Thursday, 6 October 2011

Another round of QE but does it work?

Very quick take on the Bank of England’s shock decision to order another £75bn of Quantitative Easing – a full month earlier than originally expected!

For the uninitiated (I envy you!) QE, as it is known, is the process of the Bank of England buying back Government bonds from the banks. In turn, this gives money back to the banks which should in theory ease the credit crisis as they use this money to lend to business and to consumers.

The big question now is, will it work? My own gut feeling is that it won’t. Regardless of what happens to the extra money given to the banks, and many people believe that too much of it goes on rebuilding their balance sheets or speculative trading abroad, you can’t help feeling that the Bank of England is giving drugs to the doctor rather than the patient.

What is clear is that certain sectors of the economy, such as the High Street, are suffering from a demand crisis. In other words, you and I are not buying anything because we are too busy tightening our belts. It may be simplistic, but the likes of Simon Jenkins in The Guardian have been arguing for some time that the banks cannot be trusted to lend and we should be using the old helicopter theory of economics in order to stimulate demand ie. take a helicopter up with sackloads of money and tip it out.

That should be fun to watch if nothing else, but at the moment I suspect many on the High Street will settle for a VAT cut!


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