Now that the Bank of England has called a halt on its quantitative easing programme, it might be worth stepping back for a moment and considering the momentousness of what the central bank has done over the past three years. In that period, an institution whose previous job was largely to determine the cost of borrowing through the country has carried out the most daring programme of balance sheet expansion this country has ever seen.
If you ignore the name, QE is actually pretty simple. The Bank creates cash (it is printing, but it happens electronically) and then uses that magicked-up money to buy certain assets.
The objective is two-fold: first and most importantly, get money flowing around the economy. After all, this economic crisis derives from the fact that Britain’s gross domestic product is falling (or flatlining, depending on which time horizon you’re looking at). GDP is the sum total of what we’re all spending (or earning – it should add up to the same number). So the Bank funnelling extra cash into the economy should directly boost that number – and encourage people to spend money, perhaps boosting it by a factor of more than one.
Second, the process should, theoretically, reduce the cost of borrowing for consumers and simultaneously push up prices around the country. And given the Bank’s interest rate was already down at what is from their perspective absolute zero (0.5%), and that the UK was facing the threat of deflation, those two objectives made sense.
The questions of whether the Bank’s scheme was successful, and what happens next, are ones I will return to soon. In the meantime, let’s just consider for a moment how much money the Bank has created. Earlier this year, when the total target size of QE was £325bn, I did an exercise of working out what else the Bank could have done with that cash. Today, the total amount it has spent has reached £375bn, so it’s worth an update.
If it were to spend £375bn today, the Bank of England could theoretically buy:
1. Every single vehicle in Britain
That’s right, the Monetary Policy Committee could now be in sole possession of every single car, lorry, train, plane and, I suppose, bike, in this country. This would set it back a mere £185bn – less than half its total QE outlay. Of course, that would create a slight problem, in that, well, no-one would be able to get anywhere, so the Bank could use the remaining £190bn to buy every single household in Britain a brand spanking new Volkswagen Fox. Which, of course, would also bolster UK-German relations, so good news all round.
2. Every single property in Scotland
The Bank of England’s Threadneedle St headquarters are a fine building, but if Sir Mervyn was feeling swish, he could rather easily bolster the Bank’s property portfolio with a few million holiday homes north of the border. According to Savills, the entire housing stock in Scotland is currently worth just over £300bn – so easily affordable. And, while we’re at it, it could use that remaining £75bn to buy up every property in Northern Ireland.
If, for understandable reasons, Sir Mervyn was rather nervous about the constitutional implications of the Bank of England owning Scotland, he could, instead, buy up every property in the North West (£372bn), the North East (£124bn) or the West Midlands (£309bn), including Wolverhampton, where he grew up. London would be a bit too expensive, at £783bn, but the Bank could easily afford a few of the smartest boroughs: Kensington & Chelsea and the City of Westminster, perhaps (£128bn all-in).
3. Every office building in Britain
If Sir Mervyn was after more space for the Bank’s fast-expanding ranks of employees – a lot more space – he could always splash out for every non non-residential building currently owned by UK businesses. That would set the Bank back a mere £357bn, which seems pretty reasonable considering the kinds of nifty skyscrapers, warehouses and offices one could get for that.
4. Some pennies
The Bank could, if it so chose, decide to get the money minted up into £375bn of pennies. I’m not entirely clear why they’d want to do this, but nonetheless it would be so many coins that, if piled on top of each other, they would tower 57m kilometres high, enough to reach to Mars, on one of its closer orbits to the earth.
5. A big present
If the Bank decided that rather than spending the money itself it would simply give it out, it would be able to give every household in Britain a rather generous cheque for £14,423. Just like that. Of course, it wouldn’t really be that simple, since the Bank doesn’t have the right to award what would effectively be a tax rebate to British households: that is fiscal rather than monetary policy. And the Chancellor might have something to say about a tactic like that – indeed Sir Mervyn himself has already ruled it out. However, one can but dream.
However, rather than spending its cash on any of the above, the Bank has chosen to spend it on government debt – gilts, as they are known. As far as economic theory goes, this should have had the same effect, getting cash into the economy and helping encourage people to spend. However, critics of QE argue that it has instead only served to distort the financial system, making pensioners poorer and benefiting investors and those who work in the financial system rather than the hard-pressed households most adversely affected by the recession. It is a debate that is likely to continue for some time – particularly since the Treasury Select Committee is carrying out an investigation into QE.
But what’s not in doubt is the sheer, staggering scale of the project the Bank of England has brought to a pause today.