How does this new money get into the system?

Hungerdunger

Apologies if this question is either stupid or not really relevant to this particular forum or both.

I've heard all about this "quantitative easing" and how the Government will be printing money. (Along with film clips of loads of £20 notes rolling off the printing presses) What I don't understand is how this money gets into the system. Obviously I'm not going to get an extra tenner next time I use a cash machine (Although it would be a nice surprise), so can anyone explain what difference it makes if they are "printing money", who will benefit from it and how it actually appears?

Rafter

The Bank of England is going to buy stuff with money it has printed basically meaning that there is more money is the system available for the banks to lend.

It also means that money has been created without anything useful being done (profits being made, salaries being earned etc), so it is inflationary - i.e. everybodys existing pounds are worth that bit less.

That is part of the point though - because RPI inflation is predicted to go negative next month, this means that goods are cheaper now than they were 12 months ago. If that goes on for too long, people won't buy houses, TVs or other goods because they know they will be cheaper in the future - and that causes the economy to contract further: less jobs, less taxes, more government debt.

Hope that makes sense. The main purpose it to try and get the real economy moving again.

R.

jay3_2

My understanding about this particular bit of quantitative easing is that it does not involve printing more banknotes, but rather it allows the B Of E to "create" new money, which is then used to buy assets from banks, with the intention of increasing asset prices, and therefore lowering yields. The "man in the street" never sees this new money - we just get the benefits that flow from it (hopefully!).

Here's a link to an animation which explains it far better than I ever can!

http://www.ft.com/cms/s/0/8ada2ad4-f3b9-11dd-9c4b-0000779fd2ac.html

Arthurian

Thanks - I think I understand now. Rather than heading for inflation, we are just putting the brakes on deflation? Then what happens? How would that trend be stopped, to prevent inflation once deflation has been conquered?

agsnu

With difficulty.

jay3_2

Good questions!

There has been an awful lot of money loaned to the banks, given back to consumers via VAT cuts, and various other stimuli, over the past few months. Coupled with the aggressive interest rate cuts, one could argue that there is a lot of "stored up" inflation in the system, waiting to emerge at some stage - Ken Clarke has been highlighting this danger in recent weeks (I'm not a Conservative, Labour or LibDem supporter by the way).

How to prevent this, or at least temper its effects? Well, interest rates will have to go up for a start, there will almost certainly have to be higher taxes, and we may find ourselves back in the days of restricting money supply - remember the 80s? It is going to be painful for all of us.

BenL

When this happened in Japan the banks apparently just kept hold of it to boost their balance sheets and didn't lend it onwards.

I hope we have sufficient leaverage to get the money lent outwards if they go ahead with the plan - owning a few of the banks might do it but maybe not as they don't seem to listen at the moment.

mini_lidi

Japan are thinking about giving every citizen around $100 so they can go spend, which could start every spending again?

neil324

I'm still not convinced about deflation, why all this talk about RPI, which includes mortgage payments. Sure with interest rates being slashed then thats bringing down RPI. When all the talk was about inflation the main focus was CPI which is being more stubborn.The recent Sterling devaluation has in my opinion stopped any chance of deflation here.

When the deflation thing is put to bed, then the BOE will need to raise interest rates quick or inflation will take hold fast.