Bank of England Bills and Printing Money

Regular readers may remember that, some time ago, I sent some questions to the Bank of England regarding quantitative easing (QE - printing money), following an offer by the deputy governor to answer QE questions. I sent an email on July 16th, and now have a response. Before looking at the reply, these were my questions:

1. Reuters has reported on the 9th July that, following no announcement of an extension of the policy of QE by the Bank of England, bond yields rose sharply. Bearing in mind that just the possibility of an end to the policy caused this reaction, does this not suggest to you that QE is propping up the Bond Market?

2. The CPI has finally dipped below the 2% target that the Bank of England uses in setting monetary policy, but is still not far enough off target to require a letter of explanation. I believe that the Governor of the Bank of England has identified QE as an untried unconventional policy with uncertain outcomes. Bearing in mind that during all but the last week, CPI has not fallen below target, how can such an untested policy be justified? In particular, with monetary stability as a key aim, how can such an unconventional policy be justified?

3. With regards to exit strategies for QE, the Bank of England Quarterly Bulletin for 2009 Q2 states that 'Alternatively, the supply of reserves could be reduced without asset sales, through the issuance of short-term Bank of England bills.' Is this policy? If so, can you confirm exactly when and under what circumstances you will finally sell the gilts that have been purchased?

4. A secondary question as a follow on to question 3. If the purpose of QE is not to monetize government debt, then why would you not sell gilts at the end of QE policy? Do you have concerns that the existing expansion of gilt issuance would preclude the sale as the sale might destabilise the gilt market? Is this not a recognition that the gilt market can not support the level of issuance?

The BoE took the trouble to write to me with some answers in an email but, they also referred me to other general answer to questions on their website, pointing me to answers 1, 6, 11 and 13 in particular. I will use the answers from the email and some of the general answers in this post, but you may wish to see the originals general answers in full.

The first point to note is that there was no direct answer to my question (1) in any of the answers that were provided. It appears that the Bank of England does not want to comment on whether they might be propping up the bond market. It might be argued that, in purchasing bonds, the intention is to hold down yields, but I think the implication of a spike in yields on a mere sniff of an end to QE goes beyond this. The question is, of course, an indirect way of asking whether the BoE is monetising government debt. This they have answered, and this is from the email they sent:

Quantitative easing has not been carried out to help the government meet its financing needs, and asset purchases by the Bank have not been made to keep gilt yields at a particular level. Other things being equal, yields can be expected to fall in response to the Bank’s gilt purchases.

In the general answers, they add that monetization of government debt would infringe upon article 101 of the Maastricht treaty, and that they are not being forced to make up a shortfall between government debt and expenditure:

The key point is that the Bank is not being forced to create money in order to cover the gap between the government’s tax income and its spending commitments. If it were carried out to finance the budget deficit, it would be a violation of Article 101 of the Maastricht Treaty (which the United Kingdom must abide by, even though it is not a member of the euro zone). [...]

Central banks routinely buy and sell government debt in the secondary market as part of their normal operations in the money markets and such operations are not deemed to amount to monetary financing under the Maastricht Treaty.

The interesting word in this answer is forced, as it is not apparent where this word has come from. This is the original article 101:

1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the ECB as private credit institutions.

The interesting point in this article is that the direct purchase of government debt is actually prohibited, but there is nothing to prevent indirect purchases (as they point out). At the same time, it is not apparent where this idea of 'forced' has appeared from. The implication of this is that, if the BoE were to monetize debt without being forced, this would all be right and proper. It is a most puzzling answer...

With regards to the question about why the policy is being enacted whilst CPI has barely moved below target, this is the answer in the email:

The objective of the MPC remains to hit the Chancellor’s 2% CPI inflation target. Therefore the MPC continues to focus on the medium term prospects for inflation when setting monetary policy. The MPC judged in March that in the absence of a further monetary policy stimulus, the growing margin of spare capacity created by the recession would push inflation significantly below the target in the medium term. With Bank Rate already almost as low as it could go, the MPC decided that a substantial stimulus through quantitative easing was warranted. That was the reason for embarking on unconventional monetary policy. Central banks routinely buy and sell government debt in the secondary market as part of their normal operations in the money markets. What distinguishes quantitative easing from normal operations is their scale and the length of time for which the assets are likely to be held.

