Quantitatively Eased

Created on 5/3/2009

Being Quantitatively Eased sounds like something someone might do with a plunger for a very high colonic. Perhaps that is precisely what is happening to us in the British body economic?

Today the Bank of England announced that they are undertaking their first steps into the world of quantitative easing. OK, let’s put it another way that we can all understand, they have decided to print and put through the system an initial additional £75,000,000,000 and if that goes as they would like they will follow this with another £75,000,000,000 put that total into dollars and you are talking about printing $210,000,000 Well, like the nurse would say, “that should clear madam’s system nicely!”

I have taken to using the zeros so that we can truly grasp the size of these amounts of money being pumped into our economic systems. The reason for this money “printing” exercise is to allow the government to buy such things as corporate bonds from blue chip companies and possibly some toxic bank debts. As Vince Cable, the Liberal Democrat Treasury Spokesman said, “Quantitative easing is a dangerous game as it can quickly cause inflation. However, extraordinary times call for extraordinary measures.”

The sad and frightening truth is that none of us knows how this will work out. If the Bank of England’s monetary policy committee had done nothing today as we drift ever closer to another huge economic depression led by deflation they would stand forever accused of not acting decisively when they should have known better. Today we see the result, since at the same time as announcing this very substantial measure they also reduced the rate of interest down to the historic low of 0.5%. It has never been at this level in our economic history and remember it was only six months ago that the rate of interest was hovering along, seemingly set at 5% for the longer term.

I’ve heard descriptions of the months following the declaration of war by Britain against Germany in 1939. At first nothing much seemed to happen, and then all hell broke loose. Something similar is happening now; we all know that the flood waters of this huge recession is coming ever closer to the sandbags we have tried to build around our homes and businesses but we know that anything we do might not be enough. We see governments and central bankers who clearly don’t know more than us about how to rescue this situation and naturally we are terrified.

I am also an occasional academic and I use this analogy when dealing with students facing a potentially very difficult examination. Don’t see what’s coming at you as a tidal wave from which the only salvation is to grab hold of something in the hope that the water will wash over you and there’s a chance you’ll have survived the flood. It is much better to see the challenge ahead as a mountain trail you have to climb. Make sure you prepare as well as you can and then start taking short strides, one at a time, and you will not only survive but you can reach the summit.

The people that will get through this economic disaster will either be lucky enough to already have a steady job, which they can hold onto or they will be the kind of people who are ready to plan, adapt and plan again.

The one thing that is for sure now is that nothing will be for sure again for the foreseeable future. Be prepared to wake up to shocking news and still move forward. There has never been a situation like this one and there are no means to measure what will happen next. The best-case scenario is that the measures being adopted by our leaders will work quickly and effectively and the banks will unglue the lending pipes and this will happen without releasing us into a gigantic inflationary cycle. That would be a case of the medicine being worse than the potential of the deflationary disease.

The only country where anything similar did happen was Japan in the early to middle 1990’s and that country still hasn’t moved forward from its “stagflation” problems, despite having record exports and huge balance of payments surpluses. Our situation is immeasurably worse, but we, as individuals have to hope that our leaders are a whole lot brighter now than they were when they allowed this situation to develop.

It would be unwise and hopelessly optimistic to forget that Obama and Brown said nothing negative during the last decade about the banks and the regulators when everything seemed perfect and prosperous in our seemingly robust economies. Pointing their collective finger at others now does not distract me from reminding them of their own silence then.

As for you and I, let’s get our warm clothes and hiking boots on, we have a long way to climb out of this mess!