I’m trying to accumulate as much knowledge as possible at the moment, I want to try and understand how it all works (everything, literally everything that has an effect on my life) so I can figure out what’s right and what’s wrong and what to do about it, some fella said something like:
‘ in order to defeat your enemy you have to become your enemy’
on reflection that may have been Christian Bale in Batman, but whatever, it works.
I’ve been looking at some economic concepts around the financial crash and started reading up on the utter mindfuck that is Quantitative Easing, partly because the European Central Bank are looking to do it again in Europe, and partly because I’m quite boring.
I thought I’d share what I learnt. I work in IT / BBQ, I’m not an economist so I may have some things slightly wrong, but I’m pretty sure it’s mostly correct, it is dull, but it’s also important so pay attention because there will be a test!
Are you sitting comfortably? I’ll begin; In a recession, like the one that started in 2008 and is still ongoing, people stop spending money and so do businesses (possibly as the result of job losses and uncertainty about the economy, oh and then there’s austerity measures cutting money off for people and lower wages and rising inflation and a whole shit load of other bad stuff) this means that there’s not enough money swishing round the economy so it grinds to a halt.
The good people at the Bank of England (BoE) decide we need more money in the economy, so they make some, jut press a button (I imagine it’s big and red and they have two keys to arm it like in you do a nuke) and billions of £ appears in their account (No, we can’t just do the same unfortunately, I’ve yet to ascertain why because the banks are allowed – more on that another time) they then take this new money and purchase assets from private financial institutions like insurance companies, pension funds and our good friends, the banks.
Now, before we go any further, an asset in this sense isn’t something tangible like a house or a car as you or I might understand it, it’s essentially debt, the BoE is lending the money at an agreed interest rate over a fixed period of time, (so you buy a 10 year £10,000 bond at 5% interest you get back £500 a year (5% – this is called the yield) and then your £10,000 at the end of the 10 years) this is called a Bond, the bonds the BoE bought from these companies were Government Bonds which is lending the government money (This is where all the talk of government debt and borrowing comes from, government debt is considered bang on, rock solid debt, because (unlike the rest of us) when they can’t pay they just hit the big red button and it pours all over them(As an aside and maybe I’ll cover it another time, this is why European countries, Greece, were fucked because they’ve got a central currency and can’t just print the stuff). Anyway, where were we? Bonds; confusingly the BoE bought government bonds from financial institutions which means that they were buying the government’s debt from another company – it’s a fucked up place the economy!
So, the reasoning behind all this is that purchasing these bonds puts extra money into the economy, drives the price of the bonds up (supply and demand) and the yield down so that the financial institutions that received money from the government buy products elsewhere (again, we’re not talking about actual things, we’re talking about debt again or shares) this in turn pushes up prices of all these other assets and their yields down. Why is this important? Well, lower yields means lower borrowing costs, bear with me here..
If demand for government bonds rose, this £10,000 bond would increase in price as investors pushed up the market price.
But, the government still pay £500 a year interest until maturity. If the market price of the bond rises to say £20,000, the interest rate (yield) is now 2.5% (50/2000)
Therefore higher demand for bonds leads to lower bond yields.
This pushes down the cost of borrowing everywhere because the government can borrow for less, then the corporates can borrow for less and so on until it gets down to you and me with banks lowering their interest rates because their borrowing costs are lower. Still with me? Good.
Now, before we marvel at the stupidity of this idea, let’s have a think about all of this, at no point is there anything actually tangible going on here, in order for this to work people have to do what’s expected of them, at no point are there any rules at work here (governing the process I mean, insider trading, financial regulations (ha ha) and the law all still apply) there is nothing at all that forces this process, there is no law or legal agreement that says the banks have to buy anything when the BoE pumps money into them, they can do what they like, economists will tell us that they will do it because that’s what ‘The Market’ does, this abstract construct is basically a bunch of people making decisions based on greed and is responsible for both getting us into the mess we find ourselves in and attempting to get us out. It’s so Laurel and Hardy-esque it’s almost funny, but it’s not funny because people have lost their jobs, homes and in some cases lives because of this belief in the power of the market, and the market does work, but not for you and I, it works for the big financial institutions and those around them
Let’s get back to QE;
We’ve already found out that money is pumped into the system from thin air and that is supposed to stimulate the economy by the money moving through the market, reducing the cost of borrowing, making us borrow and spend more (this could be businesses investing or consumer credit, I believe it was supposed to be businesses primarily, once the banks had some cash they could lend it to businesses) Now, let me ask you this, if, as happened in 2008, you lost a fuck load of money in the financial crash then someone gave you a load of cash hoping you’d go out and spend it in the right way, what would you do? Well, that’s exactly what the banks did, they kept it, they got rid of these assets they had and put cash back on their balance sheets then went and speculated in property, shares and commodities making their investors a bit happier (and richer) the bankers and the hedge fund owners did very well out of it, but for the rest of us? Higher prices in food and property and fuel and bugger all lending to businesses. Now, either the BoE knew that this would happen and were happy for the banks to hold onto this cash, or they didn’t which means they are totally incompetent and shouldn’t be in charge of tying their own shoelaces, never mind the economic stability of a whole fucking country. They decided to let banks (economic crash causers) do what was right.
Who appoints these people?
Who regulates these people?
Whose interests do these people serve because it doesn’t seem to be yours or mine? – actually, I can answer this one, it’s bankers and hedge fund managers.
What are the alternatives?
Do we need a central bank?
Should everyone be allowed to print money?
Should we have public representatives inside the banks to make sure they’re not shafting us?
Should economics be mandatory at school?
What do you think?
All I know is that whatever this is currently is not working.