Citywire for Financial Professionals
Stay connected:

View the article online at

Spencer Dale: the 3 big risks of more QE

Spencer Dale, the Bank of England's chief economist, has expressed his concerns about its policy of creating £375 billion of new money.

Spencer Dale: the 3 big risks of more QE

Spencer Dale, the Bank of England's chief economist, has shared his reservations about the controversial policy of creating money to buy government bonds, or gilts.

In a speech at Trinity College, Dublin, at the weekend Dale – the only member of the Bank's monetary policy committee to vote against the last increase in quantitative easing in July – outlined the dangers of its extraordinary policy of creating £375 billion of new money, which is equivalent to 25% of the UK’s nominal GDP.

Pension scheme providers and pensioner groups have complained bitterly that the QE drive to push up gilt prices, lower gilt yields and thereby reduce long-term interest rates has slashed annuity rates, which dictate many pensioners’ incomes. Dale said the three risks are:

Unwelcome side effects on the economy:

By pushing gilt yields to all-time lows, QE forces institutional investors to hold riskier assets such as shares and corporate and junk bonds for their higher yields. While this can be good for companies seeking to raise money from investors, it increases the risks ‘borne by key parts of our financial sector,’ Dale said.

He also said the prolonged period of low interest rates could delay rebalancing and restructuring in the economy as inefficient firms stay in business for longer.

‘Monetary policy can and should provide shorter-term support in times of need, but it must avoid becoming a long-term crutch obstructing the required rebalancing of our economy,’ Dale said.

Exit risks:

The Bank of England now owns 40% of the total stock of conventional gilts (ie, excluding inflation linked gilts). Selling these back without unsettling the government bond market and causing yields to soar and the cost of borrowing to rocket, would be ‘a delicate task’.

Risks to the Bank’s credibility:

Dale conceded that QE was an ‘efficient and effective’ way of injecting much-needed liquidity into the economy to avoid a deep recession after the 2008 banking crisis. Nevertheless, the policy risks damaging the Bank’s reputation as it could look that it was simply indulging in ‘monetary financing’, ie, propping up gilt prices to avoid the government having to balance its books.

Dale said: ‘it may look to some a little too convenient that we are choosing to hold vast quantities of government debt at a time when the fiscal deficit remains around post-war highs. However unfounded, these perceptions need to be taken seriously.’

With speculation growing that the Bank will extend QE for the fourth time in November in response to the stubbornly weak economy, Dale asked the question: ‘how much further can monetary policy be pushed until the potential costs and risks outweigh the benefits?’

For more on QE watch our video: 2 freaky facts about QE 

30 comments so far. Why not have your say?


Sep 10, 2012 at 17:32

for a different, challenging but more optimistic interpretation of QE, see Tom Bayley's contributions to the thread following "2 freaky facts about QE".

report this


Sep 10, 2012 at 18:27

I can predict when the next issue if QE will be. It will be when the government's deficit has eaten up the last lot of QE. They'll just issue a new lot to buy their debt. This is the only way they can keep interest rates at 0.5% and I can see no end to it.

report this

chris williams

Sep 10, 2012 at 18:35

Our society bails out the borrowers, and steals from the savers, and the next generation. QE inflates asset prices, particularly house prices. Whose dependent on house prices - the banks,and the politicians. We need something like a 30% reduction in house prices, but it will never happen.

Call me old fashion but we cannot sustain our trade and government deficits. It's a proloned period of inflation, and lower living standards that lies ahead.

report this

Tom Bayley

Sep 10, 2012 at 21:35

Thanks kenpen2. I must admit I'm not a massive fan of QE itself, but I do feel that money-printing in some form is necessary and inevitable, particularly if we are to restructure the financial system in a way that prevents a crisis happening again.

But the most important thing right now is that we all question the accepted ideas of money creation (QE or not) and discover how the process *actually* works. Until we do that we will we misled into thinking the disturbing message of the "freaky facts" video is unique to QE and not to the banking sector in general.

