bank of England cash injection

Quantitative easing is just increasing the money supply: think of it as like 'printing money', though since a tiny proportion of money in the economy is notes and coins (most is numbers on spreadsheets, or documents of entitlement), nothing actually needs to be printed. But note that all increases or decreases in the money supply are ordered by the Central Bank, but take place through high street/commercial banks.

So the above bit of the article explains how this process works:

- problem is that banks become averse to taking risks with lending, since they hold assets which may turn out to be 'bad' - i.e. they hold assets which may not deliver the expected return, including title to extant loans such as mortgages or stocks and shares - or which have already been devalued. Further, the general climate casts doubt over whether businesses and individuals will be able to pay back loans if the banks did make them.

- risk of lending is reduced if banks have more liquid assets (i.e. money, whether in physical or ledger form, stuff that can be spent immediately). They can keep reserves in case of some form of crisis on their balance sheet, and they generally have more money to lend.

- so the Central Bank gives liquid assets to the high street/commercial banks in exchange for (non-liquid) 'assets'. I'm not sure exactly what the non-liquid assets in question will be: it might be that they are created by the high street/commercial banks explicitly for this purpose: i.e. an agreement to pay the money back to the Central Bank at a certain rate, under certain circumstances. Or it might be stocks and shares, or bonds. I don't know enough about it to say.

not really the case - the money 'created' is used mainly to buy back gilts (govt borrowing) that banks and insurance companies own, so the companies in question swap one highly liquid asset (gilts) for another highly liquid asset (money) - there are three main reasons underpinning the logic (of the bank of england) for doing this:-

- the hope that the companies who have sold their gilts will then do something 'useful' or 'productive' with the money that they receive in exchange for their gilts, i.e. lend it out to consumers or businesses or invest in equity of other companies (or ironically buy more gilts freshly issued by the govt, see the last point below) in the hope that this will stimulate the economy through the demand created by the money in the hands of consumers or businesses. this is the (mistaken) monetarist belief that the supply of money in and off itself can be productive (of value) - but even for it to have a glimmer of chance of working in the first place the additional money has to find its way out of the banking/financial system and into the wider money supply, which so far in the UK it hasn't - the money supply (excluding the finance system) has hardly budged since quantative easing started because the money created ends up being put back on deposit with the bank of england (rather than being multiplied through circulation/lending in the economy) so it just sloshes around within the financial system

- the act of buying gilts in the market by the BOE creates increased demand for these assets, this pushes the price of them up and the yield % (interest earned by holding them) down - as a lot of other interest rates and borrowing rates in the market are linked to the yield on gilts so if the yield on gilts go down then the interest rates on lots of other things go down which has the impact of lowering market rates overall making money cheaper and then supposedly more people/businesses will decide to borrow now that it's cheaper to do so (assuming someone wants to lend it to them which they don't). like above though, the yield on gilts is (or was a few days ago) actually higher than it was prior to the start of quantative easing so based on this objective it could also be said that it's had no imapct (although it's impossible to tell what the yields would be if quantative easing hadn't been done)

- the last, and the dirty little secret of quantative easing is that it clears the way for the huge issuance of govt debt that will be needed over the next few years to fund state budget deficits, ensuring that investors are still willing to buy UK govt debt - if you cut out all the bits in the middle this effectively amounts to what's known as monetising th debt, basically printing money to fund budget deficits

all this is a frantic attempt focussing on the sphere of circulation alone to aovid the inevitable devaluation/destruction of capital (both real and ficticious) that religiously comes with each bout of overaccumualtion, the idea is that you can stave off the devaluation of capital through the devaluation of money through generalised inflation, but ultimately even if they do end up being 'successful' and generating inflation the measures that they ultimtately need to take to deal with that will end up devaluing capital anyway - they never seem to understand that they've ultimately no choice but to let crisis do what it does (and has to do) - to irrationaly rationalise an irrational system and reestablish value relations at a level that allows for the whole thing to start again

not directly, but ultimately money created to buy back govt borrowings from banks/insurance companies allows for more borrowing to be issued into the market by the govt which in part will go towards funding budget deficits in future years which in part exist because of spending on education/NHS not being covered by 'normal' sources of govt revenue, tax receipts etc..

