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Quantitative easing is the practice of ‘printing money’ in order to inject finance into the economy during times of economic crisis. The Bank, having already lowered the base rate to 0.5%, has undertaken some quantitative easing as a means of buying £75billion worth of assets. But will quantitative easing work?
Printing money – although in reality the money is credited electronically – is what happens when the government believes there is insufficient money circulating the economy.
Therefore quantitative easing is to increase the money supply to consumers through banks. The ultimate aim of this practice is to force banks to lend to consumers, to reboot the stagnant property market and increase spending, which safeguards jobs.
This new money will be used to buy corporate and government bonds, but whatever it is used for the goal is to reduce the cost of borrowing. The Bank of England had hoped cutting interest rates would revive the economy but 6 successive rate cuts to a historic 0.5% has failed to cut the mustard.
Quantitative easing and hyperinflation are easy bedfellows. While the threat of unparalleled inflation may be a couple of years away, increasing debt to solve a debt problem is only going to come back and haunt us. Larry Bates, a former bank CEO described it as “crack cocaine for the economy.”
There is the danger that pouring new money into the economy may see inflation take off and the value of our currency take a nosedive. Picture carrying your money in a wheelbarrow next time you visit Tescos.
Central bankers on both sides of the Atlantic assure us however that this will not happen and if you don’t believe them just take a look at their track record so far (sic). This comment is not meant to be pithy, but rather point at the absurd notion that we can count on bankers to fix the problem they not only initiated but have been unable to control.
When the economy has enough money poured into it through quantitative easing, they will turn off the tap and turn their attention to steadying the ship. Sounds reasonable but in practice is it really that simple?
For instance, who are the banks expected to lend money to? Most consumers are threatened with redundancy and are knuckling down to pay off their debts quick smart. People who are interested in buying a house will hardly be willing to take on a mortgage for a property that may be in negative equity by the time they move in. Also, what about businesses? Are banks really going to fall over themselves to give credit to a company who may fold at any time? All of these scenarios are unlikely.
It is time for cool heads, which is a tall order when a walk down the high street provides first hand evidence of a recession. Shops and other small businesses are closing up every day and the evening news provides more evidence of how deep and far reaching this recession is moving.
All of which doesn’t take away from the fact, however, that attempting to solve a debt problem with more debt is not the way forward.
Worryingly, the general policy (if you can call it that) is “act now and worry about the consequences later”.
You could say is it precisely this type of gun-ho attitude that got the world into this mess in the first place. Capitalism has burnt fingers and a more cautious approach to correcting the economy is what’s required. Already people are cutting back on luxuries and conveniences, embracing a new way of thinking about spending and starting new behaviour patterns.
One of the ways in which the government has attempted to kick-start the economy has been to punish savers. Interest rates on savings accounts are almost down to zero, which is hoped to force savers to spend. In actual fact, savers are looking offshore and to alternative investment products, such as bonds, rather than spend.
Pensioners are the only social group likely to use their savings for spending because they have no jobs to lose. If they are financially comfortable they will give their family some of their savings earnings to spend, therefore cutting interest rates is counter productive.
Many economists say Britain needs a period of saving not spending. High interest rates would attract savings that would then eventually be inputted into the economy though spending. It would also allow people to reduce debt.
Related article: 2009: The Year of the Great Recession
