An Introduction to Quantitative Easing - When It’s Used

The Bank of England in Threadneedle Street, London. Deutsch: Sitz der Bank von England in der Londoner Threadneedle Street. (Photo credit: Wikipedia)

Since the dawn of the financial crisis in 2008 - a crisis that continues to effect the health of our economy, and therefore the prosperity of each one of us today - there has been much discussion as to the best ways to minimise government debt whilst, at the same time, encouraging as much growth in the economy as possible. One tactic that has been used in a few countries including the UK and US is that of quantitative easing.

Typical Monetary Policy
A central bank’s primary and most effective tool when influencing or controlling the speed at which the economy is growing is the base interest rate. In the UK the central bank, the Bank of England (BoE), defines this rate as the rate at which they will lend to other banks. In short, by lowering this base rate, other banks are able to borrow at a lower rate and consequently offer lower interest rates in turn on both loans and savings accounts to their customers. These customers therefore have access to more affordable (due to the lower loan repayments) money with which to grow their businesses or to spend on goods and services. Meanwhile, the lower interest rates on savings accounts reduce these potential returns and so there are less incentives for customers to deposit their money as savings. All these factors make investment opportunities more attractive and spending more likely; thus increasing the flow of money through the economy.

When Quantitative Easing Is Used
This system works well as long as the base rate has room to be lowered. However, when it is too low to be reduced any further the central bank must look to other solutions to encourage further spending and investment. What’s more, when a base rate is lowered in response to a lack of liquidity and growth in the economy, there is a point at which banks can become more reluctant to lend. This is caused by the twin effects of lower yields for the bank on their loans, due to the tendency for the interest rates across the market to be lower, and the increased uncertainty surrounding whether individuals and businesses will be able to make their repayments. All of which reduces the money reaching invdividual’s and businesses and subsequently their spend and investment on goods and services within the economy, slowing down growth.

When the central bank encounters a situation such as this, as has been the case in a number of economies in the last few years, they can utilise a secondary tactic of quantitative easing. The basic principle behind quantitative easing is to introduce more money (i.e., more liquidity) into the economy to spur spending and growth, by using newly created money (colloquially referred to as ‘newly printed’ although in truth it is all done electronically). This new money is injected by the central bank when they purchase government bonds (i.e., government debt) from private companies, as explained further in the second installment of this article, with the aim of there being a trickle down effect throughout economic markets to other businesses and individuals.


Managing Growth
The level of spending in the economy can be intimated by the inflation rate - the percentage rate at which the value of goods and services are changing, usually increasing, in price. A high inflation rate reflects the fact that there is high demand for these goods and services within the economy, although the higher it becomes, the greater the chances of a rebound effect that then reduces demand and slows spending - high inflation means high prices and these prices can reduce the affordability of goods and/or money will start to lose its value (particularly in the case of hyperinflation such as was seen in Germany in the inter-war period). Therefore, countries tend to aim towards a stable rate of inflation which reflects growth with a sustainable momentum.

In the UK, a committee within the Bank of England called the Monetary Policy Committee (MPC) has the remit of attempting to maintain a stable rate of inflation at 2%. To that end the committee is responsible for a number of monetary policies. including setting the base interest rate and overseeing the BoE’s quantitative easing policy.

The second installment of this article looks at how quantitative works and achieves this aim.

To find out more about investing in global economies you can visit Stocks and Shares ISA Plan.

The Junior ISA at a Glance

The Junior ISA (JISA) has rarely been out of the news since its launch at the tail end of last Autumn, with many debating its merit as a vehicle for saving for our chidren’s futures and whether it adequately fills the gap left by the late Child Trust Fund. However, for any parent who’s considering opening one for their child it is worth getting to grips with the basic facts before weighing up their options and, to that end, the following provides an at-a-glance view of all the most pertinent information about JISAs.

Who is Eligible for a JISA?

• UK resident children (i.e., younger than 18) born...
• since 1 January 2011
• before 1 September 2002

Children born in the period between the dates above are instead eligible for a Child Trust Fund (CTF), the relatively short-lived precursor to the current Junior ISA, into which the government would contribute a starter fund, typically £250. Unfortunately those who are eligible for CTF cannot have their CTF switched into a Junior ISA.

Who Can Open a JISA?

• Parent/Guardian
• in the name of their child

The parent or guardian who opens the account becomes the registered contact for that account however any monies put into the ISA will always be owned by the child as soon as they are credited to the account, and not the registered contact. The registered contact cannot easily be changed once they have opened the account unless there is a suitable reason, such as the guardianship of the child changing (new foster or adoption parents for example), although the child can become the registered contact themselves when they turn 16.

