By Dominic Frisby
It's been more than a year now since the Bank of England began printing money, via Quantitative Easing (QE). Governor Mervyn King told the BBC at the time: "Money in the economy is not growing quickly enough to support economic growth… What we've announced today are measures to increase the supply of money injected directly into the wider economy."
The European Central Bank is now drawing ever closer to doing something similar, as the euro crisis spins out of control. So I want to take a closer look at QE and ask, "What has it actually achieved?"
QE (sometimes known as the electronic printing press) is the process through which the Bank of England creates money out of nothing by increasing the amount of credit in its own account. It then uses this money to buy financial assets, mainly government bonds. The institutions the Bank has bought these assets from end up sitting on lots of cash. So they are encouraged to lend, which drives the cost of borrowing down as more money becomes available, and the economy is stimulated. Or at least, that's the theory.
Mervyn King said that QE would either encourage people to "spend directly" or that it would "increase the value of assets," which "will lead other people to feel better off and, hence, to spend". But he also proclaimed an "absolute insistence that we will try to keep inflation as close as possible to our 2% target".
QE certainly seems to have helped boost asset prices (bearing in mind that it's not just the Bank of England who's been printing money, but the Federal Reserve too). Stock markets around the world have soared since March 2009. The FTSE 100 is up 65%, while the FTSE 250 is up by more than 90%.
Energy prices have soared, with Brent Crude Oil more than doubling, while metal prices – both base and precious – have soared too. Copper, for example, rose almost 150% from $150 to $370 a tonne. Other commodities such as cotton, cocoa and sugar have also all had bonanza years.
British house prices have surged too, albeit on lower sales volumes. Recent Nationwide data shows an annual rise of 10.5% from April 2009.
In short,…
