Increasing the money supply when the supply shrinks sufficiently to inhibit economic activity, if properly controlled, is a good deal better than borrowing more. The Bank has done the right thing, given that we are where we are. If the Treasury comes up with a workable programme of credit easing, this will be good also. Both these measures allow the deficit cutting programme to proceed as planned, while providing an economic boost without increasing government expenditure.
This all raises the question of whether all is as it seems. This Blog believes that too little account is being taken of the huge rises in energy costs, petrol, gas and electricity and their impact on other basics such as food as well as the squeeze they apply to household budgets. Add to that general inflation approaching 5% and you have significant downward pressure on growth, even before you take account of the euro crisis and American slowdown.
Regular followers will know this Blog has argued for a rise in interest rates long ago. If these had been eased up at the first tranche of quantitative easing to the approximate level of the ECB at 1.5%, this would have had little effect at that time as such rates are historically low. What it would have allowed for is a lower inflation rate and the ability to reduce them somewhat now in order to boost the economy. As it is, we are stuck with the inflation with no reserve to counter it. Moreover QE and CE might make inflation worse. It is as important to have an interest rate reserve as it is to have one in cash.
The Government and the Bank have done the right thing to set their sails against increases in expenditure and more government borrowing. The right tools are being used, but maybe not in the right order. This might lead to a less than ideal outcome. We will have to wait and see. Meanwhile Moody’s have downgraded the banks. In present conditions, that is to state the obvious.