There is nothing new in this answer. The BoE been wrong in their inflation forecasts up to now, such that the expected fall in the CPI has not taken place ....it is not clear therefore why QE is still being enacted, as it is freely admitted that it is 'unconventional' and therefore carries with it risks that are unknown? Under their own considerations, it will take at least 6 months for the impact of the policy to be felt, so it is not the policy that has prevented deflation. Deflation has simply not happened.

Questions (3) and (4) generated some interesting answers, with this from the general answers:

When it comes to tightening policy, the MPC will have two instruments available: raising Bank Rate; and selling back assets. Removing money from circulation can be achieved by selling the assets back to the private sector. The MPC will be likely to use a combination of raising Bank Rate and selling back assets, although the precise sequencing and the relative importance of the two instruments will be considered month by month at each MPC meeting. The Bank will seek to sell the assets it owns in an orderly fashion in order not to disrupt the market for government debt.

And this is the answer sent in the email:

The market for UK government debt is one of the deepest and most liquid financial markets in the world. Nevertheless, buying and selling large quantities of assets quickly is likely to influence prices.If the MPC decides that it wants to reduce the quantity of reserve balances held by the banks, it could issue Bank of England bills in exchange for the reserves, rather than selling the Bank’s holdings of government debt back to the non-bank private sector. The assets could then be sold back in an orderly fashion over a longer time period. Whether the Bank issues extra bills in exchange for the reserves or not will ultimately be a technical decision that will be taken with a view to market conditions at the time [emphasis added].

It is notable that they do not mention the sale of Bank of England bills in the general answers, but instead simply say they will sell 'assets'. It is apparent that I was correct in thinking that the BoE is not planning to sell the government debt back into the market for a long time, but is rather planning on tightening monetary policy through issuance of Bank of England bills. This is still not public knowledge, and I am uncertain that the distinction would be understood.

The BoE are right to assert that any quick sale of the bonds would influence prices, but this bumps up against a fundamental concern. How might the BoE sell the bonds into the market at any time during which there is already such massive issuance of new debt? How long will the BoE have to hang onto the government debt, and what market conditions might be considered opportune for selling the bonds?

The bottom line is that the BoE will not be reversing the QE policy in what might be seen as a conventional way (e.g. selling the original assets back). It might be argued that there is no conventional way in an unconventional policy, but I do not believe that open market operations, the nearest equivalent, would allow for assets to be purchased and held in this way. With such a radical policy, it would be expected that the BoE would have clear criteria for a return of the bonds to the market in an orderly way, and under what circumstances they might sell them.

The logic of QE is that, should an upturn in the money supply or inflation become apparent, they will need to reverse the policy. However, this would not mean an immediate tightening of the money supply, but would likely be a progressive tightening. Just as interest rates are not normally altered by large increments, or the policy of QE undertaken in one large 'dollop', there is no reason why the end of QE should be undertaken as a 'dollop'.

There is no discussion of any detail, because the Bank of England will certainly know that, with government issuance of debt flooding the market, there is absolutely no time in the foreseeable future at which they might offload the bonds without causing a crisis. The BoE's holding of government debt is simply too large...The only reason that any other method might be used for monetary tightening is that the amount of debt being issued by the government can simply not be digested by the markets. There is more debt being issued than demand. The BoE is simply filling the hole in demand.

As another concern, this is a quote from the general answers, on reselling of BoE holdings of bonds:

It is possible that gilt prices will fall, thus raising the corresponding interest rates, when the Bank starts to sell its holdings. Subject to achieving the 2% inflation target in the medium term, any sales will be co-ordinated with the Debt Management Office so as to limit any adverse impact on the functioning of the gilt market.

