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Friday, 7 August 2009

Quantitative Easing: waste of effort

More on the RBS Interim Results when I have had the time to look thrugh the several hundred pages, but it is clear from reading that the description of the business that Quantitative Easing is just a mental exercise for economists because in the real world it has no impact on the UK economy (see yesterday's post about bank's cash piling up at the Bank of England rather than being lent to UK companies).

RBS's balance sheet has dropped in size quite considerably as it unwinds some of its derivative positions, exits foreign businesses and receives repayments from its customers. It has made new lendings which it mentions in its reprts but overall lending is down for reasons described in the following extract:

In business markets, RBS has achieved gross new lending of £28.6 billion. However, demand has been comparatively muted, with companies cutting inventories and expansion plans and reducing their bank borrowing requirements. Additionally, the anticipated withdrawal of non-UK and wholesale-funded lenders which has characterised the mortgage market has not occurred in corporate markets, and the anticipated “gap” in the market for creditworthy corporate borrowers has not emerged. After taking account of loan repayments and overdraft movements, RBS’s UK business lending, including Ulster, at 30 June 2009 totalled £155.1 billion, a decrease of 1% from 30 June 2008 and a decline of 4% since the end of 2008.

In the SME segment of business markets, gross lending in the first half totalled £17 billion notwithstanding weaker demand. However, repayments have been accelerating since the third quarter of 2008, leaving balances at the end of June of £66.6 billion, up 2% from June 2008. As a result of RBS’s price pledge, 94% of customers who renewed their overdrafts in the second quarter of 2009 did so at the same margin or lower and in June, the average interest rate paid by customers on term loans was half its level a year earlier. Total credit applications in the first half were down 22% on the same period of 2008. While there has been some recovery in recent months in the number of applications for term loans, the average size of each application has fallen, reflecting, among other factors, falling property values. As a result, term loan applications by value were 37% lower. The acceptance rate across all categories of SME credit remains stable at 85%.

In other words, it doesn't ake any difference how much cash is pushed into the banks, there is very little real demand from companies to brrow to invest.

That is not surprising. After all, who would want to invest in a country that is running a government budget deficit of 14% of GDP? That way lies massively higher taxation. If the government wants to make a difference it should stop pretending that pumping money into the financial system is making any difference and start making the country more attractive for investment. That means smaller government and less red tape for businesses.

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