Quantitative Easing

The Bank of England has enacted a process that is being called "Quantitative Easing", while this has long been talked about in the media, so it was no surprise. However it was the details that were lacking that made it impossible for ordinary people to really understand what it will really mean.

The way that it has been presented was pumping money into the economy without actually printing money. As I understand the process, the BoE will just type in a new balance into the account of the nations money and will spend it. Now I just wish that I could do that in my bank account. Then the Bank of England will buy corporate bonds, government bonds and other assets to add seventy five billion pounds to the British Economy. The intention of this is to increase the amount of money available to lend to business so that cash flows through the economy.

Even before the details of all this was announced today, I could see a serious flaw in this plan. As simply the major cause of the economic contraction is that people and businesses borrowed too much in the first place. This lead too much of the consumer spending being financed via borrowed money. Therefore, while getting people to keep spending will have the effect of keeping ailing businesses afloat, it fails to tackle the problem of the existing debt that people and businesses already have.

Further, as history shows just printing money, no matter how it is done, will lead to inflation. Just think of Germany in the 1930s where a wheelbarrow full of notes was needed to pay for basic goods like bread. Or the hyper inflation of Zimbabwe today where to pay for the apparatus of the state the government in Zimbabwe just prints more and more bank notes. Therefore Quantitative Easing will have an inflationary effect. The important but as yet unknown answer to that question is by how much? If it adds just one or two percent, then it will not seriously harm the economy. Well certainly no more than the bankers have already. But if it leads to inflation of twenty or thirty percent, well that will only make a very bad situation even worse.

I am not saying that this is the wrong thing to be doing, as having an economy that is strong enough to deal with the issues of climate change and social justice is vital. This is where what the Bank of England is doing is very different. Instead of just buying up the toxic assets from banks, this money will go to buying quality assets, bypassing the banks. Therefore the cash will not just sit in the banks. Thus while the money will go to the multinational corporations, big business and rich individuals, it will actually go into the economy in one way or another.

However while there has been some innovative thinking, it is the support for the old style economics that is worrying. By buying bonds and assets from large corporations there is a risk that some of the money vanishes overseas, or that it just goes to support the balance sheets of the plc that sells the asset. While some will be reinvested in generating investment that will lead to creating jobs and economic growth, the big question is just how much?

Part of the reason why the BoE have chosen to do it this way is so that the bank can sell the assets once the economy is back to normal. Also the inflationary effect of this, the bank hopes will stop the dread of deflation. As I have spoken of before, it is this belief that only growth produces a good economy in the old style models. Therefore, I don’t understand why the Bank has not done more to ensure this new money does feed into the real economy.

Had the Bank via the government given one thousand pounds each pensioner then while the cost would be twelve billion pounds, most of that money would be spent in the high streets and the real economy. Even if one thousand pounds was given to every adult, it would still have only cost the same seventy five billion. Therefore the inflationary effect would have been the same yet the cash would have generated the spending that this measure is intended to.

Under this measure of Quantitative Easing there is a plan for another seventy five billion to be created, I hope that if this is needed, that the money goes to everybody next time and not just the rich business leaders who got us into this mess in the first place. That would also enable most ordinary people to start their own personal transformation to the new economy.

Even though most people can not yet see this, the amount of personal debt combined with the government debt will force the changes that are needed in the global economic models. The drive for growth has meant that the way that everything is measured by purely financial means has resulted in us ignoring that growth is about growing richer and not just in the financial sense.

The environment and the planets natural resources need to be properly valued. A forest is not just the value of the timber growing there, the trees are binding the soil, stopping flooding, locking away CO2 all costs that are greater than thousands of pounds value of the felled timber. When flooding can cost millions, the value should always be in favour of keeping the trees.

The same can be said about the fishing industry. Fish is an important food source for about a billion people. Yet fish are harvested not based on need or hunger but for profit. It is not that making a profit is wrong, it is the excessive profits that cause the harm. Around the world the fishing fleets of other nations will go in and harvest fish from another nations shores and seas. When carried out responsibly that can benefit the host nation. But frequently it is a larger more powerful nation that is there for a quick profit and once the fish are gone as the result of over fishing, the indigenous people are left without the fish that developing countries rely on. However this does not just happen in the developing world as in Europe this has and is happening.

Back in the 1970s Britain sent the navy to the Iceland shores to protect its fishing fleet when they went into the Icelandic fishing grounds to harvest their fish. In more recent years, the British fishing fleet has complained, with some justification, which other members of the EU were coming into British waters and taking merger stocks. Ignoring the irony of Britain having done to us what we did to others, under the old style economics we all took far too much. If green sustainable Economics was utilised, then a fair harvest could be had by all.

