Britannia Radio

What’s a billion more or less?  It wasn’t so long ago that £16  
million got people excited [that was last week over somebody’s  
pension). Now  hurling money stolen from the next generation to the  
tune of £75 billion barely raises an eyebrow.  (It’s more than twice  
the whole defence budget btw! )

The second article by Ian Campbell rehearses the current situation  
but then issues stern warnings of the utter disaster that could  
happen if this ultimate gamble doesn’t work.  It moght work, but it's  
very long odds.    BE WARNED!

++++++++++++++++++++
For the record  BoE cuts interest rates and plans to print money
=Bank of England cuts interest rates to historic low of 0.5pc and  
unveiled plans to inject £75bn of new money into the economy.
= ECB cuts interest rates to record low of 1.5pc
xxxxxxxxxxx cs
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TELEGRAPH                  4.3.09
The Bank of England's printing presses are ready to roll
The big question is whether the extra cash will actually be spent,  
says Edmund Conway.

    By Edmund Conway

As far as markets are concerned, this is World War Three. Share  
prices have fallen so far and fast in the United States that they are  
back where they were when Bill Clinton was finishing his first term  
and John Major was still clinging on to power. Despite a small pick- 
up yesterday, the sense of misery and resignation remains so  
pervasive that US markets are now priced for either world war or full- 
scale depression.

Stocks are better value than they have been for all 1,680 months  
since 1870 save for brief periods in 1920 (post-WWI adaptation), 1932  
(Great Depression), 1942 (WWII) and 1982 (stagflation hangover),  
according to calculations on the US markets from Lombard Street  
Research.

Observing this recession is rather like watching slow-motion footage  
of a car crash. [an image I’ve used a lot in the last year! -cs]  And  
at the front bumper of the vehicle are share prices and money growth.  
Shares started really sliding last autumn, just before the bankruptcy  
of Lehman Brothers coincided with a sudden and unprecedented collapse  
in world trade. But the impact of the collision is still travelling  
through the frame of the car, shattering individuals' fortunes with  
inexorable inevitability as it passes on. Investors have abandoned  
the markets because of their fright about the slide in profits and  
the rise in redundancies that lie ahead in the coming months.

Yet for all the sound and fury, the full scale of the impact has yet  
to be felt. It will only be at the end of this year, when  
unemployment is closer to three million than two million, that we  
will truly know how it feels to be in the thick of a recession. Sir  
Fred Goodwin may consider himself a victim of unreasonable public  
recrimination now, but I dread to think how the revelation of his  
pension would have gone down six or eight months hence with 10 per  
cent out of work for the first time since the 1980s.

Neither are the stock market figures the only statistics pointing  
towards a dreadful 2009. The money growth figures have looked truly  
ominous for some time. The amount of cash sloshing around an economy  
is directly related to both its growth and the level of inflation –  
but policymakers have pointedly ignored these figures since the  
decline of monetarism in the late 1980s. Had they looked at money  
growth a little more closely back in 2006, as it soared by a massive  
14.5 per cent, they would have been warned about the unsustainable  
scale of the boom. If they looked at it now they would see that it is  
growing by a mere 3.8 per cent – severe recession territory.

So we have two early warning systems indicating clearly that we are  
heading for a similar fate to that of the 1930s. It is tempting to  
assume that we should resign ourselves to this. Tempting, but wrong.  
At some point, the disturbingly large bail-outs of the financial  
system and national economies throughout the world will start to take  
effect. It takes some months for cash - even emergency infusions of  
the stuff – to filter through to those who most need it, and we are  
not yet at that point.

This is worth remembering, since at midday today emergency measures  
to prevent the depression-scenario will culminate here in Britain  
when the Bank of England confirms that it is about to start printing  
money for the first time in its history. It will not literally print  
cash – instead creating it with the touch of a key on its trading  
terminal – but "quantitative easing" amounts to the same thing. And  
it will reintroduce a focus on the money supply.

Money creation is a terrifying prospect for those aware of how easily  
governments can trigger hyperinflation by employing their printing  
presses, [For example those living on savings are getting NIL return  
and food inflation even now at 10%.  Bit this would produce a trivial  
return on deflated savings against double figure inflation  
generally.  THAT’s the nightmare forecasts. -cs] but it may also  
provide the nuclear power necessary to turn the economy around. The  
Bank's aim is very simple: directly to increase the amount of cash  
flowing around in the UK, which should, in turn, catalyse companies  
and people to spend a little more, and to avoid the prospect of  
deflation. The Bank does this by buying company and government debt  
and paying for it with this instantly-created money.

The European Central Bank looks increasingly likely to follow suit.  
It has argued, quite reasonably, that printing money will potentially  
generate high inflation in the coming years. But the more pressing  
prospect of impending European economic collapse, and indeed the  
threatened disintegration of the euro itself, are compelling enough  
arguments for it to change its mind.

Preventing high inflation is a worthy aim, but useless if, after all  
your efforts, there's no functioning economy left.

