BoE to start printing money

passau91

Let's look at an historic example - Weimar Republic, early 1920s (and Wookster will probably be able to tell us if the same is true of present day Zimbabwe). (1) Reserves of Gold and Foreign Currency are gone. International finance is less willing to value your government's promises to pay (currency notes and bonds). Effectively, imports are becoming more and more expensive as your currency is valued less and less, but you are trying to keep wages up by increasing the supply of currency notes. The cost of say a loaf of bread starts by doubling in a month, then again after a week, then every day, then twice a day (and your workers are having to be paid by the wheelbarrow-load twice a day) 'til in the end the currency has no value and you are back to barter, if you can find any commodities to purchase in the first place. If you had money in the bank, the interest rate can never hope to keep up with inflation and your deposit is wiped out. This is the true problem with printing money.

Now from what I have read from other replies, no one imagines that QE would lead to this kind of hyperinflation, but sterling would not have to devalue by very much before basics start to become more expensive and the RPI creeps up as a consequence, hitting people on a fixed income first and then the rest of us with increasing speed. As we are told, but no one appears to hear, there are twice as many savers as borrowers!

Masomnia

passau91 wrote: »

Let's look at an historic example - Weimar Republic, early 1920s (and Wookster will probably be able to tell us if the same is true of present day Zimbabwe). (1) Reserves of Gold and Foreign Currency are gone. International finance is less willing to value your government's promises to pay (currency notes and bonds). Effectively, imports are becoming more and more expensive as your currency is valued less and less, but you are trying to keep wages up by increasing the supply of currency notes. The cost of say a loaf of bread starts by doubling in a month, then again after a week, then every day, then twice a day (and your workers are having to be paid by the wheelbarrow-load twice a day) 'til in the end the currency has no value and you are back to barter, if you can find any commodities to purchase in the first place. If you had money in the bank, the interest rate can never hope to keep up with inflation and your deposit is wiped out. This is the true problem with printing money.

Now from what I have read from other replies, no one imagines that QE would lead to this kind of hyperinflation, but sterling would not have to devalue by very much before basics start to become more expensive and the RPI creeps up as a consequence, hitting people on a fixed income first and then the rest of us with increasing speed. As we are told, but no one appears to hear, there are twice as many savers as borrowers!

Could you enlighten us as to how our situation is in any way comparable to the Weimar Republic?

Otherwise bringing it up is rather silly.

passau91

Masomnia wrote: »

Could you enlighten us as to how our situation is in any way comparable to the Weimar Republic?

Otherwise bringing it up is rather silly.

Only that if we go down the QE route, confidence in our Government's ability to meet it's obligations might be weakened if Sterling takes a severe hit. Other posts have mentioned that Government bond issues in Germany and Spain had to be withdrawn and the same could happen to us. It's only really relevant if people believe that QE is the same as printing money. How do you preserve the value of savings in real terms if inflation is outstripping interest rates?

Masomnia

passau91 wrote: »

Only that if we go down the QE route, confidence in our Government's ability to meet it's obligations might be weakened if Sterling takes a severe hit. Other posts have mentioned that Government bond issues in Germany and Spain had to be withdrawn and the same could happen to us. It's only really relevant if people believe that QE is the same as printing money. How do you preserve the value of savings in real terms if inflation is outstripping interest rates?

Fair point, it's just when you say scary words like 'Weimar Republic' people get jittery. When really there's no reason to compare them.

The British government has auctioned off all its debt so far, and QE has been discussed a lot recently. Not to mention that America is also planning on doing it, and I wouldn't be surprised if the European Central Bank went down that route too. It won't be a problem to the same extent if all countries are doing it at the same time, as wasn't the case with Weimar.

As for high inflation/low base rate, I guess that people will invest more, which is no bad thing. And given that the base is so low now, lowest ever, there's scope to increase it if that becomes necessary.