I ask people to consider why they are so against £375bn of BOE money-printing when a completely analogous process has been used by the private banks to create £2000bn of credit. Yes, that's money that is effectively in circulation forming the vast bulk of our money supply. Should we not question that process also? Because if and when the economy improves, the banks are going to get straight back to inflating the next bubble, dwarfing anything the BOE is doing right now. The mechanisms to control them don't work.

So I believe we need to fix the current flawed legislation and prevent banks creating credit out of thin air. We need to make sure they can only lend money created by the BOE, i.e. full reserve lending, which is the way it was originally supposed to work and how we all assume it works. It doesn't!

This would be a significant change to the banking system. For it to happen we need awareness and consensus. It would be good to have a serious response from a detractor. Even if it's just "I don't believe it!"

report this


Sep 10, 2012 at 21:52

Tom Bayley

You are asking what's wrong with the following:

Printing money to pay government debt and fund the deficit?

Devaluing the value of currency so peoples savings are devalued

Reducing the interest rates to a level where interest paid on savings is a lot less than inflation.

Some people will love QE - those in debt with large loans and those with alrge amounts of assets.

Some will hate it - those with savings and diminished buying power from their wages that aren't going up with inflation.

report this

Anthony O' Grady

Sep 10, 2012 at 22:12

QE doesn't work. Banks don't want to lend, and households/SME's don't want to borrow. The banks use this money to speculate, creating new asset bubbles and pockets of inflation in an otherwise deflationary environment.

Professor Steve Keen has it about right. If the Govt really wants to get this cash into the economy (putting aside for a moment the potentially catastrophic effect on inflation long term) then just post everybody a cheque.

report this

Tom Bayley

Sep 10, 2012 at 23:29

Jonathan, I'm not asking any of those things!?

I'm asking what is the difference between 'printing' money and 'printing' credit, the way that banks do as a normal part of their business. I claim to know the answer - NONE.

I'm also asking people to verify my claim.

report this

Tom Bayley

Sep 10, 2012 at 23:37

Anthony, banks do not use QE money to speculate. They use some of it to buy government bonds to replace the ones they sold to the BOE. As far as I can see the rest piles up as reserves. They seem to feel it's safer there than lending it.

However, I agree with you that Steve Keen has it about right. Perhaps you could remind me how he thinks our money supply comes into being?

report this

Tom Bayley

Sep 11, 2012 at 00:48

To repeat, my main purpose is NOT to defend QE. My main purpose is to tell you that banks print money whenever they want and in far greater quantity!

How can it be right for the banks and wrong for the BOE? The BOE is responsible to the nation (believe it or not). Who are the banks responsible to?

Noone has yet addressed this point, and I know that's because you can't believe it - that's how much we are in the grip of their game.

report this


Sep 11, 2012 at 08:34

It's sad that QE seems to be the only pill that that we are taking. With all the brains they have at the BOE you would have though they could come up with a better solution.

Re posting everyone a cheque Mr O'Grady, this is what they are doing in Hong Kong.

Put the power back into the people's hands!

report this

chris williams

Sep 11, 2012 at 09:06

I get confused as to what the BOE actual statutory mandate is, does anyone know?

report this


Sep 11, 2012 at 09:10

Tom Bayley

Private banks do not print money. They just lend money that someone has deposited with them. Isn't that what you'd expect a bank to do? This is entirely different from the BOE creating money.

report this

Andrew Stevenson

Sep 11, 2012 at 10:15

I'm old enough to remember Edward Heath's 'Dash for Growth'. He told Barber (his chancellor) to order the Bank of England to print money. They managed to double the amount of cash in the economy in just three years. What happened? The cash that was supposed to go into re-equipping factories to increase our exports, all vanished into office block speculation (see history of Centre Point). A few years later we had 20-25% inflation. Heath's answer to that? Index linking everything - pay,prices. Which guaranteed more inflation.

When Margaret Thatcher got into power the nonsense had to stop. Interest rates went up to 17%. Which got the situation under control, eventually. But put an awful lot of firms out of business in the meantime. All this lies ahead.

