Quantitative Easing and a Contracting Money Supply in the Real Economy
It was decided by the Bank of England not to expand its asset purchasing scheme for another month but with the increasing inflation many fear that the previous schemes in quantitative easing (QE) have increased inflation artificially beyond its target.
These fears do not seem to be unfounded because asset purchasing is exactly what it says on the upfront, it is purchasing assets with a value of X for the value of X. QE was always only created to increase liquidity by exchanging illiquid assets for readies, not to increase the size of the economy.
So why do we see such sharp rises in inflation with less money available the wider economy and, is this the start of a trend for inflation, or is it just a sharp blip but a blip nonetheless?
An increase in the value of oil will have an obvious impact on the price of transporting all commodities both outward and inward and this may be the reason for the broadening of the trade gap and current sharp increases in the values of importing goods but quantitative easing is not responsible here.
So why are we seeing a stiffening and contraction in all aspects of lending?
Well, let’s please not forget the banks are now required to hold more capital, are still suffering from the continuous fall in commercial property values and investments in countries like as Greece and Portugal and if you considered the bank’s exposure to risk through investments in countries hanging on the edge of defaulting on debt it amounts to over 15 percent of GDP and for lenders, that is not an easy amount to soak up.
All of this leads to the banks asking for a more strict lending practices in order to sustain profit by ramming the borrowers, who ranges from businesses to residential property mortgages and credit cards, into the gaping hole in the commercial property and potential foreign sovereign debt default dike.
This credit restriction is to blame for the reduction of the supply of money in the broader economy. This is coupled with the increasing import and travel costs are driving up the values of goods, not quantitative easing through an oversupply of liquidity within the economy.
VIA Economic Voice
It was decided by the Bank of England not to expand its asset purchasing scheme for another month but with the increasing inflation many fear that the previous schemes in quantitative easing (QE) have increased inflation artificially beyond its target.
These fears do not seem to be unfounded because asset purchasing is exactly what it says on the upfront, it is purchasing assets with a value of X for the value of X. QE was always only created to increase liquidity by exchanging illiquid assets for readies, not to increase the size of the economy.
So why do we see such sharp rises in inflation with less money available the wider economy and, is this the start of a trend for inflation, or is it just a sharp blip but a blip nonetheless?
An increase in the value of oil will have an obvious impact on the price of transporting all commodities both outward and inward and this may be the reason for the broadening of the trade gap and current sharp increases in the values of importing goods but quantitative easing is not responsible here.
So why are we seeing a stiffening and contraction in all aspects of lending?
Well, let’s please not forget the banks are now required to hold more capital, are still suffering from the continuous fall in commercial property values and investments in countries like as Greece and Portugal and if you considered the bank’s exposure to risk through investments in countries hanging on the edge of defaulting on debt it amounts to over 15 percent of GDP and for lenders, that is not an easy amount to soak up.
All of this leads to the banks asking for a more strict lending practices in order to sustain profit by ramming the borrowers, who ranges from businesses to residential property mortgages and credit cards, into the gaping hole in the commercial property and potential foreign sovereign debt default dike.
This credit restriction is to blame for the reduction of the supply of money in the broader economy. This is coupled with the increasing import and travel costs are driving up the values of goods, not quantitative easing through an oversupply of liquidity within the economy.
VIA Economic Voice
