Stimulus and QEII – what will happen?

So will governments launch another Stimulus, Stimulus II, paid for with QEII and if so what will it achieve?  There certainly seems to be a rising chorus of financial experts and banks around the globe in favour of it.  It will almost certainly happen in the U.S. and has already begun in Japan. Europe is divided and has other worries anyway.  So let’s look at what will happen here if the BoE does QEII.

If they do it will be several tens if not an hundred billion pounds of new paper money printed up in order to buy bank and perhaps corporate bonds.

So what will happen?

Well let’s start with what we know.  The BoE will print up new pounds.  This money will be used to buy bonds from banks and possibly non-bank corporations.  Those bonds are debts/IOUs.  The BoE has never stopped buying bonds but has for a while restricted itself to merely topping up its holdings, replacing bonds that mature with new ones.  QEII will increase the total amount of debt held by the BoE and the number of pounds in existence.

Since it is QE rather than selling new sovereign debt our level of debt won’t increase. But the amount of paper money will greatly increase.  What effect this will have depends entirely on where the new cash goes and what it does there.

OK that’s it for what we know.  Now we pass on to what is ‘likely’.

Will it deflate the value of the pound?  It is likely it will at least in the short term.  This will be trumpeted as a boon to exporters and export growth.  However, after the ministers slide back into the crevices they came from, any longer term devaluation will depend on what other currencies do. Given that everyone is trying to devalue, the likelihood is that the pound will not retain any devaluation for long.

So what else will the money do?  Most of it will be used to buy bonds being held by the banks.  Those bonds are likely to be their own bonds (their own debt), bonds of other banks, sovereign debt they are worried about, and maybe bonds from other corporates. By buying them we take on any risk of default, while the banks get capital guaranteed by the tax payer – new cash. Basically it is cleansing more debts from the banks but calling it something other than what it is.

So the banks will have new QE cash. Hurrah! So what?  The question is what will the banks and corporations do with the new cash?  The answer for the banks so far has been not very much. And this is the massive problem with claiming that QE stimulates recovery.

Money given to the banks has done very little to stimulate the economy. Hence the state we are still in. It helps the banks but virtually no one else.   A great deal of the money they have deposited back at the BoE where we, the tax payer, pay the banks interest on it.  This helps ONLY the banks.

Some of it they have held on their books as capital requirements against loans. ONLY helps the banks.  Some of it. I think, they have used as cash flow to replace the money which is not coming in from non-performing loans.  This has helped keep those loans from imploding.  This ONLY helps the banks. We are paying off what they owe.

Some of it they have used to speculate in the markets especially the currency markets. Which ONLY helps the banks and hurts tax payers everywhere.  Is this what you want you want? QEII will increase funding all of these socially pernicious activities. And that leaves just the little that they have used to make loans.

What we can tell from this is that despite very large sums of government stimulus, not very much of the money has actually gone in to the economy.  Most has sat in the banks.  And that which hasn’t, has been used to destabilize currencies.

Why was more not lent out?  Several answers.  The banks will claim there are not enough ‘good’ borrowers.  No bank wants to lend in to a falling market. It’s too risky. They would rather play no risk-free games front running government bail outs and bond buying.

When they have loaned money it has tended to be abroad in emerging markets. This is part of what I wrote about yesterday.  Thus another ‘stimulus’ will make the flood of hot and cheap money flowing in to emerging markets worse.  Unless the governments of those countries block the flow.

What it means back home is that most of any stimulus we are paying for, is doing and will do very little stimulating here. It will stay in  banks or go abroad.  The banks will make profits from the money but not anyone else.