Start the Presses

It’s official: the Brits are going to print money.

They’re not calling it that — they’ve found a nice shiny euphemism for it: “quantitative easing”.

First the Bank of England will cut interest rates yet again, trying to force more liquidity into the system. When that doesn’t work, the money supply will be expanded.

According to the Beeb:

UK Rates Expected to Fall Further

The Bank of England is expected to cut interest rates to a fresh all-time low and start increasing the money supply in an attempt to revive the economy.

Most analysts believe the Bank will cut rates to 0.5% from 1%. An announcement is due at 1200 GMT.

As rates get closer to zero, the Bank runs out of room to cut the cost of borrowing to stimulate the economy.

As a result, the Bank is expected to try a new method of pumping extra money into the system.

Economists suggest that it could opt to expand the money supply by up to £150bn ($212bn).

Britain fell into recession last year, for the first time in nearly two decades, after the global financial and economic crisis intensified.

This saw the UK economy contract 0.6% between July and September, and then by 1.5% from October to December.

The latest set of jobless figures showed that UK unemployment rose to 1.97 million between October and December, the highest level since 1997.

Quantitative easing

The Bank is expected to try and boost the money supply by a new measure — so far untried in the UK — called quantitative easing.

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It is sometimes referred to as printing money, but it will not expand the supply of money by making new banknotes.

Instead, it would buy assets — such as government securities (gilts) and corporate bonds. But as it will not borrow to fund the purchases, it is creating new money.

Similar measures were implemented in Japan at the beginning of the decade and are considered to have had limited success.

Philip Shaw, chief economist at Investec, said that if the Bank decided to try quantitative easing, it “should in principle encourage the banks to lend to private sector agents such as households and businesses, stocking monetary growth and stimulating activity”.

However, many analysts are uncertain about whether boosting the domestic money supply would be effective.

I’ve been predicting that as the depression kicks in, sterling will be the first major currency to be degraded, and this looks to be the first sign of it.

Hat tip: Henrik.

2 thoughts on “Start the Presses

  1. I’m thinking liquidity trap:
    The Brits are probably trying to get around/out of the liquidity trap. I don’t really know the figures of the British economy, so I can’t be sure that’s what they’re doing, but I’d almost be willing to put money on it.
    I’m guessing more economies will follow Britain in the near future.

  2. Laller, they would love this to be a Liquidity Trap

    I consider the situation to be worse, I consider it a profitability trap. That for profitability in our businesses has been slowly declining over the last decade, glossed over by cheap (taxpayer-paid) credit, which stimulated various bubbles – housing being the most visible.

    Inflation can be a cure for this, with the state and the national bank creating new money to dilute the value of the existing amount, and thus transferring wealth from the citizen to the state. It’s a form of taxation, but off the books.

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