I can see how a monetarist policy works when all is normal with the economy, but the thing which strikes me as daft about QE is that there is already a huge surfeit of money supply through loans, mortgages, etc. To my mind QE isn't working in the short term but could lead to a very nasty moment in the future when everyone is maxed out on credit (monetary supply in tits own right), their debt has been indexed linked to a weakening pound, and everyone elsewhere realises the pound is worth SFA.

I'm not shure I have my head round this QE thing. I'd like it to go through my bank account though.

Originally Posted by eodmatt

I don't think that QE is always a bad thing but it is a tool that should be used sparingly

Depends what it's being used for. The last government sold it to us as means of heading off deflation which is generally reckoned to be a bad thing, despite what the two beasties in the YouTube video were saying. Deflation was never a problem under the last government, or the current one and recent tranches of QE have been carried out purely to enable the government to pay its bills.

At the end of Gordon Brown's tenancy in Downing Street, one third of government expenditure was coming straight off the printing presses. That's the entire welfare budget, funded by slapping some ink onto mashed up trees. The saviour of the world never stopped to think that this might be a bad idea.

It's worth noting that the Bank of England Act makes it illegal for the Bank to print money and simply hand it to the government. That is, as the video stated, the last resort of banana republics. Hence, as in America, our government laundered the cash through merchant banks.

Originally Posted by eodmatt

Two obvious areas for action are social welfare and foreign aid. These outputs are better addressed by hard pruning than currency devaluation as a result of QE.

Not so much foreign aid. IIRC it's only about 1% of government spending and it keeps the hippies happy while all those carbon footprint managers in the public sector are being culled.

The welfare budget represents one third of government spending. It got out of control under the Major government and it turned into a money sucking black hole under Gordon Brown. We simply can't afford it any more and the current government has barely scratched the surface. No more child benefit for folks on £40k? Is that it? Try ensuring that nobody on benefits gets more than minimum wage. How about making illiterate job seekers learn to read?

Originally Posted by Ancient_Mariner

Try ensuring that nobody on benefits gets more than minimum wage.

You would actually want those on benefits to get a lot less than minimum wage as an incentive to get a job.

Originally Posted by stacker1

You would actually want those on benefits to get a lot less than minimum wage as an incentive to get a job.

That would be against their human rights, and besides, would they ever vote for the party that did that again...

Tying a vote to taxpayers would be better - you have to have paid a certain amount of tax/NI over the years before you are allowed to vote in a general election. If you're not providing any money to run the country, why should you have a say in how it is ran? Obviously there would be exceptions for pensioners/short term unemployed/women on maternity breaks/disabled (aggregate the tax paid over the amount of time they could have paid into the system).

Job sorted, you would get a government that felt it could really make changes to the Welfare State without committing political suicide.

Originally Posted by verticalgyro

That would be against their human rights, and besides, would they ever vote for the party that did that again...

Tying a vote to taxpayers would be better - you have to have paid a certain amount of tax/NI over the years before you are allowed to vote in a general election. If you're not providing any money to run the country, why should you have a say in how it is ran? Obviously there would be exceptions for pensioners/short term unemployed/women on maternity breaks/disabled (aggregate the tax paid over the amount of time they could have paid into the system).

Job sorted, you would get a government that felt it could really make changes to the Welfare State without committing political suicide.

I can't see many career welfare claimants voting Tory. I think it was Bill Clinton's Democrat administration that introduced very severe cuts to welfare in the USA. Five years of claiming in your lifetime and that's your lot. Yet the welfare classes in America still vote Democrat. That's the power of political tribalism for you.

The "representation without taxation" problem was something Maggie tried, and failed, to address with the poll tax. In some of the bigger cities, only a minority paid rates. This led to a situation where a non taxpaying majority were able to fund increasingly lavish spending by imposing crippling charges on the taxpaying minority. Remember Ken Livingstone's lesbian housing estates and gay parachute clubs? Guess how they were funded?

Originally Posted by Alsacien

A couple of posters have asked for a laymans explanation of QE and how it works.
No need to invent a wheel, the Bank of England have provided plenty of straightforward material:

Finally, I've found time to go through the BoE explanations and think I've found the error in their basic assumptions (please feel free to correct me if I'm wrong) : -

They've assumed there's a problem (made apparent by Northern Rock in 2008 ) , it's down to lack of growth in the economy and it can be fixed. Growth is their goal and we have to maintain growth. They assume that growth can be perpetuated indefinitely and the solution to their "problem" is providing stimulus through Quantitative Easing and artificially low levels of borrowing. If you put more money in and encourage cheap credit, growth will continue. All basic Keynesian stuff. All right and good when the danger is deflation. If it gets inflationary, put the brakes on by increasing the base rate and stop printing money. That would work for the standard problem.

