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Thursday, 6 August 2009

Quantitative easing: follow the money

The Bank of England is trying to decide whether quantitative easing has had any beneficial impact on the economy. The theory is quite simple. The Bank says it is not printing money, but what it is doing, which is tantamount to the same thing is acquiring assets from the banks in return for additional credits to the bank's accounts with the BoE. The idea is that the banks will feel flush with cash and decide to lend to commercial customers thus stimulating the economy.

Before the banking crisis, banks left an average of under £20 billion on deposit with the Bank of England. Now, after £125 billion of quantitative easing, the figure has jumped to £161 billion. In other words, the banks, not wishing to take a risk on lending the extra cash, are simply leaving it on deposit with the BoE.

The government may have thought they were spraying the economy with extra cash, but the hosepipe appears to have sprung a massive leak right next to the tap.

5 months on, Quantitative Easing clearly isn't working, so the Bank decides to do what only this government could do, and extend its programme by an additional £50 billion.

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