The pound in your bank account

… is today worth 96p (yesterday’s value).  Note: not the pound in your pocket: in the absence of a gold standard or similar, that’s just a convenient token.

The Bank of England has just officially magicked £75 billion into existence.  That’s money the banks loaned into existence over the past years, and today’s “Quantitative Easing” is an admission that 75 billion of it will never be repaid.

That’s nearly 4% of current M4 money supply: hence the devaluation of the pound.  Everyone with sterling-denominated assets has just been robbed of 4% of our fortunes.  Though in reality, this is just an admission of past inflation, and only those of us who didn’t own property through the boom have been robbed of more than we were previously gifted.  At least, for the time being.

It’s also an admission that we’re not a working capitalist society.  When money is loaned, it must be paid back (which is non-inflationary), not printed into existence (raw inflation).  That implies someone has to earn the money through productive activity: bring something to the value of the money into existence.

The interesting question now is, who will buy in to sterling-denominated assets when they’re being systematically devalued?  So long as interest rates remain ridiculously low, the only willing buyer is the government itself.  Since government itself needs to borrow huge amounts which the markets are already shying away from lending, the only possible outcome of continuing low interest rates is inflation rising to Zimbabwe-like levels!

Posted on March 5, 2009, in economics, uk. Bookmark the permalink. 1 Comment.

  1. Hmmm, yeah, there has been a slight rise in the gold:£ ratio overnight.

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