As US (0.25%), UK (0.5%), Japan (0.1%), Canada (0.5%) and other key Central banks have reduced their short term interest rates to near zero. With that economic stimulus tool’s effectiveness exhausted, countries around the world are now having to turn to radical last ditch solutions like – printing money.
Yes, exactly the same thing we all learned in high school economics class is very bad idea. Printing money can lead to hyperinflation at some point taking the form of Zimbabwe’s daily additions of zeros to the prices.
Bank of England has now announced that it will be applying “quantitative easing” (QE) to add to the supply of money in the UK banking sector. In plain English this means that it will print £150bn (10% of the annual output of the economy) extra money. The extra cash will be used to purchase government bonds and commercial assets to quickly inject money into the economy.
International Monetary Fund IMF may have to use its Special Drawing Rights (SDR) to create money. IMF is simply running out of money, as it has already committed 25% of its Reserve funds to bail out Iceland, Ukraine, Pakistan, Belarus, Serbia and Hungary. IMF needs another $600 billion to address the growing crisis as the Baltics, Romania and Turkey are all teetering on the verge of economic catastrophe.
Economists claim that it is possible to do QE successfully pointing to 2000 Japanese experiment. There is a debate whether QE actually worked. Regardless, QE is a sign that central governments are beginning to use their emergency parashutes and other than the umbrella there is not much left after QE to guarantee a soft landing.