Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Is a Stock Market Crash Imminent or Does this Stock Market Bull Still Have Legs - 25th Apr 18
Gold Price Focusing on May Cycle Bottom - 25th Apr 18
Cash “Vanishes” From Bank Accounts In Ireland - 25th Apr 18
Is the Malaysian Economy a Potemkin Village - 25th Apr 18
Land Rover Discovery Sport Rattling / Knocking Sounds From Car Pillars - 25th Apr 18
China Takes the Long View on Gold-Silver... and So Should You - 25th Apr 18
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UK Gambling Statistics - What the Numbers Say - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Bank of England UK Quantitative Easing Money Printing to Hit £275 Billion 2010

Interest-Rates / Quantitative Easing Jan 08, 2010 - 09:13 AM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe Bank of England cut UK interest to a historic low of 0.5% in March 2009 for the objective of boosting the economy so as to enable it to SELL government bonds, however this did not work as bond auctions started to FAIL in March, which therefore triggered the Bank of England hitting the panic button and igniting Quantitative Easing or Quantitative Inflation, having received the green light from the Government a few months earlier.


The initial print run was for £75 billion which has been steadily extended to £200 billion to date. Nine months on the phrase Quantitative Easing is bandied about in the press as though it is normal, however I cannot emphasis enough how big an event Quantitative Easing aka Money Printing is, QE is the biggest monetary event in the Bank of England's 315 year history, as once ignited it is difficult to wean an economy off of QE as Governments fail to control the budget deficits that become endemic which demands a continuance of Q.E. and therefore risks igniting Quantitative Inflation and currency / market panics.

QE Huge Boost to GDP

I have received a few emails critical of my strong UK growth forecast for 2010 of +2.8%, mostly from those that expect / hope for a double dip recession that would allow them a second opportunity to buy into the stocks bull market at near the bear market lows having missed the birth of the stocks stealth bull market last March, in that light the following may enlighten readers on the huge boost to GDP during the past 9 months:

Whilst approx £180 billion of the £200 billion of QE authorised to date has been deployed over the past 9 months. However the true implication of QE on the economy can be better appreciated when setting it against the recession that has seen a contraction of some 6.2%, as QE of £180 to £200 billion is equivalent to GDP of 14% to 16% i.e. far greater than the loss of GDP during the 15 month recession, and not forgetting that QE is just one part of the programme of huge Government deficit spending (14% of GDP) and near ZERO interest rates (Savers subsidised bailouts) and the over £1 trillion of bailed out banks bad debt liabilities, then direct capital injections of over £80 billion (6% of GDP) illustrates the extreme lengths to which the authorities have gone to, to bring the recession to a halt, which sows the seeds for above trend growth during 2010.

The Bank of England's Route towards £200 billion QE

The Bank of England embarked upon a programme of printing money or Quantitative Easing during March 2009 with an initial print run of £75 billion of a total set at £150 billion in an attempt to wave the central bank magic wand to increase the supply of credit. However as I warned at the time (5th March 2009: Bank of England Ignites Quantitative Inflation) that once started the Bank of England would continue printing money right into the May 2010 General Election targeting an print run of as much as £450 billion and therefore igniting Quantitative Inflation during 2010.

Virtually all of the mainstream press swallowed the Bank of England's hints and winks that Quantitative Easing had ended at £125 billion during the summer months, which at the time I stated was not possible (8th July 2009: Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to Rise)

This confirms my view that the Bank of England will continue printing money into year end to beyond the current arrangement of £150 billion and probably as high as £250 billion.

I projected a Quantitative Easing total towards £250 billion by the end of 2009 with the actual total of £200 billion of money printed as a direct consequence of the Labour Government's objective of both aiming to maximise the number of seats retained at the next General Election as well as to deliver a scorched earth economy to the next Conservative Government. Therefore the Labour Government also wins because it gets to hide this Quantitative Easing debt as theoretically purchases and sales cancel each other out in the fantasy land of central banking accounting and feeble government auditing. I.e. by magic approx £200 billion of new government debt has vanished into thin air, for if had not been hidden under the carpet then UK Gilt interest rates would be much higher due to the increase in supply of approx 33%.

Asset Price Implications of the Potential End of Q.E.

Quantitative Easing being brought to an halt / unwinding of purchases would hit asset prices hard, i.e. we would see the Gilt bond market impacted as instead of purchasing 'most' of the government bonds the Bank of England would become its biggest seller with a lot of supply overhanging the market this would send the bond market into a tailspin which would follow into the stock market that has soared in good part as a consequence of Q.E., similarly the bounce in UK house prices would soon evaporate. This suggests whilst the BoE talks of ending Q.E. I just don't see it happening whilst the Government runs a budget deficit anywhere near as large as 15% even half of this would not be enough to end Q.E. So it looks like Q.E. will be here for many years as I originally voiced before Q.E. began. However as the asset markets stabilise at higher levels, the Bank of England rather than printing new money may entice banks and financial institutions to purchase bonds rather than further drive up stocks which is therefore suggestive of a tough year for other asset prices.