It is a policy America's Federal Reserve embarked on some months ago,  
and there are tantalising signs that the operation could be starting  
to work. The amount of cash in the American economy has jumped  
significantly in the early months of the year – the big unanswered  
question, however, is whether the companies or banks which now have  
this cash burning a hole in their pockets actually go out and spend it.

We must all hope that they do so, and that their British equivalents  
do the same after today. Otherwise, the global economy really will be  
consigned to the armageddon the markets seem to be predicting.
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2. Bank of England will have its fingers crossed as it starts  
printing money experiment
In the autumn of 2007, Ben Bernanke, the US Federal Reserve chairman,  
realised things were very bad. The US central bank began to slash  
interest rates and to engage in what he likes to call "credit easing"  
- dropping newly-created Fed money into markets that had seized up.

    By Ian Campbell, breakingviews.com

About a year and a half later, the Bank of England has arrived at a  
similar conclusion. The Old Lady is getting ready to follow with her  
own "quantitative easing" (QE) - but will go about it in a different  
way.

Bernanke, a student of the Great Depression and of Milton Friedman's  
analysis of it, was quick to turn to QE. As Friedman once told this  
author, there is no limit to the amount of liquid assets the central  
bank can create.
Bernanke has been testing that proposition. The Fed's balance sheet  
has more than doubled in the past year to $1.9 trillion, about one  
seventh of US GDP. The Fed's cash - fiat money created from nothing -  
has been used to substitute for moribund private lending and to meet  
the need for credit. For example, it now owns $246bn of commercial  
paper.

This week, the BoE will follow the Fed. It will probably cut its  
policy interest rate in half to 0.5pc. [It has! -cs]  That may well  
be its final cut, because a zero rate may create difficulties with  
banks' margins. And it will say more about its intentions for money  
printing.

The outline is already known. It will adopt a different approach to  
Bernanke's. Rather than, as it were, taking to its monetary  
helicopter and dropping newly-printed money into distressed  
securities and markets, the Old Lady will buy UK government bonds  
and, probably, high grade corporate securities. In contrast, the Fed  
has reduced its holding of US Treasuries in the past year.

The BoE may give an idea of its intended level of annual purchases -  
perhaps £100bn - [£75bn -cs] which will aim to add significantly to  
the money supply. The enlarged pool of money will, in theory, do the  
rest. Lending and growth should be stimulated.

[Here the author starts to look at possible consequences and the  
picture he pains is frightening -cs]

But will this work in the current circumstances? The danger is that  
the enlarged pool of money will be stagnant. Banks, corporations and  
individuals are all repairing their balance sheets. Who wants to  
borrow? Who wants to lend?

There is also a risk that what would be a further supply of sterling  
further diminishes the appeal of the currency and weakens it more.  
That might not trouble the BoE too much - a weak currency stimulates  
exports - but it would trouble the eurozone. A sterling collapse,  
however, would be a big problem for the UK as it would drive up  
government bond yields and add to the economy's already severe fiscal  
difficulties.

That the BoE has come slowly to QE is understandable. Money printing  
can be used well or irresponsibly. If a central bank monetizes an  
irresponsible government's deficit it will provoke high inflation or  
even hyperinflation - as is the case today in Zimbabwe.

The Fed cannot be accused of directly funding the spiraling US fiscal  
deficit as it is not (yet) buying government debt. The UK public,  
however, may well become nervous when it understands that the BoE  
plans to buy substantial amounts of UK government debt.

But the BoE will limit the amount of debt it buys and will aim  
eventually to sell it back to the market. The boost to the money  
supply will be limited in size and duration. There will be no  
intention to begin a hyperinflationary monetization of the government  
deficit, and every intention to avoid it. Yet with both the BoE's and  
Bernanke's approach to QE there are inflationary risks if, as the  
economy recovers, the money supply is allowed to grow too fast.

For both the Fed and the BoE, there is also a risk of failure.  
Despite Bernanke's efforts, lending remains depressed in a US economy  
that has been contracting fast. It is possible that the Fed's  
vigorous expansion of its balance sheet has prevented a still worse  
implosion of the economy and that it may speed eventual recovery. Yet  
monetary policy may "push on a string" Keynes warned, which is why he  
advocated fiscal spending as well as monetary loosening to tackle  
depression.

Both the UK and the US have gone for massive fiscal spending, with  
huge proposed deficits of the order of one tenth of GDP. But so far  
there is no response from the economy. That is understandable. The  
natural process of repair following the excesses of a credit boom has  
not been given time to take place. More patience is needed.

The fiscal impatience is understandable, yet potentially dangerous.  
The extraordinarily high levels of government deficit spending in the  
US and UK cannot be sustained unless recovery comes soon. If it  
doesn't, the fiscal position may become disastrous, leaving investors  
unwilling to buy government debt. In such, circumstances outright  
monetization of the government deficit and a wave of high inflation  
might become the only option.

That terrible moment is not in sight. For now, deflation rules and a  
spell of money printing could stimulate it away. We are in  
experimental times. Policy-makers hope they are pressing the right  
buttons.