Friday, May 8, 2009

The fact is that confidence in the currency has held up since the Bank announced the start of QE in early March

TO BE NOTED: From Stumbling and Mumbling:

Confusion about QE
Fraser Nelson is hopelessly confused here. He says:
The massive Quantitative Easing programme is making it harder for companies to raise money, because the government is flooding the market with its own IOU notes. The Bank of England today confirmed that less than 1% of the £44.5bn it has printed has gone to buy company loans – it had indicated that as much as a third of the £150bn pool would go to companies. Instead, it is a mechanism to help the government issue the £240bn of gilts it’s issuing this year.
He is correct that QE has overwhelmingly been used to buy gilts. But you can’t complain both about this and about the government crowding out the corporate sector. If the Bank of England were to buy all the gilts issued this year, the government wouldn’t have to tap the private sector for cash at all, leaving it free to fund companies. Bank of England gilt purchases are the solution to the crowding out problem.
If the markets think QE is actually a way of one department of the government printing money for the other departments to spend (a la Weimar Germany), then confidence in the currency collapses.
And if my aunt had bollocks she’d be my uncle. The fact is that confidence in the currency has held up since the Bank announced the start of QE in early March. Sterling’s trade-weighted index barely budged. Sure, this could change. But, so far, it’s irrelevant to the relationship between QE and corporate financing.
Fraser then points to the collapse in lending to non-financial companies, and says:
One explanation is that British companies are simply paying down debt. Another is that the government’s debt issuance is so extreme that it is crowding out other forms [of borrowing].
There is, though, a third explanation - that the credit crunch has made banks unable or unwilling to lend to companies. If we look at the monthly path of bank lending to non-financial firms, we see that this fell in the autumn, after the collapse of Lehmans, but has recovered a little since. If it was gilt issuance that was denying firms’ financing, you’d expect the opposite pattern.
Now, I say all this not to defend QE; I have big doubts about its effectiveness. However, to blame it for companies’ lack of finance is just silly.

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