Time for plan B? Welcome to quantitative easing

So, the Bank of England have announced that interest rate cuts alone will not be enough to stimulate the economy and despite the good lady's attempt at her own fiscal stimulus in the Metro Centre last week, it appears that we need to do somethng more drastic. The answer they have come up with, and they have been hinting at this for some time, is 'quantitative easing'.

For those who are understandably confused by this wonderful term then fear not, it is simply a posh way of saying that they are going to print more money. The idea is that the Bank of England sets the printing presses to 'turbo' and produces lots of £20 notes, which it then uses to buy a variety of things such as Government Gilts and Corporate Bonds. The benefit of this is that it pumps money into the economy, which filters down through the banking system into industry, and finally into all of our pay packets. This makes us feel richer so we then go out and start spending again which reinforces the cycle.

Now a few of you may be asking why we don't just do this all of the time, given that it seems such an obvious way of solving any economic crisis. Well the problem comes in the form of inflation. You see the more we have of something, the less value it holds. That is why gold costs more than water and money is the same, the more that is printed, then the less it is worth, as inflation reduces the amount of things you can buy with it.

In Zimbabwe for example you need around 10,000 Zimbabwean dollars to buy a loaf of bread. In fact by the time you have read this next sentence it will have gone up to 10,100 as the inflation rate is 231 million percent, purely because Mr Mugabe is continually printing money. It is interesting however that when they started printing money it was called 'economic suicide' and when we do it, it is called 'quantitative easing'.

There is a case for this method and it was employed by Japan at the start of this decade. Japan suffered terribly through the 90's with deflation and they reduced interest rates to zero for much of this period in an attempt to kickstart their economy. They started quantitative easing in 2001 and they continued it, in larger and larger quantities till 2006, which also coincided with their best period of growth for some time. Was this growth due to the printing of money? Arguments go both ways with some saying that they just benefited from the interest rate cuts made previously, whilst others point to it as the answer to all our woes.

In any event, what we all have to accept is that these are extraordinary times and for a large western economy to be even thinking about it, speaks volumes about how bad a situation we are in. Consider how complex our economy is, with all the different financial instruments and trading markets, and then figure out how the best minds in the business can only come up with a solution such as printing money. 

Its like trying to fix something very delicate and after spending many hours diligently checking all of the components one by one to diagnose the problem you start thinking, 'maybe if I just give it a little tap with the hammer.....'

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