Quantitative Easing: Episode II

There is not much the Big Bang and the Bank of England’s latest quantitative easing (QE) package have in common, but one thing that they do share is the ability to create something from nothing, which, I think you will agree, is no mean feat. The Big Bang created a universe so vast and mysterious that it is virtually impossible for us to comprehend let alone understand. The Bank of England hasn’t managed anything quite on that scale but their latest creation of £75bn from thin air in an attempt to bolster the ever flagging UK economy has left many equally bemused.

The money the Bank of England has created will be used to purchase government bonds from commercial banks and other large financial corporations in the hope that it will filter down into the wider economy, boosting spending and investment by providing cheaper credit. The Bank of England has now added £275bn to the UK economy, following the creation of £200bn in March 2009 which it hopes will put the economy back on its inflation target of 2%.

Mervyn King, the governor of the Bank of England, explained the decision of the Monetary Policy Committee (MPC) in an open letter to Chancellor of the Exchequer, George Osborne. In the letter he explains that the decision was made to increase the asset purchasing programme to “keep inflation on track to meet the 2% inflation target over the medium term” which the MPC believe will fall over the next twelve months as “the influence of the factors temporarily raising inflation diminishes and downward pressure from unemployment and spare capacity persists.”

QE has drawn a large amount of criticism for being an extremely inefficient way to help consumers and small businesses and get them spending again. Sir Terry Leahy, former CEO of Tesco, summed the argument up aptly when he said: “QE created an awful lot of liquidity intended for the real economy but found a home in markets and speculators looking for quick returns.” This criticism, with the fact that QE decreases the value of the rest of the money in the economy, whether that be the savings in your bank account, your parent’s pension fund or the turnover of a small business; shows that this latest round of QE is likely to have a negative impact on the majority of the population, and it is unlikely to boost our long term growth potential.

Ros Altman, from insurance and travel provider Saga, spoke of the latest round of QE as “a Titanic disaster” that would increase pensioner poverty whilst leaving new retirees permanently worse off. The news is not good for student loan holders either. This measure, which will boosts inflation, means the interest rate on student loans which are linked to inflation will increase, leading to higher debt for a longer period of time.

Let us not forget that this is coming after a number of tumultuous months for both Europe, with their impending debt crisis, and the financial markets which have been extremely volatile of late. So it is likely that those corporations given this latest round of money will be cautious about who they lend it to. They do not know who is exposed to what risk and they certainly don’t want to become insolvent so the most likely scenario is that the money will simply be sat on.

So whilst the Bank of England is doing the best it can to help the UK economy it is becoming increasingly apparent that all the tools they have at their disposal are no longer working; including this one. In the main this is an indictment of wider economic problems: growth is slow, consumers are struck by austerity measures, businesses are struggling to find affordable loans and the debt crisis in Europe is causing continual havoc for the financial industry. This in the face of the colossal government debt which renders typical solutions such as tax cuts and major capital spending obsolete means that we find ourselves pinned to the ground with nowhere to go.

But whilst this chaos continues the Bank of England role in this continued financial crisis must be reassessed. By sticking rigidly to trying to keep inflation at 2% at the expense of everybody in the economy seems not only irresponsible but nonsensical too. Unfortunately there does not seem to be a simple solution to our economic woes but both the Government and the Bank of England must ensure that the most vulnerable in our society are not harmed by their actions; something that does not currently appear to be the case.

This latest round of quantitative easing is not going to be the silver bullet to save the British economy from the brink. We should have our fingers crossed for a solution to emerge from the shadows soon, or we may yet see our very own Big Bang.