If Quantitative Easing Fails, What Next

Bank of England announced yesterday that it will pump a further £25bn of freshly created money into the economy as we recently reported but what is quantitative easing?

Quantitative easing is where the Bank of England uses its computers to create new money. It will then inject this into the economy in ways designed to get money flowing but without creating inflation. If they simple give money away it would instantly create inflation, it instead buys assets.

The Bank of England has bought gilts, which are loans to the UK government. It buys these mainly from insurers and pension companies, on the hope that this frees up money for them to help companies when they are trying to raise money. The theory is that more cash is available for lending to consumers, and businesses at more favorable rates.

The biggest danger is the creation of inflation. QE is to stop the UK falling into a deflationary spiral. Pumping money into the economy creates inflationary pressures. It is pretty much untried and unclear what other side effects may be created. If the economy continues to languish, expect more quantitative easing. Some pessimists even speculate that QE may even become a permanent fixture in the UK.

To read more on this story go to thisismoney.co.uk. What are your thoughts on Britain using quantitative easing?