Easing the Economy

In 2009 the British Government injected some £75 billion into the economy, increasing this to £200 billion at the beginning of 2010. In 2011 a further £75 billion was injected and in February 2012 another £50 billionj was added – a staggering £400 billion in total, over just three years. Yet recession and a stagnant economy have remained with us. Both the amounts and the need for increases should make us pause for thought.

So, what is quantitative easing, and how is it supposed to work? The Bank of England, the lender of last resort, create money electronically, then purchase government bonds (gilt securities) from wholesale financial institutions in the banking chain. These institutions are then supposed to invest in the real economy by lending the money to small and medium sized businesses who in turn create new jobs and economic growth. It is a method of public investment intended to counteract the decline in private investment and saving in a period of zero interest rates. Its primary, short-term aim is to restore confidence in the financial system (particularly after the collapse of of the US Bank, Lehman Bros.). But there have been, and remain, problems in its implementation.

Why should a bank invest in new ventures when private businesses lack confidence in the growth potential of the domestic economy? There is also the problem of poor accountability. There is no legal enforcement for the banks actually dole out the money. The receiving bank could just hold on to it and (on paper) restore their own balance sheet assets. A crucial aim of the scheme was to do just this at the beginning of the world banking crisis.

There is also the problem of inflation, either in the short or the long run – particularly in a situation where overseas demand for British goods is falling. When inflation bites, i.e. when money is pumped into the economy in large quantities over a short period of time, the real value of pension savings declines and consumption rather than investment becomes a problem. So far this has not happened because the Banks have controlled the feed out of capital to businesses.

Quantitative easing can also cause other long-term social problems. It is a measure that benefits the wealthy by boosting the value of stocks and bonds, and as a result income inequality increases. On the other hand the economic justification for rewarding the rich – both corporations and individuals – is that they do the investing upon which economic recovery depends.

February 2014 saw signs of a slow recovery; loan finance for new business is gradually increasing, unemployment is falling, bank accounts are more secure than in 2009. However, the long-term problems of economy remain; low wages, a reliance on the housing market to stimulate growth rather than on manufacturing to feed export markets, and zero interest rates for potential savers are still with us. We also face the political problems associated with an independent Scotland and our possible withdrawl from the EU. As ever, there are also problems over which we have little control: A possible downturn in China, political instability around Russia, and sluggish growth in the Euro-zone.

Despite our best efforts, we are hardly out of the woods yet.