A world in economic crisis

Bank of England retains low interest rates

Posted in United Kingdom by Aussie on February 18, 2010

Bank of England suspends quantitative easing scheme and holds rates at 0.5% | Mail Online

The Bank of England has chosen to retain interest rates at 0.5% which is really very, very low. At the same time the bank has halted its $200billion programme of injecting money into the economy, predicting a gradual recovery.

What could go wrong? At this point in time there is a real possibility that there will be a double dip recession. The “recovery” seems to be quite weak, which is not a good sign anyway. However, based upon government interventions in the past, the question to be asked is whether this action of pumping money into the economy was justified in the first place.  The problem, as I see it, is that the real situation being faced is similar to that which was faced in the 1970s when the world suffered from stagflation.

If this is a period of stagflation, rather than just a recession, then it could be argued that the steps being taken are in fact wrong, and as a result there is a real risk of the economy in the UK and elsewhere that a “stimulus” has been applied being moribund for a longer period of time. 

In this particular case the Keynesian type prescription simply does not work because there is high inflation plus high unemployment., and it would certainly seem to be the case since the CPI in the UK jumped to 2.9%. Keeping interest rates low is not really going to help. The mortgage defaulting will continue, especially if the mortgagees have not been putting money into the payment of their loans during a period when the interest rates have been low.

One reason that the economy in the UK has continued to be slow to bounce back could be a result of carbon credit trading. During last year a large steel plant was closed because of the advantage associated with the carbon offset licenses rather than the profitability of the company.

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  1. charlesrowley said, on February 18, 2010 at 3:45 pm

    I suspect that the UK will confront a serious problem with inflation as a consequence of monetary over-expansion. Attempts to squeeze inflation out of the system will be sateongly opposed by public sector unions that rmain powerful in the UK. There is a source of stagflation even if all the other factors are ignored.

  2. ozzieaussie said, on February 18, 2010 at 7:23 pm

    The information that I have gathered so far on the stagflation in the 1970s indicates that you are correct in this regard. The demand for wages was very much a part of the problem in that period. The union response to any measures that need to be taken in the future will be interesting to watch.

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