Quantitative (Un)Easing
The increasing number of stories mentioning “Quantitative Easing” seems to indicate that this drastic measure by the Bank of England is imminent. Quantitative Easing basically involves the Bank of England (BoE) making more money available, essentially printing more notes! The “experts” say it’s more complicated than that and I’m sure it is. However, the net effect will be to pump more pounds into the system. My knowledge of historical economics is a little thin, but I seem to recall that similar strategies were used in Germany, Italy and Japan during the 20th Century and that the general effect has been to promote high levels of inflation. The “experts” tell us that the issue of additional funds from the BoE will be controlled so as to prevent possible run away inflation, but how much faith should we or do we have left in the experts from the financial sector?
It strikes me that a simple, basic law of economics dictates that Quantitative Easing will cause more problems that it will solve. The law of supply and demand dictates that the more scarce an item or commodity is the higher value it will command. Conversely, when the supply of a commodity is increased, its value will decrease. OPEC is regularly (although lately unsuccessfully) manipulating the price of oil by restricting or increasing production. If the inherent value of the pounds in our pockets is decreased, the price of our food, fuel and other goods will increase in terms of the number of pounds needed to buy them. This is inflation. If the inherent value of the British currency decreases relative to foreign currencies, mainly the US$ and the Euro, the costs of importing goods and materials will increase. This will also drive up inflation, but will also increase the cost of manufacturing in the UK putting more jobs and businesses at risk.
The traditional mechanism employed by the BoE to restrict inflation is an increase in the Base Rate, so, if the inflation rate does start to increase, we can expect the Base Rate to go up nearly as quickly as it was brought down. However, under these circumstances, I guarantee that the High Street Banks’ reluctance to follow the BoE figure will be notably absent. Furthermore, there will be no cap or collar to restrict the amount of interest mortgage holders will subjected to. The Government has made a lot of the arrangement made with banks to allow borrowers at least six months of deferred payments on their mortgages before action is taken. Woe betide anyone who has six months arrears on their account if interest rates reach the 15% or so seen in the late 1980s.
Through all this we must remember that this whole crisis was started by the greed of bankers and financiers and the incompetence of “light-touch” regulation by Government. The BoE has tried to ease the crisis by lowering its Base Rate and the taxpayer has pumped money and guarantees at the High Street Banks, but they have failed to pass on the available funds or pass on all of the interest rate cuts. This is why the strategies employed by the BoE and our Government have failed to ease the slump into recession, resulting in the possibility that Quantitative Easing may be upon us. The continued greed and selfishness of the banks, coupled with the Government’s continued reluctance to impose regulation on them, may soon lead to actions being taken that will do financial harm to the people of the UK and the country as a whole for decades, even generations.