QE (what a fatuous title for printing money !)

"The Bank of England now owns 40% of the total stock of conventional gilts (ie, excluding inflation linked gilts). Selling these back without unsettling the government bond market and causing yields to soar and the cost of borrowing to rocket, would be ‘a delicate task’."

"Selling these back" Who exactly is going to buy them? If interest rates go back to something like normal levels, then the value of the gilts will fall. Why would anybody in the right mind buy them ?

report this

Clive Menzies

Sep 11, 2012 at 10:17

Jonathan, money is created as debt under the fractional reserve banking system. Ie. Banks create money for loans that didn't exist before the borrower is given it. Your understanding that banks lend depositors' money is a common misconception.


Money as Debt a 45 minute video introduction by Paul Grignon

Explanation of fractional reserve banking from a right wing economist's perspective from the Austrian School

Essential reading to understand fractional reserve banking and its corrupting influences

report this


Sep 11, 2012 at 10:46

Dear all,

Am I alone in thinking this is fairly straightforward and 'obvious'?

As people/companies default on their debts, as many many thousands will or are doing, the hole left behind in the bank balance sheets has to be filled (or the banks go bust). That is exactly what QE is doing. Nothing more. A side effect of that process is lower theoretical interest rates. However, anyone who has tried to borrow in the last 3 years knows that interest rates are now only low for those who do not need the money. the average interest rate of mortgages being granted is 5%. The underlying 'bank' rate is 0.5%. Ergo, there is no real benefit to the economy of holding rates at '0.5%', therefore, it is clear to me that the QE policy statements are merely a ruse to cover up the fact that money is being printed to fill holes in the bank balance sheets and nothing else. The central bankers know this, so do the politicians.

But is this the only solution? No. there is another, but no-one wants to hear it and no politician is willing to broadcast it. Simply put, the two solutions are:

1. keep things as they are and follow japan into 2 decades of adjustment (rounds of QE and theoretically super-low interest rates and medium levels of inflation). Eventually, assets values get back to their long term average (and below) by combination of inflation on money purchasing power prices and slight drop in actual prices. I.e, £100k house now will be worth £95k in 10 years but £95k in 10 years time, is worth only £45k now, as inflation of 5% pa will have eroded it to that. therefore house worth £100k now will be worth £45k in 10 years, which is about the price it should be at, on long term averages.

2. stop giving the banks the money and allow everyone affected to go bankrupt. Assets will quickly drop to correct levels and, once that pain is over, everyone can start rebuilding. In this option, we will see lots of repos, lots of liquidations (of banks and normal companies) and lots of pain for a couple of years. Then it will start growing again. Key here is that the government writes legislation that allows everyone to default but then pick up the pieces and carry on (including, crucially, homeowners). They will be barred from the market for much smaller period of time than currently (around 6-12 years now). Perhaps 2 years? then growth can return and can be controlled through proper management of the banks/lending market.

Our choices are therefore: 10-15 more years of 'no growth' or 2-3 years of pain and then back in the game.

As I say, no-one wants to hear option 2, so we are stuck with option 1.

Anyone for tennis? Seems thats the good news for today.

report this

Tom Bayley

Sep 11, 2012 at 13:17

Clive Menzies, thank you!

Jonathan, we have ALL been subjected to a massive brain-washing exercise. You can't see it because it's so hugely against accepted wisdom.

Morpheus, please, take the red pill! Follow the links Clive has provided. There are also presentations on the Positive Money website that are easy to follow. Please don't dismiss it all because it seems loony - the FT and the IMF have published articles and papers that agree with all this.

