...a blog by Richard Flowers

Friday, March 06, 2009

Day 2986: A Quantum of Easing


Now, pay attention, 007! If you press this button, you’ll engage and then fire the Economic Ejector Seat, blowing the top off the Bank of England and shooting seventy-five billion pounds up your… fiscal rectitude…

So, how does this “Quantitative Easing” thing work?

Well, imagine you’ve got seventy-five billion pounds… THAT’S how it works.

But this ISN’T like Zimbabwe or the Weimar Republic where they just printed money in order to pay its bills. Oh no! Here, the Bank of England is printing money to buy back the government’s I.O.U.s that they issued in order to pay their bills. Hang on, how does this work again?

Suppose you had ALL the sticky buns in Great Britain. Just suppose. [Sighs] Sorry. Back with you. Let’s say that all those sticky buns cost a billion pounds. Then suppose the Government creates a billion pounds out of nothing, just to spend on sticky buns. But you’ve still got THE SAME NUMBER of sticky buns. So now your sticky buns cost TWO billion pounds and you’ve invented HYPER-INFLATION.

On the other fluffy foot, people OUTSIDE Great Britain looking in will see this billion pound mountain of sticky buns and say, ah ha! That is worth quite a lot of Euros or a bit of a stack of Dollars or two-thirds of a Triganic Pu! But then the Government says abracadabra it’s now a two-billion pound mountain of sticky buns. And everyone else says, er no that’s still quite a lot of Euros or a bit of a stack of Dollars or two-thirds of a Triganic Pu; we’re just going to give you LESS of OUR currency for YOURS thank you very much. And you’ve invented a RUN ON THE POUND as well.

Good going, so far.

Fortunately, however, the REAL value of Great Britain is quite a lot MORE than a billion or even seventy-five billion pounds. In fact, the Bank is only magicking up a bit under 4% of our GDP (which is how you measure total sticky bun production).

That MIGHT cause a little bit of inflation… but that might just cancel out the DEFLATION that’s threatening at the moment. And anyway, Government’s think they know how to DEAL with INflation: they put the interest rates back up.

It MIGHT cause a bit of a fall in the pound. But the pound is already quite suppressed because there’s a CYCLE to this. The way the VULTURES circle the World Economy began with Americaland, and the dollar fell – remember that from early LAST year? – and then came to Great Britain and the Pound fell, and it will probably be the Eurozone next and the Euro will shift down in value, cancelling out it’s previous gains over the pound. And a falling pound HELPS our exports, as we found after the ERM fiasco. Though that is dangerously close to PROTECTIONIST thinking; remember it HURTS imports too, and world trade depends on BOTH import and export to really work.

So it’s SORT OF borrowing from the FUTURE. The Bank invents money NOW to buy the Government bonds; but when the economy is right again, they SELL the bonds back and vaporise the money again. We pay “interest” in the form of inflation and the cost is our money becoming worth a bit less.

But is it going to work?

No. Because it’s a sort of short term CONJURING TRICK, and you can’t keep doing it or the economy goes completely Mugabe.

We need to stop BORROWING to patch up the failed economy of the last few years and start BUILDING the economy of tomorrow.
Now, we’re off to Lib Dem Spring Conference. I wonder what Mr Clogg and Mr Cable will have to say about that…


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