05 March 2009

The Emperor's Newly Eased Clothes?

OK, is it just me? I realise that I've been totally out of the loop in terms of market chatter and I was never a 'monetary' or an 'economic' bod anyway, but...

...I really don't get the point of 'quantitative easing'. The new liquidity is going to purchase Gilts? Aren't Gilts already overbought? How does that put money into the economy? Isn't this 'new liquidity' just going to stay in Gilts and not go anywhere because the banks are scared out of their wits to lend? And people are scared out of their wits to spend? (It seems like every other person I talk to here in the Midlands has seen colleagues at work laid off and is hoping the axe doesn't fall on them next.)

Didn't Japan try something similar and it didn't work? Can someone explain to me how this supposed to get the economy going?

14 comments:

Sally said...

utter maddness in my opinion.... but what do I know????

Fat Prophet said...

I can not see how this works either, and like you I know of and hear of so many people losing their jobs. It seems like almost every night in our local paper there are reports of someone in this position

Doorman-Priest said...

All Greek to me.

Tim J said...

Umm . . . Well the main thing it's doing for me is convincing me that money doesn't actually exist, but is just a mental trick we use to organise ourselves -- but that when we get in a mess with the mental trick everything goes haywire, because even if money isn't real, psychology and exchange of goods are . . .

Apologies if that's gibberish to someone with your background!

I've been having a lot of problems commenting on Blogger blogs, so let's see what happens.

PamBG said...

Actually, Tim, you are not far off.

In some senses 'money doesn't really exist' - which was people's complaint when the West went off the gold standard in the 1970s. (Previously, all money printed had to have a certain value with respect to an ounce of gold.)

And markets are driven by psychology. Fear and greed. A very simple explanation: financial instruments are priced according what people will think that they will be worth in the future. So, if a particular company is expected to grow by 5% per annum over the next two years, and it's assets are now £100, it's stock price would be £110.25. (This is hugely simplistic for illustrative purposes.)

The problem, of course, is that you have to guess how much everything is going to grow. If I think that I know better than everyone else and that the company is going to grow by 8% per year, then I've got myself a bargain at £110.25. But when the fear sets in that growth is going to be less than expected, then many people will try to sell to recoop their original investment.

Tim J said...

And this is why mathematicians like to talks about game theory in this context . . .

I heard on a radio programme that the first time there was a real banking ccrisis after the Bank of England formed, people were very unhappy about paper money, complaining that it wasn't actually money.

It's interesting: atheists accuse us of basing our lives on something that doesn't exist, namely God, but arguably modern society runs on something that doesn't exist, namelly money! (I'm only half joking.)

ISTM you're saying that the value of a piece of paper simply exists in the mind of the buyer and seller.

It's strange.

PamBG said...

ISTM you're saying that the value of a piece of paper simply exists in the mind of the buyer and seller.

Yes, I think it probably is. It's a corollary of 'something is only worth what a buyer is willing to pay for it'.

If four sheep are worth one cow and it takes £100 to buy four sheep or one cow, the pound is still worth something.

At the end of the day, basing our currency on gold is still only choosing a random asset. Why not diamonds? Or platinum?

Tim J said...

Bizarrely, there's a parallel with quantum physics, too, but maybe I'd better not go into that too much. It's a bit fanciful.

Well OK, three sentences' worth. In quantum physics—the physics of the ultra-small—a quantity generally exists in an "indeterminate" state until it is measured. The act of measurement forces it to stop being indeterminate and have a definite value.

Similarly it seems to me that a house, say, doesn't have a definite value until you measure the price by letting somebody pay for it.

So in a way, the financial value of something is always in the future and hovering on the brink of existence.

Hmmm...

PamBG said...

Tim - Not only does that seem quite correct to me with respect to money and financial markets, but you've just helped me to better understand that principle in quantum physics.

An 'ah ha' moment! :-)

Tim J said...

I think I helped myself understand it better too!

No wonder it's confusing, though...!

I wonder if I should try that analogy out on some physicists?

PamBG said...

Tim - There are quite a number of people in the financial world with Physics backgrounds. Some even with graduate study in Physics. That's where the moniker 'Rocket Scientists' comes from.

Tim J said...

Interesting! But a bit sad for science that they're not doing the science . . .

I was thinking of the physicists/astronomers who follow me on Twitter. I might turn the thought into a mini-blog post for them and ask them to have a look :-)

PamBG said...

That could be interesting! :-)

Tim J said...

Now done. The post is here. I've included quite a lot of the conversation in it.

Er, it's not a mini post though. It's about 1000 words, including the quotes. ;-)