direct capital expenditure by governments produces a $1.59 change in real GDP. Now compare that substantial figure to the comparatively meagre benefits of some tax cuts and the actual DRAWBACKS of certain specific tax cuts. An across-the-board tax cut, for example, produces a pitiful $1.03 for $1.00 cut in taxes; a payroll tax holiday produces $1.29 for every $1.00 cut.
On the other hand extending unemployment benefits produces a MUCH better result: $1.64 per $1.00 of unemployment beneits provided by government.
Tax cuts are DEFINITELY not the way forward...it's a prescribed panacea that has no basis in reality.
I don't see either how extending unemployment benefits helps. Are you suggesting that EVERYBODY should be unemployed and receiving benefits? Isn't that called Communism and hasn't that been proved to be a failure?
Or is this a tongue in cheek comment?
They have already ruined our pensions, ruined our savings, ruined our businesses, ruined our jobs, ruined our exports, ruined our currency and ruined our standards of living. We cannot go on like this. This Government is an unmitigating disaster. We want, we demand a General Election soonest.
Surely it is not beyond the wit of man, although proably beyond the wit of government, to direct lending into the areas we want it to go, OK so we might get a fingers burned here and there, but if you lend against assets they will return their value, may be not this year or next, but government is a long term lender. by lending to the current crop of banks we are just throwing money into a deep pit of mismanagement, greedy fat cats and short term money men.
What business in the UK needs is people at the top who can see past the next quaters dividend, who can look at the long term picture and invest in business and industry that will give a long term return, not an extra 1p on this years dividend.
Gorden (Clown) Brown, now uses President Mugabe's ideas on cash flow.
Gorden (I'm a Clown) Brown, who's self claimed name for Prudence has proved to be as much a fallacy as every other claim NuLabour have made on every subject still considered legal to debate, decided to print money. 0% return on savings, deflation soon to become rampant, banks using tax payers cash for bonuses instead of keeping business flowing.....................
Gorden, your doing a great job. Do union members know millions of their contributions are going on your re-electoral failure.
Cameron will prove to be the same. For twelve years the Conservative party have been the main opposition. For twelve years the opposition has hardly raised it's head. For twelve years the opposition has been quite content to except "ALL" NuLabours policies.
There is "NO" difference between NuLabour and Conservative.
For the older of you, those that have personally witnessed the promises, the lies, those of us that have been used, lied to for years. Is it not time to vote for a radical party? A party that the present greedy, arrogant, pampered MP's fear the most.
If your not satisfied with a lifetime of unfulfilled promises, don't vote for more of the same.
CHANGE!!!!
Before it's too late.
No, frankly. Just because a party is radical doesn't men its not offering empty promises or won't govern with lies and manipulation. They certainly trade in false hope, reducing immensely complex problems into a handful of simplistic, "common sense" solutions that can never be implemented in the real world. Ironically, it takes real common sense to realise that.
The thing to do now is to steady your chin, stop panicking and look at the alternatives that are grounded in messy, complicated reality.
Brynley
Chepstow
So - the money which the Gov is injecting is disappearing overseas or remaining in the jaws of the Banks? No surprise - what massive incompetence on the part of Brown and Darling - who trusted and still trust the private sector and the banks to do the right thing. Once again the rich get richer and the poor get poorer. Abandon ideological blindness and false faith and set up a state financial institution to direct lend to companies and to fund housing. Stop throwing away the monies which future generations will have to repay. Mr Alex Weir, Harare, Zimbabwe
A lot of money leaves the UK through the owners of utilities, PFIs and franchises of trains and buses (these include French and German national or regional governments). The UK has been popular for investors in these fields, as consumer protection is relatively weak and profit very high. It makes sense to buy these back, allowing for social and green transport and energy policies by cross-subsidising the poor, and for savings on health care spending by ending the expensive PFIs. The billions spent so far on banks could have done just that
I am going to conquer. I am going to be flourishing. I am going to be
industrious. Please forgive me everything.
from Geography and Plays by Gertrude Stein - 1922 - page 346 - a piece called Advertisements
Me for starters. Indeed, what else would one expect from a government of such spectacular economic incompetence, with the worst Chancellor of all time and the worst PM of all time bundled up in one super idiot.
Not Flash. Just Mental.
They dont have any policies to be mandated AND Brown has lied or backtracked on just about everything has ever said, so the relevance of having a policy dissapears. The only policy they could have that he would stick too is I will do everything to save my own skin whatever the fiscal or social cost.
We need an election to get rid of these clowns full stop.
I have, both on the Independent and on other newspapers' websites, proposed several times that the best way to implement QE would be to pay an extra, government subsidised, interest to savers adding the amount to their bank deposits using the money created by QE to fund it. In this way, ALL of the newly printed money would end up with our domestic banks. Either the recipients will spend it, or the banks will be able to lend the money to others who will spend. Virtually none of it will leak abroad.
Some specific responses to other posters:
Lestersq,
Yes the idea of QE is indeed to devalue money - but only to the extent of cancelling out any expected deflation. It is not designed to stop people hoarding money, merely to remove the incentive to wait until prices fall before buying when deflationary expectations rule.
Someofusknow,
The Bank of England was nationalised by the Attlee government. It remains wholly owned by the government who appoint the Governor as well as the members of the Monetary Policy Committee.
Rmoya84,
Tax cuts may well be saved by those who receive them, but the money still ends up in their bank accounts - and hence in the banks. The banks can then lend the money to borrowers / spenders, if the recipients don't spend the proceeds themselves.
Stever,
If the price of gold falls, then it is clear proof that gold itself is not a good store of value! If you had bought gold in the early 1980s, as many people did, then you woukld still be showing a loss today in real terms.
The more we - as the working class -uncover in this financial crisis the more we can see just how corrupt the system is.
All one has to do is look at some of this mornings headlines:
"Bailout money is flowing abroad"
"Credit Card Cancer Spreading Through the Economy "
"Eureka! Creative Accounting Solves Banking Crisis!"
I viewed a excellent 25min video by Max Keiser yesterday called "RIGGED MARKETS"
which he made back in 2007. It exposes some of these issues which helps answer how we really got to this point in the first place.
Please have a look:
http://creditcrunchedoutinuk.blogspot.c
How about :
Stop Wasteful IT Projects, most of which benefit non-UK workers.
Stop Hiring even more non-productive Public Employees
Remove 2/3 of the MPs - we are, after all, run from Brussels
Reduce Taxes
Increase Interest Rates for savers to allow them to spend more
The banks have conquered and destroyed Britain and through Brown are imposing reparations on its people that are impossible to pay hence the printing of money. Have any of the idiots who talk of deflation been shopping for themselves recently?
bring back boring but grownup politicians and civil servants and teachers
We are at the normal level of spending now for to-day.
Tomorrow will have its own normal level of spending then.
Going back will not happen.
There is only now and the future which no one can forecast or control.
When will the government and the bank of Englnd learn that they can not control the market.
Its a case of King Canute trying to hold back the tide of monetary depression.
Yes the banks are turnig into a fairy tale.
God help us all.