Last week the Monetary Policy Committee decided to go ahead with another Â£50 billion round of quantitative easingÂ in which the central bank buys gilts (UK government debt) on the secondary market (i.e. it buys bonds from private holders on the secondary market rather than buying it directly from the government. That’s the theoretical difference which differentiates us from Zimbabwe). That makes a total of Â£325 billion of new money floating about in the economy.
It’s worth, at this point, briefly exploring exactly what money is these days. There areÂ two measures that the UK normally uses, narrow money supply (M0) and broad money supply (M4). The first, M0, is the total of the physical notes and coins in your pocket and in the tills and safes of companies as well as the deposits from retail banks held by the Bank of England. The second, M4, is the notes and coins held by people and firms other than banks (including the BoE), the total sum of private bank deposits and certificates of deposit.
Allowing for a substantial difference between M0 and M4 is the essential point of having a fiat currency rather than being bound to something like the gold standard. Quantitative easing, as implemented in the UK, expands the money supply by increasing demand for the bonds deposited with the BoE in M0 thus reducing their price and therefore the relative cost of cash to retail banks.
Which they’ve basically then sat on.
The BBC’s excellent Money Box had a section on this where they challenged the way that QE is implemented and questioned why, if the ostensible purpose is to stimulate demand, peoples bank accounts aren’t just incremented by about a Â£1000 each. Answer from the Institute of Directors representative came there none.
It’d be bloody brilliant. If we’re going to actually make up Â£50bn in new money that didn’t exist before, which is literallyÂ what is happening, why shouldn’t everyone get a cheque in the post? We could make it taxable so the policy would be progressive and still be sanatised so we weren’t directly printing money for government spending which is the theoretical reason countries get in trouble. It’s far more likely that people would spend it directly (or reduce their overall debt) which helps keep the economy going, businesses from going under and people in work.