Bank of England Forcing Banks to Buy Gilts

The official line of QE was to boost bank lending, however Q.E. is apparently having the opposite effect at the commercial banks as the Bank of England's twin objectives of monetizing government debt and for the the bankrupt banks to improve their balance sheets is in effect forcing the banks to BUY government bonds as Gilts are seen as the safest asset class and therefore boosts the Banking sectors credit worthiness in terms of capital ratios so instead of lending tax payer money loaned to the banks, the banks are using tax payer money to buy government bonds and on short-term deposit at the Bank of England.

Surely this must be by design as the Bank of England's primary purpose is for the orderly management of the Government debt market hence this is ensuring the maximum demand for a huge amount of debt issuance estimated at £225 billion for the current financial year, which includes new debt and maturing debt rolled over.

Continuing Budget Deficits for Several Years

Even if the next government manages to implement significant policy measures to cut the annual deficit by £80 billion year to approx £100 billion by means of tax rises, spending cuts and revenue from growth, against the Labour governments target of £162 billion. A deficit of £100 billion would still equate to about 8% of GDP, so would still require more money printing to monetize government debt of which approx £60-£70 billion would need to be monetized.

QE Money Printing 2010 Conclusion

QE will continue during 2010 until the Bank of England is sure that a. the bankrupt bailed out banks no longer risk financial armageddon, and b. That government debt issuance does not risk a Gilt bond market collapse.

My original estimate was for QE to rise to £450 billion over the next 5 years (from 2009), therefore I expect we will pass the half way point during 2010 as I expect the Bank of England keep printing printing money for several more years.

The Bank of England's December 09 announcement that it would now buy and sell corporate paper to me suggests that the Bank is considering selling corporate paper bought during the past 9 months in favour of supporting the Gilt bond market. Therefore I expect this coupled with further incentives for banks to buy gilts means much less QE during 2010 than 2009, which suggests a target total for 2010 of £275 billion, whilst at present academic economists and mainstream press suggest that there would be no further Q.E. beyond £200 billion and even that the Bank will seek to unwind QE during 2010 i.e.

Bank set to close the £200bn printing press - Independant 8th Jan 10

The Bank of England's £200bn quantitative easing (QE) experiment is set to come to an end next month, with the Monetary Policy Committee (MPC) yesterday voting to leave the scale of the scheme on hold. The remaining money in the programme will be exhausted by the time of the MPC's February meeting and it is then expected – barring shocks – to take the economy off its life support system.

Though the mainstream press said basically the same thing last July when Q.E. was at £125 billion, as mentioned earlier.

Money Printing Theft of the Value From Holders of Existing Currency

Quantitative Easing is not a free lunch, the price of which is being paid by savers as the supply of money increases so does it decrease the value of all currency, this is most clearly evident by two indices,

1. Sterling exchange rate against other currencies, though all currencies are engaged in competitive devaluation so therefore probably something like gold is a better indicator in this case 2009 saw a devaluation of about 20% with more to come during 2010.

2. The inflation indices of which the Consumer Price Index is the governments preferred measure. Throughout 2009 and into 2010 we have seen the base interest rate BELOW the rate of CPI inflation which means NEGATIVE real interest rates i.e. your rate of interest is below the rate of inflation. This means that the bill for low / negative interest rates is being paid by Savers who along with all tax payers are being forced to pay for the bankster's crimes as tax payer bailed out banks such as HBOS pay a pittance on instant access savings accounts of as little as 0.1% against a requirement of 2.3% just to cover CPI inflation of 1.9% plus the 20% tax charged on interest.

Implications for Interest Rates

The Bank of England is likely to be reluctant to raise interest rates whilst Q.E. continues. Which therefore suggests rates will only rise when the Bank of England is forced to raise rates by the markets as a consequence of risks of bond purchases. Which suggests 2010 is going to be a difficult year to forecast interest rates.

UK Interest Rate Forecast 2009

This analysis is part of a series of analysis that will resolve in an Interest forecast for 2010 in the next few days, ensure you are subscribed to my always free newsletter to get this in your email in box.

The UK interest rate forecast of early December 2008 for 2009 forecast that UK interest rates should decline to 1% (from 3%) by early 2009 and remain there into the second half of 2009. However following the cut to 0.5% in March 2009, the Bank of England has continued to pursue an artificial banking system by keeping interest rates at an extreme historic low of just 0.5% into the end of 2009 so as to flood the bankrupt banks with liquidity to enable them to rebuild their balance sheets by overcharging customers against the base interest rate and manipulated interbank market rate of 0.66% against rising real market interest rates which have been in a steady climb since March 2009 which increasingly means that the base interest rate has become irrelevant to the retail market place as explained in the article - Bailed Out Banks Not Lending, Sitting on Tax Payers Cash.

Source: http://www.marketoracle.co.uk/Article16333.html

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market . Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules