Today on Threadneedle Street in the City, the Monetary Policy Committee meets to decide the Bank of England’s base rate and whether or not to keep the printing presses running The base rate is currently of symbolic importance (unless you have a base rate tracker mortgage), because prevailing real world market rates are far higher than the official 0.5%.
Has QE worked? We will never be able to answer that question definitively. Economists will argue forever about what would have happened if things had been done otherwise. We can however point to unintended consequences of the Anglo-American monetary splurge. Commodity price inflation, a non-trivial £200 billion unwinding problem in the UK, a yet more burdensome government debt disaster. The evidence is that QE has largely allowed the Bank of England to buy the government’s new debt giving foreign investors an exit route. Pimco, the world’s biggest bond investor has taken that exit route from gilts and says they are now resting on nitro-glycerine.
For £200 billion we got growth of 0.1%, the longest recession in history and a 6% drop in output that saw Britain as the last major country out of recession. Most worryingly of all, inflation is now ready to rip.
The recession came to a technical end last week. With that QE should come to an end. Policy makers need to perform a trick never accomplished before anywhere in the world at any time in history, turn off the monetary liquidity flood without lagging inflation jumping, sterling collapsing or the economy seizing up. Mervyn’s memoirs will make interesting reading.