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Quantitative Easing & Gold - 2009
In early 2009, the Bank of England announced a policy of 'Quantitative Easing', mostly easily summed up as 'Printing More Money'.
Deciding we should publish a brief guide as to what this is, and how it may affect investors, and the value of sterling, other currencies, and gold, we came across a number of excellent Question and Answer articles on the Daily Telegraph website. We will start be quoting them, then give our brief comments.

Q&A The Bank of England and Quantitative Easing
Last Updated: 8:40AM GMT 21 Jan 2009

Q So what exactly is quantitative easing?
A In short, the nuclear button for central banks.
It is a means of stimulating the economy when interest rates fail, or hit zero. Whereas interest rates attempt to influence economic growth by changing the price of money flowing around the economy, QE, as the pros call it, attempts to control the quantity of money in circulation - hence its name.

Q So how does the Bank do this?
A It means the Bank of England creates money in order to pay for assets. Usually a government must issue an identical amount of gilts for everything it spends. This is called sterilisation, and ensures governments cannot push up inflation in order to erode away their debts, potentially leading to hyperinflation. In the system which will be used by the Bank, it merely issues fewer gilts than the amount it will pay for assets under the Asset Purchase Scheme (things like corporate debt or asset backed securities, which it will buy in the secondary market). This is similar to the system currently employed by the Federal Reserve in the US. The difference between the two amounts represents an increase in the quantity of money in the system.

Q Does this basically mean printing money?
A It depends on what you mean. In the first instance, it does not mean literally firing up the printing presses and pouring the cash into the streets. But it does mean creating money, albeit electronically, and putting it into peoples' accounts. The more radical version would be to print money and send it out to people. This is something economists have predicted may eventually be necessary, but only if the economy continues to deteriorate.

Q. What is quantitative easing?
A. It is when the Bank pumps new money into the system, in this case 75 billion, in a hope that it ends up with the banks, which in turn will lend the money to consumers, such as home buyers looking for a mortgage or businessmen looking for financing.

Q&A The Bank of England and Quantitative Easing
Q. How will the Bank actually pump in the money?
A. People keep on describing it as "printing more money". That is not strictly true.
This is how it works: the Bank will buy up a whole range of assets - particularly Government bonds - in the money markets from investors such as banks and pension funds. It, in turn, hands over money to those investors for those assets.
Think of it like the Bank buying up cars, or houses, and handing money to the sellers. It just happens to be bonds it is buying, not motors or property.
Usually if it wanted to buy up any assets, it would issue gilts borrowing money on the international money markets. This time around, it will not. It will just pay for them by pressing an electronic button, and transferring "new" money across to the investors. This is as near as you can get to printing new money.

Q. Will it work?
A. No one knows, but it is a bold move. It was tried in Japan during the 1990s, with mixed success. Fans of the policy say it stopped the Japanese economy sliding deeper into trouble.

Q. If it doesn't work, what is the next step?
A. The so-called "helicopter drop", when the Bank creates new money without buying up any assets. The most famous example of this happening was when Taiwan started giving out $100 shopping vouchers to its citizens, forcibly encouraging them to spend and pump more money into the economy.

Q. There must be a down side to pumping money into the system like this, isn't there?
A. Yes, there is a risk that it is seriously inflationary. A few years' hence we could suffer, as the Weimar Republic did in the 1930s, from hyperinflation, which would send prices shooting upwards.
The Bank insists this is not a serious risk, because it is pumping money into the system for a limited time to target the acute shortage of cash in the economy.

Bank of England gambles on printing extra money
By Edmund Conway, Economics Editor
06 Mar 2009
The Bank of England took a historic "step into the unknown" yesterday by pledging to create 150 billion of cash to pour into Britain's stricken financial system.
It pledged for the first time in its 315-year history to effectively use printing money as its main means of controlling the economy, warning that this was the only way to prevent Britain from suffering a lengthy recession and potentially becoming mired in deflation. The move means that, for the first time, interest rates are no longer the primary tool for monetary policy, with the Bank instead pumping cash directly into the system.
It announced the radical step after cutting Bank rates by half a percentage point to an all-time low of 0.5 per cent yesterday - the lowest that the Bank judges it can go without causing the entire financial system to malfunction.

