Following the publication of my post this morning on why Chris Giles of the Financial Times did not understand the QE process there have been large numbers of first-time commentators trying to post comments on this blog. What they are all suggesting is that I have no comprehension of what the QE process was all about.

All of them are making remarkably similar comments, and I presume that they do, as a result, all come from a common source. As a consequence, I have deleted them all. However, it is worth addressing their claim that QE was essential from 2009 onwards, or interest rates would not have been kept as low as the government decided was necessary throughout the period from 2009 until late 2021.

This claim is dependent upon the belief that if only the government bought its own bonds then those who might otherwise have purchased them would have, instead, to save through other media. These other media would, it was claimed, have then provided them with better returns given that the government would, through its bond repurchase programme, have reduced the return on government bonds to next not to nothing, or less.

The corollary of securing this additional return elsewhere would, however, have been that there would have been higher risk for the person then using alternative savings mechanisms. That was inevitable: the government is always the lowest risk place to deposit money. That risk would, however, have been rewarded with higher rates. Money would, the theory suggested, move as a result from the government to the private sector and that, it was claimed would stimulate growth, and all because the government had supposedly reduced what is called the yield curve.

The QE hypothesis also presumes that investors would, as a result of this forced reallocation of funds to the private sector, have been forced to fund more direct investment into the real economy, because it is the belief of those who are making these comments that when one acquires such things as shares or corporate bonds then the funds used to acquire those financial instruments will be used by the companies that lend their names to these products to fund new, real economic activity within their entities.

The flaws in this thinking are staggering in their scale.

Firstly, and most obviously, throughout the entire QE process the government did not, in effect, reduce the level of government bonds in circulation in the economy. Instead it issued new bonds under the QE, and then in effect repurchased them, or ones like them. At no time was the net value of bonds available to financial markets reduced as a result.

As a consequence, the QE process forced absolutely no one to look for new savings mechanisms in the financial markets. There was, therefore, no enforced change in the savings profile within any economy, let alone that of the UK, as a result.

As a further consequence, the relative attractiveness of other savings media was not changed as a result of the QE programme, precisely because, the opportunity to buy bond was not altered by that programme, because the net value bond issue was never reduced.

The impact of QE on the yield curve could not have existed as a consequence. If QE did not change the availability of bonds, overall (except that, on occasion, its age profile might have altered a little, but not much) then the impact on interest rates that QE was meant to deliver simply could not have existed.

It was true, nonetheless, that the funds available to purchase private-sector financial instruments did grow during this period. But that was not as a result of the QE process. That was because of the unrelated growth in the central bank reserve accounts (see my previous post on this). However, that did not necessarily result in increased economic activity as a consequence.

Almost no company has issued equity shares for the purposes of funding new economic activity for decades. If new shares are issued, they are almost always related to merger and acquisition activity, which is a notoriously bad source of new economic activity in any economy, because it usually results in a reduction in rather than a growth of the scale of the overall entities involved.

And, whilst I agree, the corporate bonds can sometimes fund genuine new economic activity, there is little evidence that this happened during the period in question because overall investment rates in the UK have fallen, most especially since 2016 with the obvious explanation being other government activity (i.e. Brexit), with QE having no impact.

As a result, the entire theory that depends QE is complete nonsense. I could offer more on why this is the case. I am not sure that I need to do so.

In contrast, it is entirely reasonable to suggest that if the Bank of England did want low interest rates then it had the perfect opportunity to deliver them in the way that it actually did. To pretend that cutting bank base rates had no consequence, which is what those posting comments imply, is quite absurd.

Firstly, if that is the case, then the whole basis of monetary policy within the economy is wrong. I might criticise the use of monetary policy, but I happen to think that there are good reasons to believe that if the Bank of England tells commercial banks that it will pay no interest, or negative interest rates, on sums deposited with it then that rate is transmitted into the economy and that this in turn does most definitely influence other interest rates right throughout that economy, including those in the longer term. There might be serious lags In that process, but the policy works.

In that case, putting all this together, the claims made that I am entirely wrong about QE because I did not understand its purpose is shot to pieces. Not only does it remain true that QE did simply represent sham transactions to disguise the fact that the government was being directly funded by its central bank, but because of the reality of the way in which QE was done, it could never have delivered the claims made for it. That was because QE programmes never, in net terms, materially reduced the volume of government bonds in issue, and as a result, QE could never have delivered the claimed benefits that it has supposedly supplied.

I suggest my trolls need better sources of economic instruction than the website that is probably driving them here.