What Accounts Can Be Opened?

• One Cash ISA
• One Stocks & Shares ISA

A child can hold both elements at the same time (as is the case with an adult ISA) and these can be held with different providers, but they are only entitled to have one of each account type open at any given time. At 16, the ‘child’ can also open an adult ISA themselves which will be completely ring-fenced from the Junior ISA.

How Much Can Be Put In?

• £3,600 per tax year

This is the limit for the 2012/13 tax year and is likely to rise in future tax years as the subscription limit for adult ISAs does. The entire sum can be put into either the Cash or Stocks and Shares elements, or split in any proportions between them.

What are the Investment Options?

• Cash
• Shares
• Collective Investments (Investment Trust, Unit Trusts, OIECs etc)
• Debt Securities (Bonds etc)

The monies within a Junior ISA can be apportioned however you wish amongst these options but, as with an adult ISA, the cash elements must be held within a Cash ISA (unless the cash is awaiting investment within the Stocks & Shares ISA) and the other investments, including Shares and Collectives, must be held within a Stocks and Shares ISA. For a full breakdown of all the investment options you should refer to a financial adviser and/or check the various providers on the market, however the investment opportunities will vary from one provider to another.

What Tax Breaks are Available?

• Income Tax
• including Dividend Tax
• Capital Gains Tax (CGT)

The Junior ISA protects any income on cash savings and investments, including interest and dividends, that would usually be susceptible to tax where the child’s overall income exceeds the standard annual tax free allowance that all individuals benefit from (£8,105 for 2012/13). In addition any gains the ISA makes will not be affected by CGT.

When Can the Monies be Accessed?

• When the child turns 18
• If the child is terminally ill
• If the child has died

Although the child can take over control of the Junior ISA as the registered contact when they turn 16, they will still not be able to withdraw the money until their 18th birthday. If the child is terminally ill the registered contact may apply to the HMRC to withdraw the monies and if the child has died the monies will pass within their estate to the relevant beneficiaries.
© Stuart Mitchell 2012

Investing in a Gap Year Trip

100 gap years (Photo credit: eleannab)

The gap year cliché is one of middle class eighteen year-olds taking time out between leaving school and starting university to back pack around the world and ‘find themselves’ whilst they flourish into adulthood. In truth gap years are becoming more and more popular across the demographics and socio-economic groups in spite of the fact that there are more competing financial pressures on our young people than at any other time in recent memory.

Why Take a Gap Year Trip?
There is no doubt that extensive travelling provides not only a geographical perspective but also a mental and emotional one. From the experiences gained with different cultures, religions and economic classes, young people who do embark on a gap year trip often report that they come back as more rounded individuals with a greater empathy and understanding of the wider world. However, these trips also offer more practical life lessons in preparation for university and adulthood in general, such as the ability to manage finances and to get themselves from a to b. In both respects initiative is vital in getting work and consequently money to fund the adventure, as well as in fathoming the best ways to travel.

All youngsters that embark on a gap year trip should find that their soft skills improve drastically through exposure to strangers and strange situations, having to communicate effectively with those they encounter. However, gappers that go for a more structured trip that incorporates a work or volunteering placement will certainly develop their soft skills in more formalised contexts as a result of having to work with bosses (perhaps for the first time) and colleagues, speak in public, resolve conflicts and communicate with all manner of people they including children - particularly those who follow the popular path of teaching English as a foreign language (TEFL). What’s more, work placements are a great way to hone those other skills that are fundamental to success in the professional world such as time management and organisation.

All in all, a gap year should improve a youngster’s future career prospects as well as their ability to succeed in the rest of their education. Most importantly, employers seem to agree and place real value on the experiences through a gap year, believing that the experiences and skills mentioned above will have been enhanced through such trips.

How Much Will it Cost?
So, for those that do place value on the experiences garnered through gap year travel, the next question is how much can you or your child expect to pay for such an adventure. The first obvious point to make is that the price of a gap year trip will vary substantially according to where you go, what you do and how long you go for.

As a very rough guideline, a typical trip for 6 months could cost between £4k to £5k depending on which countries and parts of the world are on the itinerary. Trips to places like the US will cost considerable more than trips across Eastern Europe for example and this budget may only last 3 months in the States. Again using very rough approximations, those hoping to really push the lower end of a budget could look towards surviving on a meagre £15 a day (visiting cheaper countries, cutting costs on travel and accommodation) but other trips that don’t make these savings can easily double that figure. In addition, a round-the-world ticket for gappers who are organising their travel in advance can cost anywhere from just below £1k to £1,5k with the inclusion of various airport fees that may be incurred.

