economonkey

The newest member of the Bank of England’s Monetary Policy Committee, which meets once a month to decide what to do with interest rates, claims that the worst may be over for Britain’s economic recession. Confusingly, however, he says that his comments should not be taken as a prediction and gives little evidence to back [...]

Anybody with a tracker mortgage will no doubt be happy that the Bank of England has kept interest rates at their all time low of .5% today, but there’s no light at the end of the tunnel for anybody hoping to get a good return on their savings. The media is reporting that Alistair Darling [...]

Over recent months National Savings and Investments has enjoyed a massive spike in popularity with the British public. With interest rates at an all time low, the stock market floundering and high profile news reports of struggling banks and building societies on the brink of collapse, people suddenly want to put their savings and investments [...]

This is an article that I could have written a few months ago, when the Bank of England stated its intention to begin ‘queasing’. But it has become rather more relevant now that one of the pronouncements of the G20 summit is that the International Monetary Fund (IMF) will itself begin to ‘print’ additional SDRs (Special Drawing Rights, effectively the IMF’s own currency) which its contributor countries can draw down in the shape of dollars, euros, etc.

Note my use of the word ‘print’ in the above paragraph. The days when first world countries used the printing press to increase the volume of money in circulation have long gone, assigned to eras such as Weimar Germany. Paper and ink are still heavily in use in Zimbabwe, of course, but for countries like the UK, where the notes and coins in circulation account for only about three percent of the total ‘money’ in the system, we’re really talking about digits on a computer screen.

Even so, while the phrase ‘quantitative easing’ sounds nice and strategic, in reality it has a similar effect to printing addition bank notes and throwing them out of the Bank of England’s window into the street.

To take a step back for a moment, let’s look at the main blunt instrument used by policy-makers to control the velocity of money and the rate of growth of an economy: interest rates. Set the base rate low, goes the received wisdom, and people will ‘invest’ their money rather than leaving it idle in a bank account earning nothing (or, depending on the level of true inflation, less than nothing). If the economy starts to run away from itself and bubbles form in a particular investment market, interest rates can be raised, increasing the appeal of saving and reducing the relative gains to be made by investing in speculative markets.