Once you understand how the system actually works you will no longer feel hopeless. It will be much more clear to you what needs to be done.

report this

Tom Bayley

Sep 11, 2012 at 13:21

Morpheus, here are the articles I refered to above, linked via the positive money website:

As I said, once you understand how the system actually works, it will be clear what needs to be done.

report this


Sep 11, 2012 at 13:56

Clive Menzies

The bank does not create money they just lend money out that's been deposited. This is something I certainly expect them to do. The fractional reserve is the proportion of the deposit that they are not allow loan out. So for example, if you deposit £1,000 in a bank, they might lend out £900 of that as a loan. Someone will spend the £900 and the recipient can then deposit that £900 in the bank who will then lend out £810 of it as a loan etc etc. This is not creating money like printing money even though at the end of someone depositing £1,000 has resulted in a geometric series of loans. In the example above you could also argue that the person who deposited the £900 in the bank create a geometric series of loans. But you can't argue that every depositor creates a geometric series and then add them all up.

report this

Clive Menzies

Sep 11, 2012 at 14:19

Jonathan, your analysis is correct, as far as it goes but where did the original £1,000 come from? All deposits originate as loans based on banks' reserves at the central bank.

Bank A deposits £1m with the central bank and using your example of a 10% reserve factor, can lend up to £10m, ie. £9m is created from nothing. Once the £10m lent is deposited by recipients in other banks, an additional £8.1m is created and so on (accurately described in your post). And yes you can argue that the original £1m reserves expands geometrically. Theoretically the original £1m can be expanded to £90m. If the central bank really controlled the money supply, QE would have had a dramatic effect. Pre QE, only 3% of broad money in the economy is notes and coins issued by the Bank of England, 97% is bank created Money as Debt.

I suggest you study Murray Rothbard's book, The Mystery of Banking, which is one of the best explanations of the process I've come across. I don't necessarily subscribe to his or Positive Money's proposed solutions but their analysis of the current system is accurate.

report this

Tom Bayley

Sep 11, 2012 at 16:35


As I understand it the reserve ratios don't work either. In practise the lending comes first and the reserves are found later - this is the 'myth of the money multiplier'.

report this

Clive Menzies

Sep 11, 2012 at 16:47

Tom, you're right. If you read Web of Debt by Ellen Brown you'll learn that the 12 privately owned Federal Reserve Banks were created on the promise of shareholders' capital being deposited at the Fed but in the event only a fraction materialised.

Banking interests have been conning us for years and it's been legalised and enshrined within the economic system.

Even when they commit fraud, no-one gets jailed!

report this

Tom Bayley

Sep 11, 2012 at 17:06


In Jonathan's naive scenario banks could not possibly lend more than they have on deposit - typically it would be 100% of deposits less the reserves requirement. However Northern Rock managed to lend over 300% its deposits before it went bust.

"The deposit creation process is at the heart of the banking system servicing the public and stimulating economic growth. The modern banking instruments of securitisation, hedging, leveraging, derivatives and so on turned this process on its head. They enabled banks to lend more out than they took in deposits. According to Morgan Stanley Research, in 2007 UK banks loan-deposit ratio was 137%. In other words the banks were lending out on average £137.00 for every £100 paid in as a deposit. Another conservative estimate shows that this indicator for major UK banks was at least 174%. For others like Northern Rock it was a massive 322%."

report this

Tom Bayley

Sep 11, 2012 at 17:29

BTW I didn't mean 'naive' in a personal sense!

It just goes to show you can't assume banks won't find a way to wriggle clear of regulation. Which means the only viable solutions I can see are:

1. Take away their power to create money i.e. full reserve lending.

2. Remove all the guarantees that lead to moral hazard. It's perceived as passing on risk to customers, but then again it's our money and we should be careful where we put it. Apparently it works in Canada?

3. Make those running the banks personally accountable.

Of those, to me the first is the cleanest and offers the simplest way to implement monetary policy? i.e. control interest rates and money supply.

report this


Sep 11, 2012 at 17:47

I know a lot of the problem was to do with the UK buying goods from China and China not taking the money spent on goods out of the UK economy. They invested it in banks and companies and made it available for loans. This was one of the major causes of the credit/debt boom. When the Chinese wanted to withdraw their cash there was not way of getting it as it was all lent out. Much of it to people who could never afford to pay it back and many of them borrowing more than they could afford to invest in ever increasing housing assets...

report this

Tom Bayley

Sep 11, 2012 at 18:10

Jonathan, are you sure?

