Buggered if I know…

Use to be a time when the letters ‘QE’ were reserved for the grand lady, Her Majesty, Queen Elizabeth the II.

Latterly they have been adopted as an acronym by economic commentators as short hand for the monetary policy action called Quantitative Easing. Now - monetary policy, fiscal policy, and the like, are only terms understood by the ‘old boys club’ that is the City of London aren’t they?

Being a fairly simple chap I personally like things ‘in a nutshell’ (or maybe I’m an aspiring squirrel). Anyway, I decided to do a bit of ‘economics 101′…

Turns out, simplistically, ‘monetary policy’ is pretty straight forward:

1) if inflation rises, raise interest rates (theory goes - interest rates up, spending down, inflation down)

2) if inflation falls, decrease interest rates (conversely - interest rates down, spending up, inflation up)

And as an aside fiscal policy ‘in a nutshell’ is even simpler - the government borrows and/or spends (bag loads of) tax-payers money - ala spending up, inflation up…

So much for ‘complicated’ policies…

From the above one can deduce that the rough goal of the ‘current game’ is to increase spending (and by inference inflation). Apparently this was to avoid the dreaded R (recession, oops…) or D (depression, oh shit.. let the cat out of the bag…) words…

When you have exhausted monetary policy by reducing interest rates to nearly zero however, and, you have exhausted fiscal policy by borrowing and spending up to what are considered idiotic levels (i.e. the UK has really ‘maxed out its credit card’) then where do you go from there? Would seem like at that point you hit a ‘policy void’ wouldn’t it?…

Not so apparently - according to the ‘old boys club’ (didn’t these bright sparks manage to get us into the god almighty mess?… hmm…). It’s fun, and simultaneously depressing, to imagine/realise this group of Treasury, BoE and CEO banking folks probably all drink at the same London clubs together isn’t it?…

“Oh what a laugh Harold, did you see the £40K I squeezed out of that poor old widow when we foreclosed on her two-up-two-down the other other day… - paid for the new seal fur seats in the Jaguar anyway…”

But I digress…

Enter Quantitative Easing (QE),  the “unconventional unconventional measure” in monetary policy apparently (I kid you not).

The theory here is - dummies guide style - increase money supply, increase spending, increase inflation…

I’m guessing you have picked a pattern developing here.

Increase inflation, or maybe it should be in bold, increase inflation. This, somewhat surprisingly is the goal. QE increases the money supply, therefore in idiot terms, the existing ’stuff’ (goods and services, which haven’t change one bit in quality or volume) now instantaneously cost more.

Let’s do that again - same stuff + more money = each bit of stuff costs more ‘current money’ - instantaneous inflation. At the stroke of a Mervyn King pen… or is that pin?

You see, when there is actually nothing which sort of dictates what a £ is ‘worth’ then the entire system relies on increasing inflation for everything to work. Without increasing inflation house prices don’t rise, salaries don’t rise, prices don’t rise, and obviously in those circumstance profits can’t rise and bankers bonuses definitely can’t (can they?) rise…

The good news (sic) is inflation will rise again - at a guess it will take off like a bloody rocket - in 12-24 months time. Economists happy. Everybody else up the duff. As interests rates skate off, fuel prices, food prices and everything ‘takes off’ again… I’m slightly perplexed by the political claim of no boom or bust.

Given the short burst of logic above isn’t it inherent that there must be inflationary booms and busts in the system for it to ‘work’ (using that word on the very outer edges of its definition)?

Little bird suggested to me that economists might get qualifications as package deals - degree + lobotomy for £57.50 - to learn about these terribly complex intellectual challenges
(removes tongue from cheek once again…)

Is any of this important?

“Buggered if I know…”

But I figured you probably had 5 minutes to spare (at todays salary value anyway) to read through my meanderings