This should be a matter of some concern. The BoE will be co-ordinating the sale with the DMO, which is the arm of government that raises finance. There should be no direct linkage between the activity of monetary policy and the issuance of government debt. The BoE has no business in ensuring that the government might be able to finance their debts or at what rate, and is now admitting that their operations are now (at least partly) being controlled by the central government through the DMO.

This is the basic problem; if the government were not issuing too much debt, then there would be no need for the co-ordination, as a steady offloading of the debt would not unduly interfere with the market. Also, if a private institutions were to co-ordinate with the DMO there would be outrage. The BoE and the DMO acting together is, quite literally, rigging the market.

What we have is a situation where the BoE is preparing to find reasons to hang on to government debt, and to not return the debt to the market (where it belongs) without the permission of (sorry, co-ordination with) the DMO. All the while, they continue to purchase more debt, despite the fact that CPI is still at a level at which there is no need even for a letter of explanation.

Over and above the answers to my questions, there were some interesting points in the general answers. For example, they go to some lengths to distance themselves from the idea that what they are doing is a variant of the Zimbabwe problem. This is the disingenuous explanation:

In the Weimar Republic and Zimbabwe, the central bank printed money to finance government expenditure. This vastly increased the money supply, and hence prices rose rapidly. This is not happening in the United Kingdom. Here, the Bank is buying assets from the private sector to stimulate the wider economy, because otherwise we risk undershooting, rather than overshooting, the inflation target. Quantitative easing is not carried out to help the government meet its financing needs. When the economy recovers, most of the purchased assets will be sold back to investors, reducing the money supply.

Note the misdirection in suggesting that they are buying 'assets' from the public sector. Whether directly or indirectly, they are buying government debt, and therefore they are supporting the purchase of government debt. Note also, that they are talking of when the economy recovers, and also implying that they will sell the government debt back. However, the prospect of sales of Bank of England bills in place of reselling the bonds directly contradicts this.

The last quote is one which is not of great importance in the big picture, but is indicative of the way in which the BoE is trying to bury the simple fact that they are printing money.

What is the difference between reserve balances and printing money?

Reserve balances are, in effect, electronic money held only by commercial banks and can only be used to settle transactions between them and with the Bank of England. The Bank issues paper currency in response to the demand for banknotes from the public. But reserves and notes both represent claims on the Bank of England (‘central bank money’) and the banks can exchange the reserves for notes, although as they receive Bank Rate on their reserves they will only do this if the notes are needed to meet, for instance, withdrawals of deposits. When the Bank buys assets under its quantitative easing programme, the bank account of the seller goes up by the value of the sale and their bank simultaneously acquires an equal quantity of reserves.

How this might differ from running money off a physical printing press and depositing the money in the vault of the recipient bank completely eludes me. In both cases, the recipient bank has the money available to them to do with as they wish, including converting reserve balances into bank notes. The implication here is that a reserve balance is not printing money, and whilst technically correct (there is no physical printing press) the outcome is identical.

In amongst such obfuscation, I would just like to highlight the one useful new piece of information that has emerged. It is apparent that the BoE holding of government debt is not going to be returned to the market for a long, long time. Whilst they have not said this directly, I believe that their direction is pretty clear. Their explanation for why they might not sell back the bonds in a rush is plausible, but there is nothing that would stop them from steadily selling - if the market were not already flooded.

This is the key point. The BoE have been stepping in to support issuance of government debt which would otherwise almost certainly not find sufficient buyers. The issuance of debt from the government is ongoing, and there is therefore no opportunity to sell the bonds in the foreseeable future. The Bank of England is therefore engaging on a policy of purchasing government debt which it will hold over a long period, and it is doing it with printed money.

It is, quite literally, monetization of government debt and, even if it was started as inflation policy (unlikely), it is now the only thing that is preventing government bankruptcy. That the BoE must hold on to the debt is an indictment of the government, and their fiscal incontinence. I have long argued that this is a policy of debt monetization, and the use of BoE bills to reverse QE is just further confirmation.

Note 1: Despite my cynical view of the BoE policy, I am always impressed with their polite approach in their answers. As a strong critic of the BoE, this is to their credit.

