Independent Article #1:
Will quantitative easing save our economy?
Shadow Chancellor George Osborne described it as a “leap in the dark”, it’s untried in the UK, failed in Japan and has led to out of control inflation in other countries, so why are the government heralding quantitative easing as a recession buster and what is quantitative easing anyway?
There is a lot of confusion surrounding the government’s latest attempt to heal the British economy – what it is, what it does and whether it will work anywhere near as well as their other £bn efforts to date.
Put simply, quantitative easing is when the government pushes a button and in an instant the cash reserves in the Bank of England are a good few billion pounds heavier. As we’re living in the electronic age, this does not mean that the Royal Mint has been asked to work overtime this weekend: it’s all done within the books of the bank. This extra cash is then made available to the British banking sector so that they can cash in the bonds that they have (IOUs from companies) and increase their own cash reserves. The theory of it all is that if the banks have healthier balances they will be more inclined to lend to you and me and the companies that we own or are looking to set up, and the economy is given the kick start it so desperately needs.
The billions that the government spent saving and boosting a number of the banks did not encourage lending, the reduction in VAT from 17.5% to 15% did not increase public spending, the £20bn loan guarantee scheme (£10bn funded by the government) has not had any noticeable affect on confidence, and interest rates coming down to 0.5% has not attracted more borrowing, so why do they think that this potentially very risky tactic of quantitative easing will work?
Put simply, everyone is holding their hands up and saying that quantitative easing is the only choice available to them as nothing else has worked. So keep an eye on inflation, hope that banks start lending again and pray to whatever deity you believe in that this last-ditch attempt to banish the credit crunch blues works.
Author: Bill Morrow, co-founder of business funding facilitator Angels Den talks about “quantitative easing” and how we have come to need such a radical solution.
