British Economy Facing Double Dip Recession - But Will Quantitative Easing Stoke Inflation?

[C. Flower]

Desperate Times and desperate measures. The Bank of England has been listening to Morticia and is to start printing money again ("quantitative easing").

With average EU inflation at 3% and rising, will QE stoke inflation further, or can it help the UK keep ticking over ? Should the Eurozone be doing the same ?

The Bank of England injected a further £75bn (€86bn) into the UK economy today in a bid to jump-start its flagging recovery.

Its Monetary Policy Committee (MPC) voted to boost its quantitative easing (QE) programme – effectively printing more cash – from £200bn to £275bn despite the risks it poses to the country’s inflation rate.

Meanwhile, it maintained interest rates at 0.5%.

The move – the first change to QE since November 2009 – offers the clearest signal yet that the Bank thinks Britain is on the brink of a double-dip recession.

The Bank of England said it boosted QE because ``tensions in the world economy threaten the UK recovery'' and the slack in the economy is likely to be ``greater and more persistent than previously expected''.

The decision was welcomed by business leaders who have called for help to stimulate the economy after figures revealed that Britain suffered a deeper recession and is recovering more slowly than first thought.

A report by the Bank into the effect of QE on the economy previously found that the stimulus measure provided a “significant” benefit to growth and helped GDP increase by around 1.5% and 2%. This was equivalent to dropping interest rates by between 1.5% and 3%, the Bank found.

Read more: http://www.breakingnews.ie/business/...#ixzz1a079R1WX

[Cian]

It's interesting to read the German perspective on QE, which they're very much opposed to. To sum up basically back with Weimar Germany in 1920's the Germans found themselves in a situation not all too different to what we have today.

Due to the Treaty of Versailles demanding reparations of them the German Government of the time couldn't meet it's financial obligations. The method they choose to employ was essentially QE. They printed money to pay off their debts. However, since this new printed money wasn't backed by increased economic performance or anything else it was essentially diluting their currency. People out to make a profit caught on to what was happening and started betting against the currency and short selling it, which further drove inflation and turned it into, eventually, hyperinflation, where they ended up in a Zimbabwe situation with exchange rates in the millions etc...

Ironically Hitler managed inside of 2 years or so to re-build their economy, reduce unemployment and return to sensible exchange rates using again QE!

The difference was, beforehand they used QE to pay off debts, but Hitler said every markt printed had to equate to one markt's worth of work done. So they printed money and invested every markt printed in various stimulus packages etc (this was how the Autobahn was built). And since the new printed money was in this case linked to increased economic performance it didn't suffer terrible inflation etc...

So looking at history my take on it is, it might be ok to use QE to invest in and stimulate an economy, but it's very dangerous to use the same tool to meet your debt demands...

So where is the BoE using QE - is it going to stimulus or to servicing debt???