I don't believe this is a standard problem. It's a predicament - there's an outcome to it and as much as we try we can't alter that outcome, we can't. The underlying cause of the 2008 bumper-rock wasn't a standard market reaction - it was an immature stamp of collective feet to tell the market-makers that something was out of kilter. It wasn't a deflationary caution, it wasn't an inflationary caution, it was a warning that something was fundamentally wrong with the underlying system of banking and our currencies. All the subsequent market reactions (QE, low interest rates etc.) are not addressing the cause and won't effect the outcome - they only delay it.

The predicament we face is a loss of confidence. And that's the crucial difference between inflation (a problem that can be dealt with) and hyper-inflation (a predicament whose outcomes we will have to deal with). When the traders start hiking the price of commodities in favour of gilts - it's a downhill spiral and once it starts its consequences will be apparent at the petrol pumps and in the shops within a few days. Watch for the signs - a spike in commodity values, a drastic drop in demand for Gilt/Treasury auctions, followed by a run on the banks as everyone tries to convert their currency into stuff they can live on (food, oil etc.). That's when you need a full pantry, full oil tanks and a lot of metal reserves.

The next 10 years are going to be unbelievably different to the last 10 years.

I must have missed this bit in training. I got the ironing, 58 pattern webbing TARDIS tricks, boot bulling, marching up and down, shooting, fieldcraft, bivvying up, cleaning mess tins of hexi block residue, but I'm fucked if I can remember the lesson on macro-economic policy.

Oddly enough they dont do it anymore. But it used to be simple and all you had to do was shout PAYANDPAYBOOKCORRECT, SAH!

And all was right with the world.

Nowadays things are much more complex and there are drills for everything: iPod playing ok; iPod STOPS etc.

Originally Posted by sniper_bob

Finally, I've found time to go through the BoE explanations and think I've found the error in their basic assumptions (please feel free to correct me if I'm wrong) : -

They've assumed there's a problem (made apparent by Northern Rock in 2008 ) , it's down to lack of growth in the economy and it can be fixed. Growth is their goal and we have to maintain growth. They assume that growth can be perpetuated indefinitely and the solution to their "problem" is providing stimulus through Quantitative Easing and artificially low levels of borrowing. If you put more money in and encourage cheap credit, growth will continue. All basic Keynesian stuff. All right and good when the danger is deflation. If it gets inflationary, put the brakes on by increasing the base rate and stop printing money. That would work for the standard problem.

I don't believe this is a standard problem. It's a predicament - there's an outcome to it and as much as we try we can't alter that outcome, we can't. The underlying cause of the 2008 bumper-rock wasn't a standard market reaction - it was an immature stamp of collective feet to tell the market-makers that something was out of kilter. It wasn't a deflationary caution, it wasn't an inflationary caution, it was a warning that something was fundamentally wrong with the underlying system of banking and our currencies. All the subsequent market reactions (QE, low interest rates etc.) are not addressing the cause and won't effect the outcome - they only delay it.

The predicament we face is a loss of confidence. And that's the crucial difference between inflation (a problem that can be dealt with) and hyper-inflation (a predicament whose outcomes we will have to deal with). When the traders start hiking the price of commodities in favour of gilts - it's a downhill spiral and once it starts its consequences will be apparent at the petrol pumps and in the shops within a few days. Watch for the signs - a spike in commodity values, a drastic drop in demand for Gilt/Treasury auctions, followed by a run on the banks as everyone tries to convert their currency into stuff they can live on (food, oil etc.). That's when you need a full pantry, full oil tanks and a lot of metal reserves.

The next 10 years are going to be unbelievably different to the last 10 years.

They have given the explanation in a fairly neutral context e.g. how it works in theory, the 3rd link goes into the transmission channels and rational in context.
You are completely right in that this is not a typical scenario, deflation does not look as likely as above benchmark inflation to most analysts, but there are substantial risks that could push it either way, especially fuel prices if something kicks off in Iran.
This approach is very much a lesser evil option, not where anyone would want to be. Without improvements in growth and confidence there is no way out of the hole that has been getting deeper since 2008. I would not expect substantial improvements without US led growth. Europe should get onboard around 2013-14 after a wobbly 2012, I don't think a 10 year horizon is realistic.