THE pound fell sharply on Wednesday against both the dollar and the euro as the money markets were shaken to the core by the unexpected news that the powerful Bank of England Monetary Policy Committee had been split over the issue of embarking on a further round of quantitative easing (QE).
The nine-strong committee voted by six to three not to increase QE by £25 billion to £400 billion with the outgoing governor of the Bank, Mervyn King, unexpectedly voting for an increase.
What has shocked the money men is that, even though the proposal was defeated, it was seriously put forward in the first place and that it had the support of three members of the MPC.
This has been taken as a sign that the Bank will in fact be embarking on another round of QE in the near future, something that no-one had anticipated, which will see the end of the UK’s ‘Triple A’ status and open the inflationary floodgates.
The reason for the panic amongst the bankers and money markets was summed up by a money analyst from the Royal Bank of Scotland who said: ‘People weren’t expecting the Bank to go down the QE route again. It smacks a little bit of desperation.’
Last week the Bank was forced to revise up its forecasts for inflation, warning that it would rise to at least 3% in the coming year – the target was 2%.
The Bank said it was prepared to ‘tolerate’ rising inflation.
QE, which amounts to nothing more than electronically creating money that has no value whatsoever and pumping it into the banking system, can only increase the rate of inflation.
So not only is the Bank prepared to tolerate rising inflation but King and his associates are prepared to use it as a policy and push it even higher.
The argument put forward for QE is that if the central bank pumps money into the banking system then this extra money will be used by the banks for loans to homebuyers and businesses and thus stimulate ‘growth’ in the economy.
In practice, when QE has been used in the past it has not led to investment in manufacturing for the simple reason that the banks are not prepared to invest in collapsing industries that, far from making profits, are going bankrupt.
Instead, QE money ends up in the money markets and with the commodity speculators who promise a quick and large return for driving up the price of essential commodities like oil and grain.
Thus, QE only benefits the bankers and speculators who, while driving up the price inflation of essential goods making immediate super-profits, are cutting workers’ wages on a daily basis.
The bankers and the speculators profit while the working class and middle class see their wages, savings and pensions turned into worthless bits of paper.
The insoluble problem faced by King is that British capitalism, along with the other capitalist economies, is in a state of ‘stagflation’.
This is where you have economic stagnation and inflation at the same time.
In fact, the capitalist economies are not just stagnating but in full-blown slump with manufacturing industry and output in Britain and the entire eurozone collapsing.
While King, despite all evidence to the contrary, claims that QE is a desperate measure to drag the economy out of a crash, in reality it is a means of keeping up the profits of the banks while the working class and middle class take the full brunt of a collapsed economy and the kind of hyper-inflation last seen in the 1930s’ German Weimar Republic.
One thing is clear today, capitalism is out of control and immediately facing a huge crash which can only be resolved through the working class taking power and putting an end to this bankrupt and anarchic system and advancing to a socialist society where production is for human need not profit.