Tuesday, 18 October 2011

QE in the UK and the value of Sterling

No doubt on message boards across the globe you've encountered the Pavlov Dog response to any mention of Quantitative Easing. Here's a typical line of nonsense.
Personally, with further QE in the system and the possibility of further monetary stimulus we could see further devaluation
It all gets a bit irritating particularly when the reality is so easy to determine via the excellent Oanda historical forex prices site - which neatly shows the rate movements in percentage terms.

Here's the GBP rate during the initial Asset Purchase period (11 Mar 2009 to 26 Jan 2010) when according to the know-all wags and their money multiplier fantasies there were billions of new pounds desperate to flee the country.

GBP Forex % change during initial Asset Purchase period 11 Mar 2009 to 26 Jan 2010
Well that didn't fit the script did it. The value of the Pound rising against three major currencies during a period of 'monetary expansion'.

Even more amusing is what happens after the Asset Purchase programme was suspended.

GBP Forex % change during Asset Purchase suspended period 27 Jan 2010 to 6th Oct 2011
So no real change against our major trading partners and a substantial decline against the Yen. And that despite promises of Austerity, cut backs in public spending and a change of government. Surely that foreign investment should have been flooding in?

Clearly the foreign exchange relationship is much more complicated than simply interest rates and quantities of financial assets. There is a whole host of variables here defining a dynamic relationship that defies simple gut reaction analysis. It's complicated.

There is no evidence that the Asset Purchase function has caused any devaluation of Sterling. Another myth to file in the 'Neat, Plausible and Wrong' category.