Wookster

Masomnia - not sure if you read this part of Passau91's post?

passau91 wrote: »

Now from what I have read from other replies, no one imagines that QE would lead to this kind of hyperinflation

Hyperinflation is inflation over 100% - I don't think anyone really seriously believes QE is likely to lead to that sort of inflation.

AIUI the term printing money means increasing money supply therefore QE is the same as printing money. The key point is where does the printed money end up? Is it in the hands of government to fund the government deficit (as is the case in present day Zimbabwe & the Weimar Republic) or is it going into the private sector to stimulate demand. Both of these have inflationary effects as it increases monetary supply without increasing production. One would like to believe it is the latter.

If it is the former then it implies that the government cannot fund the deficit. That situation perpetuated leads to present day Zimbabwe.

When viewed in the light of articles such as the one below, questions might be asked...

http://www.independent.co.uk/news/business/news/public-borrowing-soars-to-record-levels-1626427.html

chucky

Wookster wrote: »

Hyperinflation is inflation over 100% - I don't think anyone really seriously believes QE is likely to lead to that sort of inflation.

well it's been mentioned on here frequently that QE would lead to hyper-inflation.

Generali

Wookster wrote: »

I still don't see how this will not cause massive inflation - cash is used to pay off debts, it flows out of the UK to the creditors of the big banks who realise that hey it can't buy any more than it did before so they start to sell off sterling assets which causes a run on the pound and makes it nigh on impossible for the government to borrow.

Also in a globalised work it is just impossible to imagine the government taxing banks heavily - taking that much cash out of the system would surely lead to downward pressure on asset prices & a painful reduction of credit available to corporates and consumers - thats akin to what we're seeing now...

The part of my point which comes across badly is that this would have to be done on a global scale.

It would solve the short term problem I think. Longer term it would be a disaster of course.

Masomnia

Wookster wrote: »

Masomnia - not sure if you read this part of Passau91's post?

I did, and it confused me since he brought up the Weimar Republic in the start of his post. You're probably aware that prices were doubling every two days there at one point, which is why it's popular with the 'economic armagedon is looming' crowd.

Hyperinflation is inflation over 100% - I don't think anyone really seriously believes QE is likely to lead to that sort of inflation.

I've read it suggested a number of times on this board, and I've avoided this thread until now because of it. 'Britain's going the same way as Zimbabwe...'

AIUI the term printing money means increasing money supply therefore QE is the same as printing money. The key point is where does the printed money end up? Is it in the hands of government to fund the government deficit (as is the case in present day Zimbabwe & the Weimar Republic) or is it going into the private sector to stimulate demand. Both of these have inflationary effects as it increases monetary supply without increasing production. One would like to believe it is the latter.

If it is the former then it implies that the government cannot fund the deficit. That situation perpetuated leads to present day Zimbabwe.

When viewed in the light of articles such as the one below, questions might be asked...

http://www.independent.co.uk/news/business/news/public-borrowing-soars-to-record-levels-1626427.html

Indeed, the 'quantitative' bit in QE refers to the fact that the quantity of money in the system is increased. And as I understand it, it does mean that the money created is used to purchase assets in the form of gilts from banks and/or company debt, adding liquidity into the system generally. I don't doubt that there will be inflationary effects, but surely that's better than a longer more protracted recession?

As for the article, I agree it's dangerous to be borrowing so much. I think the term 'record' may be a little misleading, though. Just because it is high does mean the debt can't be sustained short term.

Wookster

Masomnia wrote: »

Just because it is high does mean the debt can't be sustained short term.

You're right. Nothing is certain, however I believe that a risk averse attitude should be taken with public finances to keep the country in the near pole position that it currently is.

What I object to is what I think is the excessively risky deficit we are already running. Were we to know that this isn't going to get much worse, I would probably feel less strongly but we don't, and the news is getting worse at a faster rate...

nickmason

Wookster wrote: »

You're right. Nothing is certain, however I believe that a risk averse attitude should be taken with public finances to keep the country in the near pole position that it currently is.

There you have it, proof that Wookster isn't !!!!!!.