Quantitative easing

Thursday the fourth of March saw interest rate being slushed again to 0.5%. The aim is to make borrowing cheap and stimulate demand in the economy. While this is good news for those with a mortgage to pay its not good news for savers(I am not one of them). One other thing is that this tool seemes to have lost traction. If it does not work I dont see the Bank of England reducing IR to zero. The other problem the economy has is that of inflation, not that it is increasing but actually it is decreasing and this phenomenon is reffered to as disinflation, that is when inflation is decreasing but remains positive. The situation that noone in this country aspires to be in is that of deflation, this is means there is a fall in how much the whole economy is willing to buy, and the going price for goods. Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral.

To show that there are still a few tricks up the sleeve of the Bank of England they have now come up with another tool called 'quantitative easing'. This basically means printing money. This is what the BOE can and is going to do now. Desperate situations require desperate measures. QE is similar to what Mugabe is doing in Zimbabwe but we know that Mervin King (the Governor of the Bank of England) is a much smarter guy than the comrade. As observed from the Zimbabwe scenario printing money has the effect of increasing inflation, which is exactly what the BoE wants to do to avoid deflation. In his own words though, Mervin King, said this is not an exact science, so the jury is still out on this.

I think most people will be asking how QE is going to work, I will give a very brief descrption of how this is going to work. Firstly, Quantitative Easing is defined as the creation of new money out of 'thin air' by a central bank, and its injection into the banking system. The aim is to increase the amount of deposits in private banks so that, by way of deposit multiplication, they can increase the money supply by increasing debt (lending). The key word here for me is lending. The economy desperately needs the banks to start lending again which, unfortunately despite all the measures taken they seem reluctant to do. For clarification's sake there will be no printing of money everything will be done electronically, since the banks have an account with the BoE their accounts will be credited with an amount of money hence the banks will be flooded with excess liqidity to promote private lending and reducing their risk to liquidity shortage. There are viable businesses out there that are in a desperate situation not because they cannot sell but because they are out of cash and thats where the banks come in, if the banks lend them money(overdrafts) they will be able to pay the wages and also buy raw materials putting people back into work, once a lot of people are back into work then there will be an increase in demand for goods. The psychological battle is to convince a jittery banking system to start lending again.

I will not be able to draw any comparisons between the situation here and our economy in Malawi, I will leave that to you guys since you are the experts. I think it was Gordon Brown who said that a weak currency is a reflection of a weak economy and a weak Government. I hear the Malawi currency is gaining strength, what does this say about the current government of Bingu.

I will sign-off by asking few a questioning to you guys; How is the economic downturn affecting our economy and which areas of the economy are most hit? Are we prepared for this; if not what is it that we need to do in order to ease the effects?

I have to confess that I am not an economist and I will be glad to take your comments on this article.