Money’s cheap, so is the thinking

Start the printing press, the BoE is to continue its failed policy of printing money

I know! Let's just print some more money...
Simon Miller
On 10 February 2012 14:15

I sometimes wonder what goes on at the Monetary Policy Committee (MPC) meetings in the Bank of England. Do they look at the hard evidence of continued inflation, continued lack of liquidity in the marketplace, the cost of pensions and then say ‘sod it lets print money’?

Do they dream of releasing this new money and, in a flash, banks start lending, money flows through the system and everyone skips around in the warm glow of recovery?

It is the only explanation I can think of for the latest round of insanity from the old lady.

The BoE announced a further £50bn in quantitative easing (QE) on the grounds that it expected inflation to fall over 2012 and yet figures out today saw factory gate inflation rise 0.5 percent in January - a net 0.3 percent rise over two months.

Granted the trend is downwards but this is more a case of a slumping economy rather than any policy that the committee has followed and there are danger signs that the slump could lead to deflation – hence the QE.

So of course banks will then start lending again right? Wrong. The money is used to shore up capital bases to not only satisfy capital ratio requirements but to also create a bulwark against the next crash. 

And – before anyone starts bashing banks again – it is not just banks that are parking money. 

UK business is awash with cash, around £700bn of it, just sitting there. 

Instead of being spent on innovation or growth – leading to job opportunities – it sits, waiting.

Waiting for what though? I have always felt that businesses – much more than banks – have an almost instinctive feel to political realities which politicians either ignore or cannot fathom. If they are parking cash, their instinct is that there is something big about to happen, and my suspicion is that it is euro-tinged. 

Despite finally reaching a deal, Greek politicians found it flung back in their faces by the useful idiots in euroland who now wanted an extra €325m (£273m) of cuts.

It seems that the political elite in the eurozone are now actively prepared for a Greek exit. Banks have been capitalised through QE-by proxy, and faced with German impatience over Greece, the decision appears to have been made to allow Greece to burn despite the claims otherwise. 

But I doubt this Greek fire will be a sufficient firewall for the rest of the eurozone – Portugal especially looks vulnerable to contagion at the moment. 

It is this scenario that is leading the hoarding in the UK I suspect. The instinct that Greece is going to fall followed by Portugal and possibly Italy. Companies are taking the decision that Gordon Brown singularly failed to do in preparing for the worst and hoping for the best. 

Now, with the likes of Barclays revealing a £5.8bn profit, I am sure that there are individuals and small businesses that take a dim view of this hoarding – especially with a £2.2bn bonus pool – but it is sensible for banks and businesses to shore up their funding even if, in the long term, they will have to start lending properly again if they are to maintain their raison d'être

The problem is QE. It does not solve the issue of liquidity, all it does is keep borrowing costs low for a government which, despite protestations, has yet to generate a real cut anywhere except for defence at a time where we may need our forces fully functional and prepared. 

What QE does is punish savers and punishes pensions.  If the government want people to save for their retirement it is pretty bizarre to approve of measures that see pension pots and companies hit by pension deficits. 

Twenty years ago a pension pot of £100,000 would have bought an annuity providing income of £15,640 for life, but now provides only £5,800 and is set to go lower. Those companies who still fund pension schemes will now have to find £49bn to make up the deficit caused by this idiocy. 

The only easing I would like to see is that of MPC members who have consistently failed to control inflation. 

If QE does not provide liquidity then it has fundamentally failed in its perceived task and the deficit of clear thinking in the MPC and government will come back and hurt us in the future as the price for cheap money will, eventually, have to be paid. 

Simon Miller is the Editor of Financial Risks Today. He tweets at @simontm71 

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