that part of things however is not something that the govt or BOE ever aknowledges as it's too close to zimbabwe type situation of creating money to spend - so the official line is that the creation of money is all just about reigniting circulation and liquidity etc..

last year's TARP here in the states was exactly this mechanism. from wiki:

so you're exchanging "bad" money for "good".

fair enough, the classes of assets bought are different in the case of the US and the UK. tho' broadly the concept is that the govt "pumps money into the system" by buying up one class of assets (whatever it be) with actual cash, which then hopefully is lent out. but i don't know that the money used by the UK and US treasuries were different, the one created out of nothing, the other already existing. can you give a link?

Monetarists don't believe that money can be productive of value. Monetarists believe MV = PY i.e. (Money Supply)X(Velocity of Money)=(Price level)X(Output). And they believe that if you increase the money supply you just increase the price level (i.e. cause inflation) and that contrary to Keynesian theory (Phillips curve etc.) this will not result in increase output. So monetarists advocate a steady money supply because they believe inflation can have a negative effect on the economy but can't affect the real economy in the long run. (FWIW there have been pretty much no monetarists since the mid-80s, economists are all most all either new classicals or new keynesians now.)

That said, I'm a bit confused oisleep by what you're actually saying. Are you saying that monetary policy, i.e. changeing the money supply and the interest rates has no effect on the real economy? That an expansionary monetary policy can't stimulate the economy?

To be clear. Monetary policy can stimulate the economy. As I wrote elsewhere:

So, to answer Jacks question, what increasing the supply of money does is decrease the interest rate making it easier to borrow. This then stimulates the economy.

How this is done is by printing money and using that money to buy bonds. This is by the way all perfectly normal, this is not an innovation of the crisis. This has been going on for years and years.

And this whole OMG they're just printing money is 90% media hysteria. Seriously, who the fuck do they think prints the money. The Bank of England, it says so on the money. The fact that the boe is printing more money is in order to stimulate the economy. And its not all that odd.

yes (i mean, same with the US treasury and economy), and i'd be happy to hear an explanation from anyone here about that

The problem is that the converse of this is not always true. Companies always like cheap money but that doesn't mean they will invest it productively, since they risk losing principle (which one assumes they would have to pay back even if they got an interest free loan). So easy money leads to activity but that activity is often relatively "speculative" rather than "productive" - this isn't different than the recovery from the last recession, except for the scale.

You're right that the tactics of the central banks aren't different from earlier times. The main thing that's different is, again, the scale relative to the size of the economy as a whole. These tactics do, indeed, get "the economy" moving to one degree or another, just less and less effectively when so investment is already speculative, when there are already so many misdirected resources, etc.

The crux of my point is contained in what I wrote below:-

the (mistaken) monetarist belief that the supply of money in and off itself can be productive (of value)

this is the crux of of everything - and we can set aside definitions of monetarism and the like for just now and concentrate on some basic facts:-

1. quantative easing is part of monetary policy

2. there is a fear at the moment of widespread deflation through the devaluation and/or destruction of value as overaccumulated productive/commodity capital and ficticious value struggle to face off their necessary devaluation

3. quantative easing (i.e. a monetarist tool) is being employed to try to prevent (2) above

4. the prevention of devaluation (on a societal level) can only work by either creating new value or preventing the devaluation of existing value that is not sustainable - which amounts to the same thing, the creation of value

Therefore the belief by those employing the measure is that the monetary policy/supply of money/increased lending can be in and off itself productive of value - supply of money or more importantly the circulation of interest bearing capital to allow value to efficiently traverse the circuit of capital is clearly a necessary condition for the expansion of value, but it's not a sufficient one - this is the point being made.