Note 2: Please accept my apologies for the lack of replies to many comments. My 'real life' is very busy at the moment, such that I am very pressed for time. I have even been forced to rush this post, even though it is one of the subjects of particular interest to me, and would have preferred a better researched post (finding article 101 in EU documentation exacerbated the problem, as it was not very easy to find). I hope that the rush does not show.

China and Treasuries - A Puzzle

Perhaps some readers may think that I am obsessed with China as, once again, China is the central subject of this post. A long while back I speculated on what China might do as the current economic crisis unfolds (yes, it is still in full swing). The basis of my speculation was quite simple; I simply thought about what actions I would take if I were in the position of China.

My first thought was that it would be vital to move reserves out of the $US, which would mean offloading treasury positions. I was unsure at the time about how this might be achieved without spooking the entire market, and destroying the value of the remaining holdings. As it was, the exit method is relatively simple and involves shifting holdings from long term debt into short term, and simply not rolling over the existing debt. It turns out that China has been making this shift for some time, but remains a net buyer of treasuries:

For instance, the report showed huge central banks such as Japan and China remained buyers of U.S. assets. China's holdings of U.S. Treasuries rose to $800.5 billion in July from $776.4 billion in June.

The same report showed a net outflow of capital from the US, and this makes the ongoing purchase of treasuries by China ever more curious. Of particular note is a recent article in the Shanghai Daily, which will reflect the official government 'line'.

AS the global economy appears headed toward recovery, concerns are growing that the United States' addiction to massive fiscal stimulus as an economic panacea could eventually lead to an even bigger crisis - a loss of confidence in the US dollar.

Nobel Prize-winning economist Paul A. Samuelson raised the specter of a "truly global financial panic" if countries funding the US deficit, particularly China, decide their investments in US Treasury securities are no longer safe.

Warren Buffett warned in The New York Times that side-effects of the current fiscal intervention could be as dangerous as the financial crisis recently averted - in the form of inflation eroding the dollar's purchasing power.

Preserving the dollar's strength has importance far beyond protecting American tourists from the shock of paying the equivalent of US$25 for a hamburger in London or Tokyo.

Economic experts are concerned about the dollar's health for a number of reasons. Most importantly, the scale of current trade and spending imbalances puts heavy downward pressure on the dollar's value over the long term.

The US imports far more goods and services than it exports, flooding international markets with dollars and undermining their value.

The Chinese 'line' on the $US and the actions of China contradict one another. The standard explanation for this is that China simply can not afford the destruction of the $US, as the two economies are tied inextricably together. Such an assertion would suggest that China sees a future in which it just continues to fund US consumption forever. When the switch into short term debt is considered, this is simply unbelievable. One way or another, China knows that it must move off the treasury treadmill. Why they have not already done so remains a puzzle, but they must begin a retreat soon. In particular, the $US slide seems to be gaining momentum, with Geithner's remarks on the future status of the SDRs as a reserve asset pushing the decline further:

The Dollar Index, which the ICE uses to track the dollar against the currencies of six major U.S. trading partners, dropped to as low as 75.915, the weakest since Sept. 22, 2008, before trading 0.2 percent down at 75.944.

One explanation for the weakness of the $US is that economic recovery is providing an incentive to move into higher yielding assets. This from Bloomberg:

The dollar fell to a one-year low against the euro and weakened versus the yen on speculation the global economic recovery is gathering strength, encouraging investors to buy higher-yielding assets.

A contrast to this explanation was issued a few hours before this post, and comes from China's Xinhua news:

The Fed began its two-day monetary policy meeting on Tuesday and would announce rate decisions on Wednesday. The central bank is widely expected to leave key rates unchanged at historic low level, and its statement after the meeting would be fundamentally same with previous statements.

If the statement is in line with expectations, it means that the Fed would keep its ultra-loose monetary policy for a while, increasing pressures upon the dollar. Any unexpected signal could spark big fluctuations in currency market.

It was reported that U.S. is proposing a broad new economic framework to tackle global economic imbalances on the Group of 20 financial summit due later this week. The framework may lead to weakness in the dollar, analysts said. It prompted investors to take profit from the greenback's gains in previous sessions.

