The Bank of England is in something of a pickle.
After cutting its interest rate for the 6th time in a row, to 0.5% – the lowest rate in its history – it now has nowhere to go. And why has it been slashing away at the lending rate? Because the Bank is trying to encourage you and me to rush out and spend. Again. We might all be a lot stupider about economics than is healthy, but most of us know when the writing is on the wall. With a combined personal debt of over £1.3 billion, falling job security and plummeting house prices, those of us with more than two functioning brain cells are staying away from the shops. Besides… correct me if I’m wrong – but wasn’t the spending frenzy and subsequent overheating of the economy one of the reasons we’re in our current mess?
So, having floored interest rates, the Bank is going to pump £75 billion into the economy in a dinky little move called ‘quantitative easing’. How does it work? Well, the Bank of England buys up assets, such as Government and Corporate bonds, using money it has magicked out of thin air.
Don’t you just wish that you were a Bank for a couple of hours?
With all this new money sloshing around the system, the banks are supposedly going to feel more confident about lending us more credit, thereby increasing economic activity. Apparently.
It is also claimed by some economists that quantitative easing will help the cost of borrowing. The Bank buying up bonds with their magic money will decrease their availability in the marketplace, thus creating a demand for said bonds. As many debts are borrowed against these bonds, if they become more valuable, the cost of borrowing should get cheaper and easier. That’s the theory, anyhow.
Trouble is… I still am tripping over this business of buying the bonds with made-up money. It sounds to me, far too much like printing money to fill a fiscal hole.
Why not – if there isn’t enough of the stuff in the system, why can’t we do that? Because of the risk of hyper-inflation, that’s why. And if you haven’t just crossed yourself with a fiver and uttered a prayer of deliverance to the God of Sterling at the h-i word – you should’ve. It’s your worst nightmare. Those of us who recall inflation running at 25% in the 70’s will bore the rest of you with tales of how in the time it took us to get around Tesco’s, they’d already put up the price of the shopping in our baskets. And that relatively was mild in world terms – in Zimbabwe the poor devils are coping with inflation rates of 1000%. They might as well use their currency to fill the potholes in the road – it isn’t fit for anything else.
And if you think I’ve been going a bit OTT about this hyper-inflation thing, you might like to know that I’m in good company. Any right-minded Government gets goose-bumps at the idea. To the extent that The Maastricht Treaty forbids any EU member country to print money in order to deal with fiscal shortfalls.
The Bank of England are arranging to buy the bonds with their made-up money through financial institutions, instead of directly from the Government. Which means they won’t be breaking the rules against printing money. Because the financial institutions are not Government owned. Not completely – not yet, anyway…
So… my fears that quantitative easing might be leading us headfirst into the horror of runaway inflation on top of the credit crunch are completely unfounded. I hope. Please God…