Bank Of England

Just seen on the news that interest rates will remain the same but that the Bank of England will be pumping 50 Billion pounds into the economy.

Now this might be a daft question, but, where does this money come from? I would have thought that it can only have an effect on the economy if it is "new money". Conversely though, if it was already there would it not have been a stabilising factor anyway? If it is to be borrowed in, does this not just weaken the economy further by extending borrowing?
If this amount of money is so easily available to the Bank Of England why have we so many parts of our society that are screaming out for amounts that are a fraction of this such as the NHS? It also seems ludicrous that ordinary people are picking up the tab for fixing the banks through increased taxation, rising prices and wage freezes whilst this sort of money appears to be readily available to the Bank of England!

I suspect that I know the answers really in that the whole system is one huge credit roundabout that has to periodically refill its coffers via a slump or "downturn" or recession!

It called Quantitative easing where The Bank of England can pump money into the ecomony because it runs it's own system. This is the problem for countries in the euro as that is controlled by the ECB (European Central Bank) that is not controlled country by country. The US can do the same as they have their own central bank and are not tied to other ecomonies.

Usually, BoE try to raise the amount of lending and activity in the economy indirectly, by cutting interest rates. Lower interest rates encourage people to spend, not save. But when interest rates can go no lower, the BoE's only option is to pump money into the economy directly from their reserves on a temporary basis. That's how I understand Quantitative Easing .

It would be interesting to see where it is too...

Sadly the previous government did actually apply the phillosophy of the O/P but the money did not reach the end user nor did it reach the poor dinner lady's and nurses. It got held up somewhere... I'll let them tell you where.. :)

according to the dinnertime news, the BoE "electronically" creates this money and passes it on to companies etc, who in return give assests back to the bank?

so this money doesnt exist?

i have long thought of these huge numbers that national and world economies deal in to be no more than binary numbers floating around in the ether, so who owes what to whom...and who keeps track of every pound / dollar?
this is too much for my tiny brain !

My understanding is it's money they electronically create for the purpose of buying financial assets - the problem is it can lead to inflation (I think), it's a delicate balancing act...

Its all good news for a firm that changes waste plastic bottles into re- usable plastic for the packaging industry, less to landfill, less demand for natural resources, that firm can now go forward with a bank loan for new machinery to trade, and employ rather than dismiss any staff...see the news...

Mind you there's nothing like a Quango to confuse everyone. Technically it's not owned by the Government but the Treasury solicitor's on the Governments behalf. As I understand it that is how it has been IPO'd as a separate entity. In that way it can buy Government gilts and bonds and release money to the Treasury. The premise being that the BoE sell these on at a profit, thus securing more capital. It also means that it can buy more secure private bonds rather than the riskier banks.
An inflation target is set by the Chancellor but interest rate decisions are made by BoE Monetary Policy Committee to try and meet the target for overall inflation in the economy. If the interest rate is heading above target they raise the interest rate and sell assets. If it's below the target then it buys assets... And that my friend is capitalism ;-)

Bank of England is who countries borrow money from (y'know, the whole national debt thing) and are in no way apart of the Government. In the US it's called the Federal Reserve. There is so much corruption in there!

What ever at least they are trying to do something but it's good news for those innovators who are brave enough to see they way forward.

"Now this might be a daft question, but, where does this money come from?"

I think it comes from Loughton, where it's printed.

But as it's unlikely that everyone holding B of E banknotes turns up to ask the Chief Cashier to honour the notes promise to pay the bearer on demand the sum of the notes they can print as much as they like.

"I think it comes from Loughton, where it's printed. "

Spot on D-2012...!

As we no longer have a Gold Standard, or to put it simply, as we no longer have to have the same amount of currency in circulation as there is gold in the vaults at the Bank of England, they simply print more money!

The problem with that is that the more they print, the more it increases inflation.

Where does the money come from? The B of E can just produce it just by writing down figures in a ledger (figuratively speaking)

Quantitative Easing - In theory the 'Central Bank' (in the UK it's the Bank of England) injects money into the economy by 'buying' loans from businesses. Unfortunately in the UK this has translated into the B of E buying back 'gilts' (Government Bonds) from large investors who are often 'the banks'. In theory this will allow 'the banks' to lend more money to business to expand and grow the economy, in practice 'the banks' are using it to build up their own capital (as is now required by new banking regulations) and very little is getting out where it would help 'UK PLC' to grow. In the USA, the Federal Reserve (the Fed) actually buys direct from large businesses by purchasing their 'bonds' (debts/loans). and so stimulates the economy

So, as usual, in the UK the bankers get all the money and 'joe public' pays more in taxes. It's a great pity we don't seem to have any intelligent & honest economists in our government. The fact that the UK taxpayer owns RBS (one of the biggest banks in the world) seems to have escaped the notice of most politicians. In theory, we - the taxpayer - should be able to instruct RBS to increase the amount of loans to small and medium sized businesses but our wonderful, overpaid, greedy, incompetent politicians appear not to understand that the 'owners' of a business have a right to determine how a business operates.