There are many techniques that seasoned gap year travellers will recommend to keep these costs down or to cover them as you travel. Buying tickets when your abroad rather than before you go will reduce the travel costs (albeit at the expense of some forward planning) whilst picking up paid work during the trip can help. Casual work, such as bar work, is only likely to bring in a little social money, but a popular solution is to organise a placement teaching English as a foreign language (TEFL) as that can bring in a little more to help with the costs whilst really strengthening those soft skills in the process.

Whichever way you or your child chooses to fund a gap year, there is no denying that it will cost a substantial amount of money at a time in their lives when they are also having to think about how they will afford university and/or adult life. However, there is also no denying that the experiences and skills they’ll gain can be immeasurable so it might be best to start putting some money aside in that JISA as soon as possible.

© Stuart Mitchell 2012

Investing in a Gap Year Trip

The gap year cliché is one of middle class eighteen year-olds taking time out between leaving school and starting university to back pack around the world and ‘find themselves’ whilst they flourish into adulthood. In truth gap years are becoming more and more popular across the demographics and socio-economic groups in spite of the fact that there are more competing financial pressures on our young people than at any other time in recent memory.

Why Take a Gap Year Trip?
There is no doubt that extensive travelling provides not only a geographical perspective but also a mental and emotional one. From the experiences gained with different cultures, religions and economic classes, young people who do embark on a gap year trip often report that they come back as more rounded individuals with a greater empathy and understanding of the wider world. However, these trips also offer more practical life lessons in preparation for university and adulthood in general, such as the ability to manage finances and to get themselves from a to b. In both respects initiative is vital in getting work and consequently money to fund the adventure, as well as in fathoming the best ways to travel.

All youngsters that embark on a gap year trip should find that their soft skills improve drastically through exposure to strangers and strange situations, having to communicate effectively with those they encounter. However, gappers that go for a more structured trip that incorporates a work or volunteering placement will certainly develop their soft skills in more formalised contexts as a result of having to work with bosses (perhaps for the first time) and colleagues, speak in public, resolve conflicts and communicate with all manner of people they including children - particularly those who follow the popular path of teaching English as a foreign language (TEFL). What’s more, work placements are a great way to hone those other skills that are fundamental to success in the professional world such as time management and organisation.

All in all, a gap year should improve a youngster’s future career prospects as well as their ability to succeed in the rest of their education. Most importantly, employers seem to agree and place real value on the experiences through a gap year, believing that the experiences and skills mentioned above will have been enhanced through such trips.

How Much Will it Cost?
So, for those that do place value on the experiences garnered through gap year travel, the next question is how much can you or your child expect to pay for such an adventure. The first obvious point to make is that the price of a gap year trip will vary substantially according to where you go, what you do and how long you go for.

As a very rough guideline, a typical trip for 6 months could cost between £4k to £5k depending on which countries and parts of the world are on the itinerary. Trips to places like the US will cost considerable more than trips across Eastern Europe for example and this budget may only last 3 months in the States. Again using very rough approximations, those hoping to really push the lower end of a budget could look towards surviving on a meagre £15 a day (visiting cheaper countries, cutting costs on travel and accommodation) but other trips that don’t make these savings can easily double that figure. In addition, a round-the-world ticket for gappers who are organising their travel in advance can cost anywhere from just below £1k to £1,5k with the inclusion of various airport fees that may be incurred.

There are many techniques that seasoned gap year travellers will recommend to keep these costs down or to cover them as you travel. Buying tickets when your abroad rather than before you go will reduce the travel costs (albeit at the expense of some forward planning) whilst picking up paid work during the trip can help. Casual work, such as bar work, is only likely to bring in a little social money, but a popular solution is to organise a placement teaching English as a foreign language (TEFL) as that can bring in a little more to help with the costs whilst really strengthening those soft skills in the process.

Whichever way you or your child chooses to fund a gap year, there is no denying that it will cost a substantial amount of money at a time in their lives when they are also having to think about how they will afford university and/or adult life. However, there is also no denying that the experiences and skills they’ll gain can be immeasurable so it might be best to start putting some money aside as soon as possible.

© Stuart Mitchell 2012
If you want to find out more about saving in preparation for your child’s future adventures then visit Junior ISA.