It is very clear that the line in China is that it is US profligacy putting pressure on the $US (a view shared by myself). It is very clear that, if Chinese news sources are following the official government line (the normal practice), the Chinese government has concluded that a $US fall must take place. This makes the ongoing purchase of treasuries ever more puzzling.

I did speculate that perhaps, just perhaps, China is hoping that the US will reverse the current policies (in particular in the face of Chinese complaints). However, the more I thought about this, the less probable it appeared to be as a credible explanation. There has been absolutely no indication from any arm of the US government of any indication of any reversal of current policy. Unless there have been some substantive assurances given behind closed doors, it appears highly improbable that China might hold any hopes for change.

Another line of reasoning I followed was that China simply does not want to be seen as the country that 'pulls the trigger' on a $US collapse. Once the crisis takes hold, they will be able to stand back and suggest that they did all they could to support the world financial system - despite US profligacy. Once again, however, I am not entirely convinced with this argument. Compared with the diplomatic gains, the potential economic losses make this appear to be a very poor trade off. I am also not convinced that China would be that concerned with such niceties, as they will in all cases be able to point to their requests for responsibility from the US and their patience when the US continued to devalue their assets.

The last line of reasoning I considered appears to be the most probable. It is simply that China's wealth is indeed denominated in the $US, and they are just doing enough to hold the $US from free fall. The reason is that this allows them time to use the $US, which they are still accumulating in large quantities, to prepare themselves for the post-$US world. Returning to the speculative post in which I imagined what I might do if I were China, I suggested that they would also diversify their holdings into commodities (in particular gold), other currencies, and would continue and accelerate their purchase and control of commodity/resource companies.

With regards to gold, it is now no secret that China has been purchasing gold (600 tons - though are now planning to buy domestic production of gold), and also other commodities (though there are some suggestions that this is easing back). There are also hints that China is going to restrict supply of some of their own key commodities, which will support a growth in high tech industry. Also, with regards to securing access to resources, China appears to be accelerating a process that had already started at the time I made the speculative post. A friend kindly pointed me to a recent article in the FT on this subject:

China’s sovereign wealth fund is deepening its holdings in commodities by investing about $850m in Noble Group, a Singapore-listed commodity shipping and trading company with deep roots in China.

In the past two years, CIC has shifted its emphasis from dollar investments in financial firms, including Blackstone and Morgan Stanley, to investments in commodities groups and hard assets including real estate.

With regards to currency, the $US 50 billion purchase of SDRs is one form of diversification, and perhaps ties in with the ambition for the RMB to displace the $US as the reserve currency. My aim here though, is not to restate my arguments for why the RMB might succeed, though yet further signs can be found of the ambition in action:

[regarding the purchase of $50 billion of IMF SDRs] But the agreement stated that China will pay the IMF up to 341.2 billion yuan ($50 billion), also known as renminbi, for the SDR bonds, based on the Aug. 25 exchange rate [...]

But Zhang also noted several other, more intriguing possibilities about how the IMF could harness the yuan soon to end up in its hands.

It could use yuan to buy assets from other financial institutions or for issuing loans, hence spreading the Chinese currency more widely.

"This would signify that the renminbi, to a certain degree, would replace the dollar as a global reserve currency. It would be an important impetus for renminbi internationalisation and it would have a negative influence on international demand for the dollar," Zhang wrote in a research note.

What all of these points are driving to is that China might be just providing enough support for the $US through bonds to prevent a free fall of the $US. The motive might be that they are using the time of instability to prepare for a post $US world, and are seeking to position themselves to ride out the storm that would follow a major fall in the $US. It is no more than speculation, but they may simply be preparing for the troubles ahead, whilst their $US have some use and value.

So far, so interesting, as they do appear to be following the most logical strategy for a country in their current position. However, I also speculated previously about the next step in the strategy over and above the points I have already mentioned. In particular, if the $US falls dramatically, and there is plenty of speculation on this end emerging in the mainstream media recently, what would China do in this situation?