If you, or anyone, believes that the supply of money and attempts to increase the circulation of interest bearing capital in and off itself is creative of value (real value, not speculation and ficticious value as Red Hughes points out above) then that's falling into the trap of fetishising money and accepting the surface level appearance of things, which is an odd thing to do for someone who lists Capital as their favourite book - as marx points out (quotes below not exactly in relation to the same issue as we're discussing but captures the essence of the issue):-

But the point of all this is that the nature and location of the problem faced is within the sphere of production and the fact that with over accumulation we get to the stage where although not leading to an absolute fall in the mass of profit/surplus value produced at a societal level, the increase in surplus value extraction does not keep pace with the expansion of capital value that seeks to capture a share of it - at this stage and at some point (no matter how much it can be delayed in the short to medium term through monetary or fiscal policies) something has to give and that is the requirement for existing capital to be devalued/destroyed to re-equilibrate value relations and allow for 'balanced' accumualtion to resume. Now the point of saying all this is to show that the problem relates to the sphere of production and the production of value, but manifests itself in the sphere of circulation - attempts are then made within the sphere of circulation to solve the problem (i.e. monetary policies and focus on trying to ensure lending is increased etc. all assuming that this in itself can be productive of value) but these are doomed to failure because they purely focus on the sphere of circulation - whereas the underlying production of real value, in the sphere of production, is the crux of the problem

within capitalism, value is created in production through the transformation of nature by labour into use values, not through clicking buttons at the central bank and engaging in transactions in the market/sphere of circulation (or through unsustainable fiscal policy) - sure the sphere of circulation is just as necessary a component as that of production to allow value to expand itself, but the belief that the problem in one sphere can be solved by focussing entirely on activities in the other sphere portrays a complete misunderstanding of the process of capital - equally it's fundamentally incompatible with the labour theory of value and all that rests upon that (exploitation as the sole source of profit etc..)

so all these monetary (and fiscal) approaches are destined to ultimately fail as they fundamentally miss the point of what is going on - sure they can stave off further devaluation for a while through the creation of other bubbles and the ficticious value that they produce, but this only serves to displace and postpone the problem, spatially and temporally, for a certain time or at best allow for a more controlled and orderly devaluation stretched out over a long time frame

that's the thing about the credit system it helps displaces contradictions within the circuit of capital, and although all links, bar the most important one, in the realisation process of capital can be brought under the control of the credit system and inputs can be acquired and outputs disposed of with the aid of credit, it's no substitute for the actual transformation of nature through the concrete production by labour of use values which lies at the heart of the system - and as always in capitalism contradictions are never actually solved they are merely postponed or displaced to another level, but by it's nature they will always resurface and lead to the thing popping out at some point - it can't be resolved 'satisfactorily' within the confines of itself without destroying itself completely

but we can lift this dicussion from the realm of theory to practice by looking at what actually happens in real life - the experience of Japan in the 90's where following the collapse of a massive period of over accumulation - near zero interest rates existed for most of that time, where quantative easing was used in abundance, yet as a result bank lending actually decreased during that time, deflation and recession persisted, the economy tanked and stagnated for nearly 16 years - yet still and despite all of this a huge amount of faith is still invested by central bankers and treasury ministries in both monetary and fiscal policies to solve problems that they are incapable of solving - sorry to quote marx again but he definately hits the nail on the head with this one

just to clarify however I think fiscal policy/stimulation is just as misguided as an attempt to solve the inherent contradictions served up by the accumulation of capital - just like monetary policies it can stave off things for a certain time but it never engages with the underlying problem and again we can look to a real life example of the the great depression where despite all efforts at fiscal and kenysian policies these were of little relative benefit and it ultimately required the massive destruction of value ushered in by WWII to really 'sort' things out, re-equilibrate value relations and allow for the whole thing to start again

(ps sorry for ruining your thread jack)