The scientists who study fish populations are saying that if we don’t harvest the fish now, and allow stocks of cod to properly recover, then with a smaller harvest allowed the long term viability of the fishery will be guaranteed. Also with a higher core population of fish then the cost of catching the fish will be lower. The boats will not have so sail as far searching for the fish, this in turn will lead to lower carbon dioxide emissions as less fuel will need to be burnt and better profitability.

Therefore the Quantitative Easing measures should have been used to pay some of the fishermen to stay in port and not fish, that way there could be a moratorium on fishing while ensuring that the skills were not lost and the economy of fishing communities did not suffer.

The difficulty is that the government and most businesses have not yet realised the fundamental shift occurred when the banking system collapsed. That old style economics has failed and that only by developing new and truly sustainable economic and business models can we ever hope to get ourselves out of this mess. Quantitative Easing looks like a needed measure as it can be used to ease this transition.

However, no money or support should go to any industry that are part of the old style economic model or the previous unsustainable industries.

On the same day as the Quantitative Easing was announced, in the figures from the Motor Manufacturing Association was published. As expected in Britain the volume of sales were down. However, the sales of smaller, more economical and energy saving cars was up and by a significant amount. The big players in this industry are all going to Governments across the world begging for handouts. Often with the cry well there will be so many thousands of job losses if you don’t.

Even before the recession there was a thirty- percent over capacity in automobile manufacturing across the globe. More cars were being made that there was a market, not only that but the big three manufactures; General Motors, Chrysler and Ford were making the wrong cars.

Back when President Clinton was in office, even if he was not always in his pants, he gave the big three millions of dollars to develop an automobile that could give eighty miles per gallon. Well they were very grateful, but the car that emerged should outrage every American taxpayer. As the big three sat on their hands, and the tax payers money, while Toyota seeing they were going to have to compete developed the Hybrid. In effect American tax dollars help Japan gain a commercial advantage.

Therefore, while there has to be support for the right types of manufacturing, these old fossils should not be supported. Quantitative Easing, Fiscal Stimulation, you can call it any name, has to be about enabling the development of sustainable industries.

The major international corporations like GM play a game of taking government subsidies, making grand promises then frequently failing to deliver. Then when the going gets difficult they blackmail whole countries even whole regions with the treat of job losses. GM in particular has played that card once to often and now looks like they have lost this game of poker. As while the loss of jobs and skills will hurt national economies, the simple fact is it would be pointless making more of any product that no one wants. To then have the product sitting in fields will only delay the inevitable collapse of these companies and industries.

While some will argue that it is only lack of credit that stops people taking out the loans to buy new cars, miss the real point. People who are already worried about making mortgage payments or increasing fuel bills, will not want to borrow. While the price of oil may have fallen, it is only because the asset bubble of Property Values has burst that has deflated the pressure of the energy crisis.

That will return as soon as the economy picks up. Even if we did not have the crisis of "Damaging Climate Change", and then the shortage of energy would still create a serious limit upon economic growth. This is why it is vital that the new "Sustainable Economy" develops and uses renewable sources of energy.

The capital from this Quantitative Easing could be spent providing all of the United Kingdoms renewable needs in one proven technology. That of Geo thermal power stations.

While the technology was developed in locations where steam vents were already known to occur, a Geo thermal power station can be built almost anywhere. The largest cost is the drilling of the bore holes. To go deep enough so that you are hitting hot rocks costs about five million dollars US per power station. You don’t need to have a reservoir of heated water in the ground as by pumping in water the steam rises from the second bore, that’s why the cost can be so high initially, and you have conventional turbines driven by the steam. There is an added advantage as the water pumped down can be contaminated water, and the rocks act as a filter cleaning contaminated and polluted water. Therefore depending upon geology we can use these wells to dispose of hazardous waste as well as generating power.

While the capital costs are about sixteen million per power station, while a gas fired station can be built for about a million, there are not the ongoing costs of fuel, and almost no greenhouse gasses, therefore the costs of running such a station is minimal. The reality of all transport powered completely by electricity becomes possible. There would be no need for Nuclear power and as they cost twenty five million pounds each to build (that’s just the construction costs), this is a cheaper option. With the money from Quantitative Easing we could build four hundred of these Geo thermal power stations and not just in Britain but across Europe.

The economic landscape has shifted and while change will be painful for some, the future is far brighter than many imagine. It does though depend upon our leadership thinking about the long term, thinking about everyone and not just the few, and more importantly thinking about ways of utilising this opportunity of change to make the environment central to economic thinking hence forth.