I often used to wonder who all this debt was owed to. The chinese seemed a likely candidate. But then I looked at the scale of the debt in UK, US and first world countries and it just seemed impossible. How could the Chinese have made enough money to account for a multiple of GDP of all those countries?

Of course the answer is the debt is owed to noone other than the banks. They did not get the money from somewhere else. They just created it.

report this

Rose G

Sep 12, 2012 at 12:45

IMHO, I believe that those in charge of the monetary policies are just as much in the dark about the consequences of their policies as the rest of the population is.

Furthermore, I beleive that we are pre-supposing that the people with the power to make these changes, politicians and banking industry megaliths included, actually know what they are doing - truth would be that they are no closer to understanding the consequences of the policies than is the rest of the population, but they have to make the right noises to claim their salaries and bonuses!

The pre-supposition that intellingent beings are making these decisions which affect the rest of us, will one day be revealed that it was all hogwash.

What I can guarantee from all these rubbish policies, including QE, is that we will all be poorer for it, but our young ones will be paying the costs of the rest of their lives, so no worries, eat, drink & be merry, for tomorrow we may die, but our children will bear the brunt of these monstrous decisions made by corrupt people for their equally or more corrupt buddies in high places.

report this

Tom Bayley

Sep 12, 2012 at 14:40

Yes, Rose, so perhaps we should simplify the system then? If you could understand it then the bigwigs ought to as well, right?

Here's a way to understand it:

report this


Sep 13, 2012 at 13:17

Bank debt is just a piece of paper - very similar to a betting slip. Banks are meant to assess risk of lending and adjust the interest rate accordingly. Wonga charges 4000% pa on toatlly unsecured loans. Assuming half default they are still making a lot of money. Interbank lending increases this sea of debt notes and muddies the water for anyone tring to determine a banks exposure to cash being called by its depositors.

We are seeing a gradual shift to equity based financing of business by bonds or shares and cheap freely avaiable finance will not return until the next credit bubble returns which will only ever really occur when employment levels are resored and property is seeing value growth. Until then the banks are just charging up their loan pots with cheap taxpayer subsidised government loans.

The effects of QE on value of the £ against other currencies is all relative. I think there is every chance that some countries are printing money when they don't need to to ensure they can continue to eport their goods competitively. Instread of giving it to the banks they can build up reserves or reduce their national debts.

Ultimately the UK is sinking deeper into debt while many of the countries we trade with can strengthen their position.

report this

Paul Eden

Sep 16, 2012 at 10:34

The fact that QE has been introduced is an admission that politicians and bankers have made serious blunders in the running of the economy over past decades.

They don't accept that millions of people have been harmed financially, principally pensioners and other savers, by QE. They close their eyes to this because it cannot be avoided and it would be self-defeating and impractical to compensate all who have suffered loss.

They not only do not understand all the ramifications of the enormously complicated tangle of debt and financial structuring in the economy, but there is no one who truly can understand it. The whole lot proceeds on a wing and a prayer.

If QE has caused gilt prices to rise and yields to fall, then when the government does sell these gilts, the reverse must be the case. These two things are being manipulated by government. There is no real 'free market' operating, but here we see a process of manipulation that leaves people looking like so many cogs in a wheel being turned...and they turned over.

report this


Sep 16, 2012 at 11:46

Paul Eden

The BOE/government never really has to sell these gilts back. The can continually buy more when they mature. In fact I've heard someone who sits on the BOE monetary policy saying that the BOE won't sell the gilts they have bought back to the market but look at controlling the economy with interest rate rises when it has recovered. The idea that QE can be reversed is purely theoretical and will never actually happen.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire Guide to Investment Trusts

In this guide to investment trusts, produced in association with Aberdeen Asset Management, we spoke to many of the leading experts in the field to find out more.

Watch Now

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add to your safe senders list so we don't get junked.


David Kempton: 4 AIM stocks I'm buying for 2018

by David Kempton on Jan 25, 2018 at 17:04

Sorry, this link is not
quite ready yet