Printing Money, More Painkiller than Cure
Sunday, August 9, 2009 7:09
The drug of Quantitative Easing ought to be hugely potent by all rights. However, the Bank of England governor Mervyn King’s bold or even say dangerous money-printing scheme has far failed to restore the economy to health as a result.
The theory behind the money-printing scheme is straightforward. The Bank has already cut official interest rates to 0.5%, and can’t practically go any lower. Fresh cash is for bolstering the amount of money sloshing around and coaxing banks to lend more to credit-starved clients. It will be largely being used to purchase UK Government bonds. It should push up the prices and bring down the cost of borrowing in the financial markets. But, lending to companies and individuals remains moribund, and the money supply has continued to flatline.
The Bank’s continued policy of using the fresh money to buy debt issued by the Treasury makes a lot of people deeply uneasy. As a result, the Bank has ditched its previous policy of only buying a narrow range of gilts.
Ultimately, the real test of QE will be in the financial markets. There are some indications that the asset purchase scheme has had an indirect positive influence on stock markets and confidence. To date, however, the marvelous medicine of Mervyn has proven to be a painkiller rather than a cure.
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