Update 7th October 2011: Today the Bank of England announced another round of quantitative easing (QE) making this QE2, 85 billion pounds created from thin air to buy “assets” (bonds, securities etc) in the hope some more fuel will spark the economic fires. They are not to worried by the 5 % inflation as they realise their country is f…ked. Now I recall in economics class I learnt that low to no growth (and must likely shrinkage in the near future) did not occur with high inflation. but printing money did cause inflation and eventually the loss of value in the pound and the breakdown of economic society.
I think at the very least the Bank of England’s commitee might consider changing who they are giving the money to, perhaps giving it to the people at the bottom not financial gamblers might stimulate growth. At the very least it may stop another riot.
I recall first reading of quantitative easing in The Australian when in my early 20’s ( almost 20 years ago) I read an article I think written by an younger Ben Bernake suggesting there is a safe way for central governments to print money. A way of boosting an economies confidence without the disastrous effects of literally printing money (hyper inflation and a loss of trust in the medium of exchange) because the money needs to be paid back it acts as a pump prime for the engine of the economy. Unfortunately like stamping on the accelerator of your old Ford if the pump priming doesn’t get the car started the engine floods and the only way to start it again is to pull the engine to pieces.
What is quantitative easing or QE? The Federal bank creates a credit, a debt out of nothing and uses it to buy bonds from banks giving them real money. The bonds must be bought back (debt repaid)from the government at a future date so really it doesn’t add money the economy from nothing in the long term, only in the short term, hopefully creating a flow of confidence that builds wealth and more money before the debts need to be repaid. It’s a bit like boosting your mood by lending yourself money, you never really have to pay it back but every day you don’t you become more morally bankrupt, and your confidence wains. So far QE1 and QE2 has not worked. The global economy is not gaining enough confidence to start the engine.
The US Federal Reserve is hinting at a QE3, a third round of quantitative easing to quell market disaster. The Japanese used this desperate measure in the 90’s to little long term avail and the UK has used it during the GFC.
The problem with QE is if the economy hasn’t created more wealth from the QE paying back the debt actually hurts the economy. Combine this with a reliance on this free money to continue a destructive habit and you have a hollow economy. Welcome to the new US QE1 was 1.7 trillion, QE2 was another $600 billion how much more will the US economy need to pay back with QE3.