Quantitative Easing or Counterfeiting Money?
We have all heard many allegations throughout the years regarding the threat of the illegal forgery of notes. We’ve also been the suspects on countless occasions as a cashier in a shop has held our given notes to the light to check for the metallic strip running down the centre of a note or the faint illusion of the Queen’s head. But what if we hand a note which doesn’t have these recognisable traits issued by the Bank of England? Are we accused of counterfeiting money? Is the note confiscated and we receive no financial compensation?
Thankfully I’ve never been a victim of this. But what if the note is valid and its source is the Bank of England but the same potential damages of using a faked note still exist?
As many will have heard, in these dire circumstances, the government’s latest attempt to stimulate growth is to inject conjured finance into the market in the hope that banks will be able to provide businesses with the required loans to quicken growth. Widely regarded by economists as being the last thing to do in times of crisis as it leads to higher inflation; or in some cases, hyperinflation, and potentially damages the natural recovery of an economy.
The head of the Bank of England, Sir Mervyn King is adamant that this financial package will find its way into the pockets of the producers and inflation rates will return to more acceptable levels, from 5.2% to 1.7% by 2013. This notion of Quantitative Easing is a key aspect of George Osborne’s plan for financial recovery and reducing the UK’s budget deficit.
But more specifically, what does this Quantitative Easing mean for our economy? If illegally and meticulously print a £20 note and use it in a shop, am I not stimulating growth in a similar fashion? The money I’m using has no representative wealth and has no solid worth but no doubt the shop will use it the same way it uses any other money; to restock its shop or pay its staff. What if I do this a billion times and spend my money broad. Similar to the government’s first package of £200 billion, although mine would not drain money which could be used to reduce the deficit, would not require more borrowing, would not lead to further governmental intervention and would not lead to the public discontent that the government work on the side of the bankers. The downside is that I’d be in jail, probably not to the concern of most. But surely this action would do the same, if not be more productive for the economy.
Mr Osborne’s plan does offer a wide array of methods for stimulating the economy and reducing the deficit. With the crisis in Europe being one of the blame targets of the failure of Mr Osborne’s plan (as was the royal wedding which surely helped stimulate growth), our major trading partner has grinded to a halt and Quantitative Easing is required to consolidate the economic revival on the home front. Its damages will remain unknown until its true results are found. The government’s latest extension of QE comes with a new input of a further £75 billion, which the cynic would argue if £200 billion did so little, what much difference would £75 billion more do. Maybe this crisis isn’t something which can be resolved by financial stimulus.
Maybe the banks just aren’t loaning money in the right places. Small and Medium Sized Enterprises (SME’s) are the preferred target due to the efficient allocate of funding and resources but it would appear that the money from QE is sat gathering dust in the vaults of the banks, as some would argue, being used to provide bankers with healthy bonuses (which, if they spend it, fits my hypothesis on counterfeiting money perfectly). But with the banks not offering loans to potential producers, the money is not acting as a stimulus but a new account which investment bankers can spend as they will.
This begs the question: why aren’t the banks loaning the extra money being injected into them? They are hoarding the money, as they remain hopeful that interest rates will soon rise from the pitiful current 0.5%. Once interest rates rise, the banks will be more willing to lend money, as they are able to obtain higher profits from borrowers. Keynesian Economists believe that the UK’s current situation: of an increase in Money Supply via Quantitative Easing having no impact upon the level of interest rates, is referred to as “The Liquidity Trap”. Keynesians believe the only solution to the Liquidity Trap is for government intervention via fiscal stimulus. Classical Economists reject the notion of the existence of The Liquidity Trap.
At the moment, Britain has the highest inflation rate in Europe, a 0.5% GDP growth rate in the third quarter of 2011, an opposition who’s insistent that the governments plan is failing and needs a plan B, banks who are offering enough loans or allocating funds efficiently, around an 8% unemployment rate, a failing housing market, and price hikes from utility companies. As I go on, these problems are coming closer to home for each one of us. I never expected growth to occur at the click of a finger but 0.5% is abysmal, especially after an enormous stimulus. Something is going wrong and I’m not often one to agree with Labour’s economic policy but maybe a revised plan should be on the agenda for the start ofv2012. Either that or I should start mass printing £20 notes and stimulating growth by myself for greater effectiveness. Lengthy jail term would be my reward but at least my gesture would offer more of a stimulus than throwing money at the banks, telling them ‘you caused this problem, now go and sort it out’ and finding out that banks are terribly inefficient at stimulating growth, particularly if the banking system has been widely regarded as being