SQL

SQL,

I am not trying to be picky , but the taxpayer owns 82 % of RBS, and we dont know the full story of the deal that Labour made when it was done. Im not even sure how much influence this coalition can have on whatever deal was done.

It is Monopoly or Toy Town money, notes printed by the Bank of England which have no security behind them, and are conjured out of thin air. They are actually a devaluation of the existing currency. Germany had the same idea in the 1930s and it resulted in citizens carting a wheelbarrow of high denomination (but virtually zero value) notes to buy a loaf of bread - if they could find any.

Here is the Bank of England's explanation of how it works:-

"This policy of asset purchases is often known as 'Quantitative Easing'. It does not involve printing more banknotes. Furthermore, the asset purchase programme is not about giving money to banks. Rather, the policy is designed to circumvent the banking system. The Bank of England electronically creates new money and uses it to purchase gilts from private investors such as pension funds and insurance companies. These investors typically do not want to hold on to this money, because it yields a low return. So they tend to use it to purchase other assets, such as corporate bonds and shares. That lowers longer-term borrowing costs and encourages the issuance of new equities and bonds."

Ah, I see, rather than not being worth the paper it is printed on, it's actually not worth the electron it is generated by. That's all right then.

Pwyll,

This is not personal dig at you but on closer examination the Bank of England's explanation was obviously written by a PR person well versed in Morris Dancing (or some similarly useful occupation).

The BofE buys back the 'gilts' from - let us say - a pension fund. So the pension fund has bought from and then sold back to the BofE a bit of paper (no doubt the pension fund makes a profit on this transaction). The pension fund then goes and buys equities or corporate bonds ??? Why not do that in the first place?

Also this totally ignores the fact that pension funds are required in law to hold a percentage of their funds in 'gilts' as security (the UK government cannot go bust!).

It should be that the BofE buy bonds (lends money to) direct from big business but it doesn't happen in the UK and so 'Quantitative Easing' just puts more cash into the financial sector - and that leads to ?? (hint - Germany in the 1930s).

SQL

'Quantitative Easing' kind of reminds me of the way Gangsters show you the goods, they have a suitcase, they open it show you the money, shut it then hand it over to get the contraband, only to find that when you get home, you can see the money on the top but underneath its just wads of paper... they can fool some of you... some of the time...!!

Might cause a hyperinflation and knock on effect of low wages ,and higher property values , so high in fact will they sour by comparison such low wages ... will mean no on can or will be able to afford to buy them...

Quantitative Easing is an agreement to print money. The country is already bankrupt and the need to pay the country's debts can only be met via this method. Without it, the government will not be able to pay the £185 billion it needed to borrow owing to an incorrect forecast on growth to begin with which they based their calculations on! Capitalism is being propped up and the markets are false as no-one wants to see the markets drop; if they drop, the government will not be able to afford the loans it has already borrowed at a set rate of interest from the IMF. There is no true free market; it is falsely being managed and it is no different to Greece.

The government is tied to printing money for the EU owing to being a member and therefore does not only owe money to the IMF.

Quantitative easing can also mean people getting close to retirement might get quite a bit less from their insurance companies then they might have got. it can also erode the interest paid on peoples savings. I guess the still continue to have money rolling in though.

QE has nothing to do with the Government, it is to do with the ecomony. The Bank of England and the Government are two entirely separate entities. Decisions are made by the Monetary Policy Committee (MPC). The BoE can choose to purchase Government bonds, just as it can decide to purchase from any other outlet it sees fit. It aims to keep to the target of the CPI. It does not involve printing more banknotes. Furthermore, the asset purchase programme is not about giving money to banks. Rather, the policy is designed to circumvent the banking system. Without extra spending it could undershoot the target which could force the markets to stagnate.

The economy is just a 'catch all' word. The Bank of England and the Government are supposed to be separate but I would dispute that they are. Agreements have been made. Thank you for agreeing that the market is managed. Who set the target?