Bank May Start Printing Money Soon
We heard more rotten economic news today. The Bank of England may have start to printing money soon, and that means the pound could fall further.
Mervyn King, the Governor of the Bank of England, said today that the current measures to revive lending may not work. He also spoke about a `deep recession' and said `further easing in monetary policy may well be required,' according to Bloomberg.
In other words, cutting the base rate to zero looks likely, and the Bank looks set to begin quantitative easing. It will start buying corporate bonds next week.
The bank also cut its forecasts for economic output and inflation in 2009. On top of all that, unemployment rose to 1.97 million in January - the highest figure since August 1997.
What now?
The pound has dropped against the dollar this afternoon, and I suspect we'll see further falls.
That's bad news for those of us who want to travel or invest overseas, but it's good news for exporters who will be able to sell goods more cheaply abroad. A falling pound should boost prices in the UK and reduce the chances of the UK experiencing deflation.
Another concern is that Mervyn King may be too aggressive in his attempts to boost the money supply. If that happens we could suddenly switch from worrying about deflation to worrying about too much inflation. It's very hard to know what the correct balance is.
So overall, a depressing day but I'm determined not to get too gloomy. We will get out of this mess one day. It just may take a while...
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peepobaby I would check with Alistair Darling if I were you
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In the 1970s the combination of an inflexible labour market and powerful unions forced the UK into an upwards wage spiral whilst unemployment was rising. Today we have a highly flexible labour market. So if anything, we're at the start of a downwards spiral in wages. And by the way, no money gets printed at all. The form of QE that the BOE has set out just encourages people that are hoarding cash (generally overseas) to give it to UK banks to lend out. It increases money available for borrowing and takes borrowing rates up. Printing money is when the government start to pay for goods and services using money that they have literally printed.
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It is really not difficult to understand that if you print money ( quantative easing ) you are diluting the currency you have therfore if you have £100 and the government prints another £100 note and puts it into circulation your £100 is only worth 50% or £50 That means that prices will rise therfore people will need more money and we have inflation It all happened exactly the same way in the 1970 only this is worse because on top of this we have a major banking crises which is not just sub prime debt from America THe banking crises is far more complicated
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13 February 2009