QE is not money printing. It's worse?

[SavageReturns]

Where's dealtn when you need him? I'm sure he can explain this in a way that at least I can understand.

This might already have been explained but, hopefully simply, the BoE buys an asset, Gilts from the market. To pay for this it exchanges (newly created) money, which it gives to the seller of the Gilt.

In essence the Central Bank (more accurately one of its subsiduries) now owns an asset and has created a liability. The asset can be thought of as having a profit/loss - just like many of us on here that buy shares, if the price goes up we have "made a profit" if it goes down we have "made a loss". Although some investors and in particular some boards this doesn't always appear to apply!

One of the allegations is the Central Bank has "lost" a lot of money. The counter is that many of these assets will be held until maturity so the "loss" will actually only be holding an investment for a known return, and any loss is just an "opportunity cost" and not a trading/investment loss. The second counter is more "so what". in essence the QE wasn't meant to be considered against any (potential) loss, but to "rescue" the economy from weak growth and deflation. Indeed its unwinding, and associated losses, are the signs of the policy's success (and a price worth paying compared to the alternative costs of its failure).

Considering the liability side (which few do, or understand) essentially that (newly created) money works its way round the financial system, but essentially everyday "money" sits in commercial banks (as we use it to pay for stuff and the sellers of that stuff either buy stuff themselves or "bank" it). That deposit at the commercial bank in turn, at the end of each day gets deposited at the Central Bank "overnight". That deposit is an asset of the Commercial Bank, and therefore a liability of the Central Bank. In simple language the Central Bank pays the Commercial Bank interest on that overnight deposit as a "cost".

So again (as a measure of the policies success in creating growth in the economy etc.) as daily variable interest rates rise the fixed interest rate return of the Central Banks Gilt asset doesn't go up, but the variable floating rate element paid on its deposit liability does, and therefore the daily running cost of QE becomes more expensive.

One side of the argument will be QE was stupid and is now costing (us) more. The response from some will be "Good. The policy worked!".

QE becomes more expensive for who? The central bank? They manufacture money, surely it is completely irrelevant to them.

They pay interest on their liabilities, so the higher the overnight rates the more expensive it is for them. That liability, and its running cost, exists. I wouldn't describe that as completely irrelevant. Are we close to the point where that increase in cost is unaffordable and unlikely to be met on an ongoing basis though? No.

So what determines it to be unaffordable? What is that threshold? How could they ever not meet the liabilities and costs? Again, they manufacture money.

[dealtn]

How could they ever not meet the liabilities and costs? Again, they manufacture money.

At the point it becomes publicly unacceptable to incur those costs, or when the market is unwilling to transact at an interest rate to "clear" that "manufacturing".

You are aware that countries have defaulted in the past, and that currency crises have happened? Whilst the UK is a long (very long) way from any point of default or threat to Central Bank operational concern - can you explain how an infinite manufacturing process could occur without harm to the economy in practice?