We must print more money, says Bank
Governor appeals for urgent action to salvage Britain’s shrinking economy
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Independent Minds
The Bank of England is to start ‘printing’ new money for the first time in 30 years as it runs out of options to kick-start the economy. The Governor of the Bank of England will write to the Chancellor within days to get permission for the unprecedented action.
The Bank will create the money by buying government and corporate bonds from financial institutions for new supplies of sterling. Termed “quantitative easing”, it is the modern equivalent of printing money. It is designed to put more cash into the economy, creating more money for companies to spend and for banks to lend.
The move marks the most dramatic step taken yet by the Bank as it tries to stop the deepening recession turning into a slump. One of the main reasons for the financial crisis has been the unwillingness of banks to lend money after the sub-prime losses in the US.
Critics have branded the action irresponsible and said it could stoke inflation and spark a run on the pound but the severity of the recession has driven the usually conservative central bank to throw caution to the wind.
The minutes of this month’s Monetary Policy Committee meeting, released yesterday, showed a unanimous vote to request the go-ahead from the Chancellor. Alistair Darling is expected to reply immediately to the Governor’s letter in an exchange that will cap urgent work at the Bank and the Treasury to allow purchases to start as soon as possible.
Andrew Goodwin, a senior economic adviser to the Ernst & Young ITEM Club, said: “It is crucial that the Bank be allowed to swiftly and boldly implement this policy. The lack of supply of credit is the biggest problem facing the UK economy and increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions,” Mr Goodwin said.
Under measures announced last month, the Bank is already authorised to buy up to £50bn of assets to help unblock frozen markets but without increasing the supply of money to the economy. The Bank’s rapid move to the extreme option of creating new money in exchange for the bonds underlines the increasing sense of crisis.
The Bank’s nightmare is a sustained period of deflation – general falling prices – which would prolong and deepen the recession by encouraging consumers and businesses to delay spending. A short period of falling prices is expected later this year, driven by dropping energy costs, but with inflation falling and the economy contracting quicker than forecast, the Bank wants to act to prevent a downward spiral.
The results of a CBI survey released yesterday showed manufacturers’ order books shrinking at their fastest rate since 1992 and companies expecting to cut output at a pace not seen for nearly 30 years. The measure of export orders slumped to its lowest since November 2001, quashing hopes that sterling’s recent sharp fall would boost overseas sales for British businesses.
The Bank has never taken such a radical step to boost the money supply before but similar measures were used by Japan in the early 1990s and during the 1970s when the supply of sterling was increased. Critics argue that creating new money did not prevent Japan’s “lost decade” of stagnation.
The Bank has started a softening-up exercise to rebuff accusations that quantitative easing amounts to recklessly turning on the printing presses in a way that has driven countries such as Zimbabwe into hyperinflation.
Charles Bean, the deputy governor for monetary policy, said on Monday the aim was to boost the supply of money and credit to achieve the Bank’s 2 per cent inflation target and not to finance a government budget deficit as happens in corrupt regimes.
With the economy “undergoing a significant and sustained adjustment” and inflation heading for negative territory, the Monetary Policy Committee decided it would need more than rate cuts to limit the recession and keep inflation close to its 2 per cent target in the medium term. The minutes showed doubts growing about the impact of further interest-rate cuts as the committee agreed to slash borrowing costs to a record low of 1 per cent.
It voted 8-1 in favour of the half-point reduction. David Blanchflower called for a one-point fall but the majority rebuffed his call for a bigger cut because it could deter banks from lending.
“There was a great deal of uncertainty about what would happen to banks’ and building societies’ ability and willingness to lend at low levels of interest rates,” the minutes said. “There might even be a point where further cuts in bank rate could have an adverse impact on the economy.” Mr Blanchflower said past errors were due to cutting too late and not too soon.
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Comments
Even if there is no hyperinlflation, the value of money will be significantly eroded. I bet the architects of this madness have their wealth securely hidden in hte form of gold and other tangibles.
While I may be a trained economist and senior investment banker, not to mention a strong believer in the Austrian School, it suffices to simply summarize:
1) You can't get something for nothing
2) Guys that were part of the problem's creation cannot understand the solution
3) Bubbles contract after being inflated. The solution is to increase the savings rate, not to push inflation higher and force savers to spend their money.
4) Printing money will destory the UK for decades to come, and there is no punishment severe enough to match the wreckless and irresponsible actions of Brown and Darling.
A substantial reduction in personal taxation would be a big step in the right direction and is the only way forward.
Gordy and Co know this. It would of course reduce his cut of the take an unbearable thought for those who live so well off the backs of others. But people with cash to spare tend spend it on everyday commodities triggering the road to recovery and he will recoup a large slice of his ill gotten gains through VAT.
Of course this in turn should a reduction be decreed would beggar the question why are we all paying such high levels of tax to begin with and with the cat out of the bag the game would be up. Wouldn't it?
It would help of course if anti-sociual spending like that on corporate welfare and corporate welfare wars was cancelled, bjut it won'e because of the nature of the psueduo-democracy.
Bet your best blouse that government will be *forced* eventually to implement large tax *increases* to rake in more and more debased currency.
Printing money, has a stark effect, it waters that currency down proportionally to the available known currency in circulation, it has a compound effect that if not checked causes the above mentioned run, it is an effect that once has a grip on that nations economy, is very very difficult to escape.
