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Thursday, January 08, 2009

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Counterfeiting

Recently the term "quantitative easing" has come into the political lexicon .

What is it? In short, quantitative easing is a central banking policy tool used when the rate of interest falls so close to zero that further reductions are impossible or have no effect in stimulating the economy. It means the Bank of England creates money out of thin air, and uses it to buy government securities, although it reality it could be used to buy anything.

Done by any other person, it would be known as "counterfeiting", but that Ladies and Gentlemen is the very nature of the Bank of England today.



Why it won’t work

Today gold sells for about £560 per ounce. Now suppose that an alchemist solves the oldest problem of all by turning iron ore into gold at very little cost. Moreover, his invention is widely publicised and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold?

Presumably, an unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, even before the alchemist had produced and marketed a single ounce

So, what has this got to do with Bank of England monetary policy?

Like gold, the £pound only has a value to the extent that they are strictly limited in supply. But the UK government has a technology, called a printing press that allows it to produce as many £pounds as it wishes at virtually no cost. By increasing the number of £pounds in circulation, or even by credibly threatening to do so, the UK government can also reduce the value of the £pound in terms of goods and services, which is equivalent to raising the prices of those goods and services.

We can now conclude that, under a paper-money system, printing more money will create greater spending and hence hyperinflation.

Excess liquidity = quantitative easing.

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