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Saturday, March 14, 2009

The flow of money

All of this talk of quantitative easing is confusing at the best of times. It certainly did not feature when I took my A level Economics exam thirty years ago. However, the Independent has a new twist.

They say that much of the new money the Bank of England has "printed" to stimulate the UK economy is ending up abroad where it will be of no benefit to UK households and businesses:

The Bank is in the process of purchasing about £75bn of government securities, or gilts, over a three-month period, the first instalment of a massive £150bn programme. The Bank is effectively converting these government securities or gilts into cash and bank balances which, it is hoped, will be used to support lending and spending in the UK and boost the economy.

But City experts analysing the scheme for The Independent say large quantities of money will simply end up abroad because so many of the gilts are held by foreign investors. They fear that they will hoard the cash, which will be of no benefit to the British economy, or dump it in favour of safer currencies, which could cause a run on sterling. More than a third of gilts are owned by foreign entities, official statistics reveal, and there are doubts about how effective the policy will be if that sort of proportion of the new money is diverted abroad.

Colin Ellis, an economist at Daiwa Securities, said: "In principle, creating new money to pump into the economy is the right thing to do when interest rates are already near zero and further monetary stimulus is required. But the Bank of England may, possibly inadvertently, be buying up gilts from foreign investors – who, according to the latest data, held over £190bn, or 36 per cent, of UK Government debt. If the Bank is pumping its new money abroad, it is clearly not going to UK households and businesses, and will not help boost UK demand."

Even if relatively little of the cash leaks overseas there is a strong possibility that the banks, as with previous attempts to bolster them, may end up "hoarding" the cash to shore up their own beleaguered positions, with little extra lending to companies and first-time buyers.

Poor Gordon Brown cannot win either way.
Perhaps devolving the money down to regional Governments and Assemblies and Local Authorities to spend on project that would create work and be of social benefit to our society?
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