by Stephen McPhie, CA
Partner, RSD Solutions Inc.
I recently went to a presentation by a representative of the Bank of England. The main part of his talk was explaining how “Quantitive Easing” is not the same as printing money. Last year the Bank of England purchased around £200 billion of UK government debt, just slightly more than the previous year’s fiscal deficit (close to 12% of GDP).
Anyway, the thrust of his argument was that QE is not printing money because the debt was purchased from dealers who were holding the debt and the purchased debt is being held by the Bank of England for possible resale in future (…. at what loss?). The debt is not purchased directly from the government and is not cancelled. Purchasing it from the dealers frees up capacity for them to invest elsewhere in the economy.
Seems like a semantic argument to me. Money is fungible so the fact it goes round in a circle does not alter the underlying character of what is done, nor does the accounting method. Also, the B of E representative did not mention the current year’s deficit will be of a similar magnitude and will need to be bought by dealers.
It seems simple (and I realise that my analysis is also overly simplistic). If the economy’s supply of goods and services is static (for argument’s sake) and the money supply increases, then the nominal price per unit increases. Sound like inflation?
So what does all this mean? Sterling has fallen considerably against the dollar recently. Inflation fears have cropped up and many are expecting higher interest rates mid year. This has caused a part recovery of Sterling. However, the economy contracted in the last quarter so sterling fell again. (By the time anyone reads this, Sterling will probably have continued its yoyo impersonation.)
As a one off, there may be an argument that QE provides a boost. Politicians are fond of the term “kick starting the economy”. However, the economy does not look like a motorbike to me, so should not be expected to behave as such. I think the jury is still out on QE and we can expect uncertainty and volatility to continue. Corporations should understand their FX and interest rate exposures and beef up their risk management.
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