Friday, 7 October 2011

Money from nothing

Mervyn  (Bank of England King), (parentheses deliberately misplaced), has told us he wants to help the economy by injecting some 85 billion into the system. It is called Quantitative Easing, or as Dire Straits (the Band, but it might as well be the term for our current times!) might have sung it, "money for (from) nothing". I know that Q.E. is a hotly debatable tool and I do not know enough to be able to make an informed comment about its appropriateness at this time or ever. However I did listen to Mr King being interviewed about it, and found his answer to the question, "How does it work?" interesting. He answered firstly by giving the catch all response, "It stimulates the economy". The interviewer thank goodness was not satisfied with this. "But how does it do that?" he insisted. Here comes the interesting part. The Bank buys bonds from, guess whom? Bankers! So the Banks get massive cash injections, which they are then supposed to use for stimulating growth by lending to small to medium businesses, to the construction and manufacturing industries. What are these people telling us time after time after time? That the banks are not lending to them, despite one round of Q.E. already in the system! So what are the banks doing with all this money. They are shuffling it around other banks and financial insititutions of course. You can be sure of this: substantial amounts of it are making yet more bankers wealthy. If Q.E. is going to help at all, it has to be done with major strings attached, to prevent the cash from evaporating long before it ever hits the factory floor.

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