The Bank of England has flooded our economy with £200bn of new money to help boost growth; now, the Fed is pumping in another $600bn to America's. But where is it? And who has benefited? Nobody seems to knowby Faisal Islam / October 20, 2010 / Leave a comment
“Political Ravishment” by Gillray (1797): Prime Minister William Pitt loots the Bank of England by printing money to pay for a war
Many British schoolchildren will be familiar with the song “Magic Penny”: Hold it tight and you won’t have any Lend it, spend it, and you’ll have so many They’ll roll all over the floor
Though written by an American, its popularity in this country is unsurprising. It was here, after all, that David Hume and John Stuart Mill developed the quantity theory of money, the basis for modern monetarism. So it is entirely appropriate that Britain is now engaged in the world’s biggest experiment in the creation of magic money. Quantitative easing (QE), as it is officially known, or “printing money,” as it is traditionally described, has seen a flood of magic pennies wash through the country. So far £200bn has been conjured up by the Bank of England since March 2009.
Britain is not alone; almost all the world’s major economies have dabbled in QE since the financial crisis struck in 2008. This year the European Central Bank (ECB) sheepishly joined Britain, the US and Japan. In the spring, it was widely assumed that QE programmes had run their course, having pumped the targeted amount into their economies. But now policymakers in big western economies are considering “QE2”: another burst of monetary mysticism.
Yet as the world’s central bankers reach for their magic cash machines again, odd, unintended consequences of QE with social, political and even diplomatic repercussions are coming to light. For a start, the world’s leading economists seem unable to agree whether it has worked or not. The IMF’s verdict in August 2009 was that QE is “not a panacea… does not have to be a curse… and is not a non-event.” So at least we know what it is not. But what it is remains a mystery.
“It was one of the many measures to get confidence back in the system,” says former chancellor Alistair Darling, the man who had to sign off on the Bank of England experiment. “Nobody really knows what impact it’s having,” he says with shocking candour. “Look at the Bank of England [monetary policy committee] minutes, even they are split.”
Monetary policy is conventionally about raising or lowering interest rates. The central bank has an “official base rate,” which is the short-term rate on what it lends…