Germany did this very thing, in fact it was possibly one of the very few positive successes Hitler had as leader of that nation, taking a hyperflative economy and using scrip and barter bank schemes, managed to rebuild the German currency, more recently we have seen Zimbabwe, the perfect warning in itself on how not to wreck ones economy, in a perpetual hyperflative state, in 5 years time, a thousand, trillion dollar note might have to be invented, it is that dire.
The Americans also have seen what happens when Bush ordered the printing of new dollars, Bush tried to be clever and hide the various "M" reports which tell the world how much American money exists, this failed and the dollar plummeted opening the door for the next entree, the sub prime debacle.
The best way out for Britain is simple, weather it out, stamp on excessive expenditure and adopt a period of austerity, allow the economy to shrink back to a stable size and the pound to stabilise with it, it may be time to consider regardless of political bent, the adoption of the Euro and embrace the Eu economical zone fully to gain the full benefits of the bloc, it will piss the Americans off but they have wrecked our economy.
Two areas alone would make an immediate difference, scrap the Trident replacement, withdraw all troops from Iraq and Afghanistan, that would save the economy some 25 Billion or more over the coming years, we simply cannot afford it any more.
Do not just read this. Act.
If printing money is a bad thing, why not abolish it and resort to barter?
So you think we live in a democracy ?
Try and remove an incumbent government that is criminally incompetent.
Our Grandchildren will be paying the arrogance and hubris of new labour.
The government just will not face the reality of what they have done.
Their flawed solutions including massive devaluation and panic slashing of interest rates have not been given time to work, so now they debase the currency.
The one word that comes to mind is panic.
As a result not only will they destroy the country they will destroy themselves
Of course the driver imagines that this will never happen to him and (probably) blames his boss for force feeding fiancal necessity when the driver shoud have advised the boss of his folly and insisted that he be more prudent!
In December 2004 Mervyn King commented in Banking World (The Journal of the Chartered Instiute of Bankers) that he could not envisage another housing market crash similar to the early 90s. He totally ignored the 100/125% mortgages being granted to first time buyers (Northern Rock) and the dangers inherent in the "buy to let" market (Bradford & Bingley) etc. etc. etc.. Perhaps Gordon thought of the capital gains tax he would reap in when these let properties were eventually sold (if he had not already got them by inheritance tax!).
If these people can not see their own recent history I suppose it is inevitable that they think only of tomorrow, the next wage packet, and the next election and not of the tainted legacy they will leave for eyars to com.
The professor replied, "I don't have time to explain it at my office, but if you come over to my house on Sunday and help me with my weekend project, I'll be glad to explain it to you." The student agreed.
At the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool.
They both went out back to the pool, and the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, "First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed.
The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it." The student was naturally confused, but did as he was told.
The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.
The confused student asked, "Excuse me, but why are we doing this?"
The professor matter-of-factly stated that he was trying to make the shallow end much deeper.
The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough.
However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you'll really have accomplished is the destruction of what could have been truly productive action!"
The professor put down his bucket and replied with a smile, "Congratulations. You now understand the stimulus bill."
He sounds a bit dodgy. I'd tell my mum about him.
But using it to pay off bad debts and loans might help. Equally print money and give it to savers who have lost out in falling interest rates and to raise unemployent benefit substantially.
It is time the government gave direct help to the victims of this crisis instead of channelling it through the banks which does not work because the banks will just swallow it up.
is obstructed.
http://www.independent.co.uk/news/busin
how odd!
No one wants to borrow - why? because we are feeling insecure and uncertain. There is no point borrowing money if you cannot be sure you can repay it. No one in their right mind would go near a bank, ever again if they could avoid it.
The economists are right, problem is banks. No one wants to borrow.
The Banks are selling loans no one wants - they have yesterday's fish on their stalls, and it stinks!
The Banks have dropped their interest rates to the lowest in sixty years. We the public are not fooled!!! not least because the minute people borrow those rates will go shooting up. We do not want to be saddled with debt. The banks have money, but no one wants to borrow it. Better by far to buy gold - it won't go rotten on you.
Until the psychology of this recession is understood, it will worsen. No one wants to buy shoddy goods, yesterday's newspaper or to borrow money. The government cannot persuade people to buy money because we all know that we have to live within our means. And we also know that the money supply is rotten to its core.
The one action that would give everyone a jumpstart for joy would be a GENERAL ELECTION and for GORDON to GO. Then we can have a fresh start and a set of principles for public life that have been sadly missing since the NULABOUR clique seized control.
Any increase in the fiduciary issue will not solve the problem because the clumps of money will simply grow, as people hang on to not only what they've got but also what they get.
Meanwhile the value of our currency will diminish, so that the funds which people are holding on to, will shrink in value.
We cannot stand a devaluation of the pound: we could, perhaps, stand a revaluation, though that remains a dubious option.
Frankly, our best way out of this recession lies in manipulating people's attitudes and confidence on the one hand, and bringing pressure on the Banks to release the funds which they hold instead of hanging on to them, on the other.
did i hear something falling through the floor?
On the other hand if sterling does go base over apex we could possibly join the Euro (though by that point I doubt we would qualify) which might be the whole point of this fiasco.
Don't let the bastards grind you down.