Quantitative easing: I told you so

The quantitative easing programme is being scaled down and may well have reached its limit. Remember, you read it here first.

It is not often I am right and all the other economists and financial commentators are wrong so please allow me a fair dose of smugness on this occasion. Already the experts are coming round to what I argued in this column four months ago, that the Bank of England money printing scheme would peak at £200 billion.

Let us have a quick recap. The Bank of England was originally granted up to £150 billion to spend on buying government and company bonds in order to mop up government debt and to get the economy going.

Back in July, after £125 billion had been dispensed, the bank asked the government for permission to raise the ceiling to £175 billion. And here the confusion began. Columnists were leaping up and down about ‘an extra £50 billion’. That was wrong, as I pointed out. It was an extra £25 billion (plus the remaining £25 billion already included in the original figure).

To muddy the waters further, it transpired that Governor Mervyn King did in fact want an extra £50 billion (taking the total to £200 billion). This again was misconstrued. Those headlines saying King wanted another £75 billion and had got £50 billion should have said King’s extra £50 billion had been chopped in half by his own colleagues.

The difference, as I argued all along, was important. Commentators talking about the higher figures were easily able to persuade themselves to think in terms of yet higher figures, so the assumption grew that King would soon persuade his fellow members of the monetary policy committee to go above £200 billion.

However, the real situation was that MPC members had dragged their feet over King’s extra £50 billion and that a compromise was likely: King would eventually get his full £50 billion but no more. Faces saved all round.

And so it has come to pass. The Bank has for a second time asked for, and been granted, an extra £25 billion. While it is still possible that circumstances will change and that the quantitative easing programme will be expanded further, the current thinking is thus far and no further.

The bank began by spending £25 billion a month. The last batch of £50 billion has been spread over three months. Now we are to have £25 billion lasting for the next three months. The rate of spending has slowed and by February will be down to a trickle.

There is much merit in this decision. There is no evidence that quantitative easing is actually working, despite the protestations of Mervyn King. This gradual winding up allows him to claim job done. However, the creation of all this extra money is needed to mop up the soaring government debt and an extra £25 billion will come in handy as the bank bailouts demand cash now.

The slowdown in the cash creation programme sends a welcome signal that we are over the worst. According to King: "A number of indicators of spending and confidence suggest that a pick-up in economic activity may soon be evident."

He is probably right, although I do not put much store by the encouraging manufacturing figures for September, showing a 1.7% surge. This merely confirms that the August figure, a 2% drop, was a holiday blip in an otherwise slow recovery.

Far more important is that the economy will have to be weaned off the measures that were taken to prop it up. VAT is due to rise in January, £2,000 cash for trading in old cars has been extended once but will probably end when the money allocated runs out and now quantitative easing is being wound down. We are also seeing a little daylight at the end of the very dark tunnel that has been the bank bailout scheme.

Investors are rightly seeing matters in a cautiously positive light. The FTSE 100 has established a trading range between 5,000 and 5,300 points and has paused for breath after the summer surge rather than falling back as I feared. The next movement will, I believe, be upwards.

I told you so, part two
Oh dear, I am unbearable this week. Readers of this column will have felt no surprise at the news that Conservative leader David Cameron is dropping his ‘cast iron’ commitment to hold a referendum on the Lisbon Treaty.

As I have pointed out on several occasions, he never intended holding one.

Residents of various European countries, including some of those supposedly more enthusiastic for the undemocratic, wasteful, inefficient and unresponsive leviathan than the British electorate, have over the years demonstrated a persistent reluctance to vote the correct way (ie, yes).

This culminated in the Irish rejection of the treaty, a decision that could only be put right by making it clear that they would have to go on voting until they saw sense.

We all know perfectly well that the UK voters would, if given the chance, express their desire to quit the European Union and therefore cannot be allowed a referendum. Tony Blair understood this and thus stalled on a referendum until it was no longer his problem.

Cameron equally can see the blindingly obvious and was able to go through the motions knowing that the issue would be resolved before it became his problem. Now the Czechs have signed up it means that all EU member countries have acquiesced without any residents voting in favour (unlike the EU, I do not count a 1-1 draw as a victory).

The Conservative rebels can bleat all they wish. There will not be a referendum on Europe. There was never going to be one.

Taxing tax
Thank you to those readers who have sent further responses to my story of the friend who could not find out how much tax would be imposed on motor cycle parts he was buying from China. Two of you managed to do what the HMRC could not manage, which was to calculate that the rate should be 3.7%.

The goods are on their way. I will report the outcome when they arrive.