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Cowley: QE is not working - gilts are effectively worthless
by Stewart Cowley on Feb 08, 2012 at 00:01
The Bank of England is running out of options on what to do next.
The current Quantitative Easing (QE) program is fast approaching its end. The Bank now owns some £275 billion of gilts, which is close to 30% of the total market. This is a staggering amount and one that is not widely acknowledged and for which there has been little or no public debate.
What’s more, the effectiveness of the policy has to be questioned. The Bank implements QE through the so-called ‘portfolio channel’, whereby it buys gilts not from the government but from banks and pension funds and the like. The idea is that the cash is then sent into the economy…somehow.
No signs QE is working
But on any measure, there is precious little evidence that it is working.
For instance, lending to consumers fell £377 million in December. Even worse, year-on-year borrowing by consumers has taken a lurch back down, even from the low levels it had achieved in 2010/2011, which in itself was a fifth of the peak in 2004.
So whatever QE was meant to achieve, all it has really done is transfer a large amount of capital risk (duration) out of the hands of the private sector and into the hands of the state, through the agency of the Bank.
As we have pointed out in the past, there is some doubt as to how much more effect QE can possibly have when government bond yields fall below 2.5% – 3.0%. Amazingly, this is exactly where long-term gilt yields have gotten to recently.
Gilts are effectively worthless
At the same time, on a number of valuation metrics (against inflation or credit default costs for instance), gilts are effectively worthless as an investment, unless your primary concern is to hide your money away from a banking system that will be prone to shocks for some time to come, especially if there are further episodes of uncertainty coming out of Europe.
This shouldn’t be underestimated as a possible use for gilts in the future (you could liken them to a safety deposit box) as many sage commentators, like George Soros, are currently lining up to call the end of the euro in the years to come. Clearly, there is trouble ahead.
What to do next is matter of urgency
£275 billion is the maximum amount so far made available for QE so the Bank needs to consider urgently what to do next.
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