The decision to create more cash, announced by the Bank's Governor Mervyn King, and the Chancellor of the Exchequer, Alistair Darling, was regarded as a last-gasp measure for the authorities to prevent Britain from sliding into a 1930s-style depression.
However, with little evidence that so-called quantitative easing has succeeded elsewhere in the world, experts voiced fears about the consequences of the "nuclear" economic measures.
Some fear that the extra infusion of cash will generate uncontrollable inflation several years from now, consigning Britain to a long period of either high prices or perhaps even Zimbabwe-style hyperinflation. Others said they were worried about the economic legacy for future generations, with the policy textbook having effectively been torn up.
A member of the Bank's Monetary Policy Committee, Andrew Sentance, described the new post-interest rates world as representing "a step into the unknown". Under the new system, the Bank will keep interest rates at 0.5 per cent for the foreseeable future and will attempt to boost the economy by buying a variety of assets from investors such as pension funds and insurance companies.
Importantly, however, it will pay for these assets not with a pre-raised cache of funds but by creating new money and transferring it to the investors. Mr King said that the Bank would create up to 150 billion, with the first 75 billion to be spent in the next three months, starting next Wednesday. The total is equivalent to just under 5,800 for every household in Britain. "The world economy has turned down very rapidly since last autumn, the amount of money is not growing at all, and the economy is in a recession, so we need to increase the supply of money," said Mr King.
The Bank hopes that investors who receive its money will go out and spend it, helping to bring the credit crisis to an end. However, should the scheme fail to spark any economic growth, the total spend is likely to grow even higher.
Mr King pledged to reverse the policy as soon as it appears to be effective by selling off the assets and effectively destroying the 150 billion. However, many economists were sceptical about whether the Bank and Government would be able to resist the temptation to allow inflation to run out of control.
A team of 10 experts has been working on the scheme since just before Christmas, when it became obvious that interest rates were failing to stimulate the economy. Graeme Leach, the chief economist at the Institute of Directors, said: "We strongly support quantitative easing and think it will be most effective if the Bank is aggressive in its use. Markets need to see a shock and awe approach over the coming months but even then there is no guarantee of success."

IMF poised to print billions of dollars in 'global quantitative easing'
By Edmund Conway
16 Mar 2009
The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.

Alistair Darling and senior figures in the US Treasury have been encouraging the Fund to issue hundreds of billions of dollars worth of so-called Special Drawing Rights in the coming months as part of its campaign to prevent the recession from turning into a global depression.
Should the move, which is up for discussion by the summit of G20 finance ministers this weekend, be adopted, it will represent a global equivalent of the Bank of England's plan to pump extra cash into the UK economy.

However, economists warned that the scheme could cause a major swell of inflation around the world as the newly-created money filters through the system. The idea has been suggested by a number of key figures, including billionaire investor George Soros and US Treasury adviser Ted Truman.
Simon Johnson, former chief economist at the IMF, said: "The principle behind it is that everyone would get bonus dollars and instead of the Federal Reserve having to print them, everyone gets them.
"The objective is to create a windfall of cash. However if everybody goes out and spends the money it could be very inflationary."

Quantitative Easing, Inflation & Gold
All these articles about QE mention inflation. It is an obvious worry, as it is a very likely result of this policy.
Governments tend to use inflation and / or devaluation (which amount to the same thing) as a stealth tax.
Whether or not you share the fears about QE causing inflation, any issuing of "new money" must almost certainly reduce the value of the "old money" already in circulation.
Over thousands of years, the best defence or insurance against inflation or devaluation has been to hold hard assets or commodities which will retain their value. Probably the best and safest of these is gold.

Competitive Devaluation

Spot Gold Chart in US Dollars - 2nd November 2007

Spot Gold Chart in US Dollars - 2nd November 2007
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