There seems little point in reducing interest rates any further as the interest rate cuts are proving to be ineffective and the Bank of England base rate cuts are proving to be unpopular with savers and borrowers. The pound is falling against the dollar and the euro. Savers are not being rewarded for saving their money and interest rate cuts are not being passed on in total to mortgage borrowers and businesses.
Gordon Brown and Alistair Darling are asking us to spend more in an effort to keep the economy afloat. Spending money is the last thing on people’s minds when they fear for their jobs as the recession starts to bite and their first thought is to save for a rainy day.
The British government may be considering printing more money to boost the economy and to ease the banking freeze on lending to borrowers. Quantitative easing was last used by the Bank of Japan between 2001 and 2006 to fight domestic deflation. This policy did not succeed in stopping deflation and scholars cannot agree whether the actual technique actually worked. In Zimbabwe President Robert Mugabe has been printing money for years with horrific results. Printing money is a remedy of last resort and should only be used in extreme situations as it causes inflation!
Alistair Darling the Chancellor of the Exchequer does not like the term ‘Printing Money and he has said that the treasury is looking at other ways to stimulate the economy. The Chancellor has said that if the government was to use quantitative easing it would be the government that would play the active role in how it is used and not the Bank of England. Maybe we should call it quantitative easing as it sounds better than printing Money- that’s what the Americans call it and they have by all accounts already started printing ‘green backs’. Billions of Dollars!
Governments use quantitative to boost the money supply within the banking system by providing the banks with extra capital. The problem with quantitative easing is how much money should the government print and when should they stop printing money in order to not control inflation. The Government can also control the process of quantitative easing by selling the assets it buys with the newly printed money. Inflation is one of the biggest dangers of printing money or using quantitative easing.
So how would the government implement quantitative easing?
It would involve the Bank of England giving money to the banks in return for assets, like buying government bonds, corporate bonds, dodgy assets and toxic mortgage debts. The government in effects buys the debts, like mortgage or bonds in exchange for money and the government then become liable for the debt or should I say we the taxpayer becomes liable for the debt. This helps to put more money into the banking system. The hope is that the banks would lend this extra money to us so that we will spend more. Quantitative easing is extremely risky and it needs to be practised safely and with caution.
In the words of George Osborne, Shadow Chancellor “printing money is the last resort of a desperate government when all other policies have failed.” The government needs to find some other monetary mechanism to fight deflation. We all know that inflation is controlled reasonably well by increasing and decreasing the Bank of England base rate during boom times. If Bank of England and this government use quantitative easing and they lose control of it we could see interest rates of 17% and 18% returning and inflation rising beyond anything we could have imagined. Your thoughts, experiences and comments are welcome. Just CLICK on the GREEN coloured COMMENT bar below and Leave your thoughts or experiences today!