My argument was that China would, as soon as a $US rout looked realistic, sell hard and fast into the market, and seek to recover as much value from the $US holdings before hitting the bottom. I speculated that they would likely have a contingency plan in place, including a floor at which they would stop selling and hold. In the event that this kind of scenario took place, the US economy would go into severe shock, along with the institutions of government. No doubt, just as China has prepared for this contingency, I am guessing that the US is likewise prepared. My guess is that they will have a plan to stem the tide, but also that they will be playing the role of King Canute.

In the economic aftershock, China will still be left with significant holdings of US assets. In some respects, these will be of little value. However, my speculation is that this would provide a vital element in China's bid for economic ascendancy. In particular, they could use their new found economic strength to go on a shopping trip in which they would seek to purchase leading US companies, and in particular companies with leading edge technologies. The economic position of the US government will be so dire that they will seek any form of an infusion of capital and overseas currency into the country, and will not be in a position to block any Chinese moves on US companies, with the sole exception of industries that are directly related to the defence sector.

In this scenario, China might be able to jump up the technology ladder at a rate that would otherwise be impossible. It would facilitate the step up the value chain that is necessary for China to achieve economic super power status. This from a recent Xinhau news article, in which they report on the Chinese Premier, Wen Jia Bao, as suggesting that the economic crisis presents risks and opportunities:

China has the capabilities of taking over the commanding heights in the fields of economy and science and technology, said the premier.

He highlighted the importance of choosing the correct new and strategic industries that can play a supportive role for the country's current economic and social development. China must master key technologies, otherwise, the country might be controlled by others, he stressed.

Wen said that China needs industries that have broad prospects, consume less energy, have a larger impact on other sectors, offer more jobs and make more money. "We must select and develop new and strategic industries with an international view and strategic thinking," he added.

A total of 47 academicians, professors, experts, entrepreneurs and industry leaders attended the meeting and gave their views on the issues of these new industries.

It is very clear where China's ambitions are directed and they simply reflect the ambitions of most countries. The difference is that China is increasingly moving into a position where those ambitions might be achieved.

As with my original post, the one in which I speculated on China's actions, I can only speculate here, and would emphasise that it is no more than speculation. There are a few problems in the argument, such as why China might undermine the $US with negative statements, if they seek to prepare for a post $US world, and need the $US for preparation. This appears to contradict the argument, and can not be explained. Many elements of my previous speculation have been enacted by China, but they are nevertheless still net purchasers of treasuries, against my expectations. It may be that I am missing something, but I have yet to find any explanation other than the one that I have suggested here.

As ever, and in particular with such a speculative post, comments and thoughts are welcomed. Perhaps there is a more mundane explanation?

When will the Money Printing Stop?

Having already posted today, this is more of a note than a full post. I have noted recently that the UK inflation figures yet again defied Bank of England expectations of deflation. Whilst their recent inflation report was full of caveats on inflation vs. deflation, the original justification for quantitative easing (QE-Money Printing) was a deflation scare. As I have pointed out in many posts, the target inflation rate has barely been missed throughout the entire period of QE, and the predictions of deflation have never come to pass. The requirement for the Bank of England to write a letter of explanation to the chancellor is if the Bank of England misses the inflation target by 1%.

Yet again, inflation is still sitting stubbornly close to the target, such that no letter is required. This from the Telegraph:

The Consumer Prices Index (CPI), which is the Government's preferred measure of inflation, dropped to 1.6pc from 1.8pc in July - the lowest level since January 2005 according to data from the Office for National Statistics (ONS). It was the third month in a row that CPI was below the 2pc target.

As it is, the main cause of the fall in the rate of inflation is lower gas and electricity prices, which have fallen by considerable amounts. If we turn our minds back, it is apparent that the high prices with which these price falls are compared were extremely high prices resultant from the spike in prices of oil, which I predicted would fall back.

