Is Quantitative Easing(QE) the best strategy to deal with the much worst than expected GDP drop of 0.4% for the last quarter (June – September 2009)

Guardian: http://www.guardian.co.uk/business/2009/nov/01/bank-england-mpc-quantitative-easing In an article "Businesses urge bank to extend quantitative easing" noted British Chambers of Commerce supporting an immediate £25billion injection. Spending away £175 billion in the recent past and now a further £25 billion pushes the UK debt to £200 billion. This equates to the size of a few developing economies put together. It seems rather ambitious to continually carryout QE when economic indicators are adverse. In economics we appreciate that when recession hits a country, a string of economic stimulus are adopted. Why do we need to always resort to extreme measures such as QE to revitalise the economy. Of course, QE has had a positive impact on house prices, stock markets and business/consumer confidence but such drastic money supply injection will lead to massive government debts, that would translate to significant increase in future taxes and unsustainable debt levels which would take a long time to resolve.

BBC : http://news.bbc.co.uk/1/hi/business/8321970.stm Record recession for the UK economy described the frail state of the UK economy as compared to other countries. In spite of the massive QE that the BOE/MPC has implemented, the failure to see any positive progress in the UK economy as compared to the likes of Germany, France and even Japan, seriously questions the dependability of the technique. For one thing, as compared to other nations with EU, UK has taken on a more aggressive strategy, backed by mounting debts, while the other EU countries such as the 2 identified above, is managing their respective economy with a stronger foundation for the past, present and future. I note this with much concern as the "real" economy appears to be artificially propped up rather than self developing. To make matters worse, the rather optimistic view in the article by Alistair Darling indicating that the economy would recover by the end of 2009 does not seem to phantom the full extent of what lie ahead for the UK regardless of what the economic statistics may suggest.

Economist : http://www.economist.com/world/britain/displaystory.cfm?story_id=14770191 noted that the Bank of England is engineering an elusive recovery. The article noted a MPC member, Adam Posen describing how well QE has prevented deflation, improve credit and asset market which appears to be very much wanting. Reading major financial news recently, it can be observed that businesses are complaining about the scarcity of loans, especially SME, with banks extremely conservative with their lending, charging exorbitant interest rates (although the base rate is 0.5%), are very selective and focus on building their balance sheet from the "huge bad debts portfolio". Furthermore, another article "Loose Thinking" describes how Japan the pioneer of QE during 2001-2006 did not achieve much success in combating deflation or improve economy. What I believe is that the unconventional monetary strategy of QE seems to be linked to desperate attempts of MPC/BOE to do something to build confidence but lack any clear direction. Mr Masaaki Shirakawa, governor of Bank of Japan may appear to offer advise on how QE should be practiced, with Britain and US leading the race on QE but the real question is whether Japan is a good example to follow. Japan’s contextual economic structure is very distinctive from the West, with a culture of savings, reliance of businesses primarily on banks, time horizon for results, but also, whether Japan have in fact come out of economic stagnation.

FT: http://www.ft.com/cms/s/0/1a3a4456-c273-11de-be3a-00144feab49a.html?nclick_check=1 remarked what is believed to be the other factors that need to be considered to deliver economic recovery. I chose this article as it contained a remark that I have emphasised in this paper about the need to look at the holistic perspective. Mr Adam Posen exclaimed the need to restructure the small number of large banks to enable greater competition and wider available funds. I believe that we need a mathematical and holistic approach to manage the economy which involves setting the infrastructure right, before adopting economic stimulus. For instance, QE will not work if money supply increases and yet, banks are reluctant to loan to businesses. This means, access to funds remain futile and businesses, even those with good prospects are perceived risky, continue to be forced to shut down. What is required here is a wider source of financing for companies. Also, the focus on economic regeneration activities which I believe has not been emphasised in many readings.

In conclusion, I think IMF article UK Budget Imbalance in the Global Financial Stability Report noted an interesting caption which I feel best describes how UK’s QE strategy is being deployed. IMF notes that Britain is trying to do a Ryanair by pretending to reduce costs but simultaneously borrowing to meet its obligation. With no clear economic direction, worst funding gap in the world, reactive engagement of QE and MPC’s inability to understand and measure the effectiveness of QE, the economy is likely to be heading south, with far reaching economic consequences.