Bank of England ‘undisputed champ’ of QE

2012-FEB-09

“The fixture of 0% as monetary policy carries with it an admission that money is worthless.”

So says Jim Willie in an article at GoldSeek.com. It has also encouraged a desperate “rush for yield” on the part of investors who (understandably) are looking for a little more from their money than the paltry rates offered by banks and government bonds. Hence, the spectacular rally in corporate bond prices over the last month.

And while the private sector bid up corporate bonds, central banks continue to buy government debt. The Bank of England is expected to announce another round of “quantitative easing” (QE) today, worth £50 billion – though some predict it could be as much as £75bn. As Detlev Schlichter points out, given that inflation in the UK is already over 4%, it’s a little hard to square this new move with the Bank’s supposed commitment to a target of 2% inflation.

As Schlichter notes, “the Bank of England is the undisputed champ of QE. After the next round of money printing, the BoE will have created new money to the tune of 20 percent of GDP, and will fund more than a quarter of all outstanding government debt via the printing press.” As he comments, the only limit to this money printing is when the public start to lose faith in the currency. And by that point the economy will already be over the cliff’s edge.

Nevertheless, before the fall central bank liquidity can deliver the superficial appearance that everything is in fact getting better. As discussed repeatedly on this site in recent months, this appears now to be the case in America – where a surging stock market, falling unemployment, and increasing bank lending are just some of the factors leading more and more observers to conclude that things are getting a lot better as far as the US economy is concerned. Barry Ritholtz lists some of these positives over at his “The Big Picture” blog.

The UK may well experience such a “mini-boom” in the near future, once the new money created by the BoE starts to filter through into the wider economy. This will of course be accompanied by higher inflation, and the continuing disincentive towards saving and investment. But as far as gold and silver prices in British pounds are concerned, the future looks very bright indeed.