It is also noteworthy that the reason for continuing inflation is the higher prices of imports, which was my suggested reason for continued inflation when considering inflation versus deflation. The weakness of the £GB was always going to have a counterveiling impact to the shrinking of the economy. This point is of particular note for the US, now that the $US is sliding. In the case of the UK, I pointed out that currency weakness would take a while to show up in import inflation, as prices and contracts will take a while to adjust (e.g. when a contract is signed, it takes often takes a long while before the contracted goods are actually delivered at the pre-inflation price). The same will apply for the US, with time lags in inflationary pressures.

Returning to QE, it is interesting to see that the media have been distracted from the original purpose of QE, now that the predicted deflation has not taken place. This is from the FT:

Although six months is a comparatively short time to judge QE, Mr King can already point to some signs of success, but these are balanced against other more negative indicators.

On the positive side, government and corporate bond yields have fallen, boosting company borrowing in the capital markets. Indeed, sterling corporate bond issuance has surged to an annual record, with three months still remaining of the year.

Ten-year gilt yields are only 3 basis points lower, at 3.61 per cent, than the day before QE - but Charles Bean, the Bank's deputy governor, insists that they would have been 50bp higher without QE.

Investment grade sterling bond yields are 2 percentage points lower, at 6 per cent, than in early March, although euro-denominated corporate bond yields have fallen just as sharply with the help of the European Central Bank's injections of liquidity into the money markets.

QE has also boosted the equity markets, although it is difficult to quantify how much money investors have switched into shares from their gilt sales. The FTSE 100 has risen 38 per cent since the launch of QE, but a lot of the gains were due to an improving world economy and resilient corporate profits.

Like so many commentators, the deflation scare that was the justification for QE is quietly being forgotten. It is not clear why the memory of so many journalists and commentators are so short. With the notable exception of Liam Halligan in the Telegraph, it seems that the origins of QE are of no importance.

Throughout the policy of QE the Bank of England has sought to generate confusion over the role of deflation and inflation as their justification for QE. This is an excerpt from a previous post, where I highlight the kind of methods being used:

If we remember, the bank targets CPI, not RPI. However, in the Bank of England inflation report from February, it might be noted that the RPI is discussed in the report, even though the CPI is the target for inflation. You will note how the measures are blurred in this passage.

Deflation is sometimes used to describe any fall in the general level of prices (as measured in the United Kingdom by the CPI, RPI or the GDP deflator), however short-lived. A more economically significant phenomenon, however, would be a sustained period of negative inflation.

The RPI is likely to fall temporarily over the coming months (Section 4.1). This period of negative retail price inflation would be unusual (Chart A) and predominantly reflects the much lower contribution from mortgage interest payments, following the recent large falls in Bank Rate. The MPC’s central projection is for its target measure, annual CPI inflation, to remain above zero throughout the forecast horizon. (p33)

Whilst there is no direct statement of targeting of RPI, the way in which the whole passage is put is somewhat grey. The same section of the report then goes on to warn of the dangers of deflation......it appears that the Bank of England is subtly conflating the two measures, and they even use a chart which is designated as the 'ONS composite index'. (p33) One of the interesting points is that an argument for printing money directly follows this discussion of RPI and deflation:

Periods of low inflation, associated with weak demand, may limit a central bank’s ability to use conventional monetary policy to stabilise the economy. But if reductions in official interest rates do not prove sufficient to meet the inflation target, policymakers still have other options available to them to stimulate the economy, if necessary (see the box on pages 44–45 in this Report). (p33)

In a previous post, I have explained exactly why there is no element of QE that might justify the policy. This is beyond either a summary or quote, so I would recommend those that have not already read the post, to read it now.

Yet again, despite no indication of serious deflation, there is no indications of any halt to quantitative easing. Why is this? More to the point, why is it that so many in the media are sitting back and watching the monetization of government debt continue with so little concern? At this point, the press should be filled with outrage. Instead, they appear to accept this policy as if it were perfectly normal. Have they not noticed that the policy justification has failed to materialise?

Exactly how or when QE might stop, and under what circumstances, continues to be opaque. It seems that nobody seems willing to give the answers, and the press does not appear to be concerned. In the interim, the government continues to spend money still wet from the printing press.....to say that this is a bad situation is an understatement.....