Is Quantitative Easing the solution ?

IS Quantitative Easing the Solution ?

When considering the UK economy  I would suggest that Quantitative Easing may not be the right solution for the economy. I believe this because it may cause more problems for the economy than we already have for example the increase in monetary policy could cause the currency to depreciate this would mean the government would have to offer up more currency when paying back their loans to the bond markets.

This will lead to less spending by the government to benefit businesses and other causes which may increase growth and help the problem. The main thing the central bank has to worry about is the currency depreciating and inflation increasing because if things get too out of hand it could be a similar problem to Zimbabwe.

Quantitative Easing has already caused many problems for different countries across the globe and it is important that UK doesn’t make the same mistake. I would suggest that it will be important for the UK government to think of other ways of increasing growth. Instead of looking for “quick fixes” such as Quantitative Easing look for sustainable methods of creating growth. 

This could be to invest more in manufacturing in the UK so that we have more exports and focus more money into education programmes that offer real practical skills. The UK government needs to look at the bigger picture and learn from other countries such as Germany or China that have massive manufacturing power and are now reaping the benefits of increasing growth.

Another way for the UK to inspire growth is to improve the real productivity of the country this could be done in many ways. The first way could be to invest more in research and development this is because tomorrow’s products and tomorrows growth will depend on a large amount of research today. More investment in research and development will mean more products for the country in the future which will mean more exports. Another way to increase productivity would be to invest in education this is because the more educated people are the more they will be able to earn and the more they will earn for companies or as entrepreneurs, this will create growth for the entire country.

The final idea for the UK government could be to invest heavily in the infrastructure of the country this could be to build more roads or to improve connectivity such as broadband. This will quicken the country and make it easier to move goods around and easier to communicate which hopefully increase growth and businesses will find it easier to operate.

If the UK doesn’t look at sustainable ways to increase growth they could be faced with big problems such as higher inflation and a depreciating currency. This could cause the UK to have problems paying back its loans as there is no growing business to pay more tax, if the UK can’t pay back its loans it may be stripped of its credit rating which will make it even more difficult to obtain credit.

What will happen in the future?

Considering the current UK Economy with the GDP staying stagnant and barely increasing and inflation also increasing the UK Economy is looking in a very bad state. The UK’s credit rating has also been downgraded which will make it difficult for the UK to borrow money to revive its economy. The graph below shows the UK GDP (Gross Domestic Product) and how much it has changed in the last 4 years in terms of percentage.

As there isn’t much sign of growth in the UK Economy the government will need to look into ways of stimulating the economy. This could be the use of a monetary instrument such as Quantitative Easing or an alternative. I believe that if the UK continues to apply Quantitative Easing the economy will eventually get worse and the currency may depreciate beyond repair this will make it more difficult for the UK pay back loans which will decrease the credit rating even further.

An increasing inflation rate will make it harder for businesses to survive as they will have to pay more for stock and other expenses as the price of goods increases rent will increase in order to satisfy the real estate owners. This will create larger expenses for businesses and with a decrease in consumer spending it will make it very difficult for many businesses to stay afloat. We are already seeing many large and small businesses go into administration due to the changing economy and decreases in consumer spending. Businesses such as HMV, Blockbuster and Jessops have become victims of changes in consumer spending and with the UK economy worsening it may cause many other businesses to go into administration.

An increase in business bankruptcy will seriously hamper the UK’s growth and cause it to go into further financial trouble, the graph below shows that bankruptcies in the UK are still increasing and almost 4000 businesses go into bankruptcy every financial quarter since 2010. This is a staggering statistic which shows how difficult the current economic climate is for businesses to survive and pay their creditors.

This could result in a total collapse of the UK Economy and all company will move out to somewhere that is more economically stable. If the UK wants to revive the economy they need to act quickly and think different ways to revive the economy as Quantitative easing hasn’t worked for many countries.

What alternatives are there to Quantitative Easing?

There are a large amount of alternatives to Quantitative Easing which could inspire growth. One of the alternatives would be to decrease taxes this will lead to increase in consumer spending as customers will have more money. More money being spent will mean higher profits for companies which will mean more growth.

Another option would be to increase subsidies for farmers and start up business this will help their business to grow and to increase profits as the manufacturing costs of the business will be subsidised. This will mean that farmers will be making more profit and they will be able to pay their workers more money. The disadvantage to subsidies however is that the government will have to find this large amount of money to subsidies these farmers and the government may not be able to sacrifice that amount of money.

The third alternative would be to directly invest money into start up businesses, instead of going through the banks the government could cut the middle man out and directly invest capital to start-up businesses. The increase in investment will lead to more companies being created which could help to increase growth because the more companies there are the more competition there is. The more competition will hopefully inspire more growth as companies look to compete for customers.

Overall I believe that direct investment into companies will be the best way to inspire growth. This is because lending money through banks increases the time it takes for businesses to get the funding they need. This is not ideal as the UK government is quickly running out of time to revive the economy. The direct investment will allow more companies to start up successfully rather than the banks taking the money and being really strict in the way they lend it out.

An example of how this could help the UK to revive the economy would be if they directly invest into rail companies this could lead to a decrease in ticket prices which will increase mobility. An increase in mobility will mean more people will look for high paying jobs in the city, higher paying jobs will mean an increase in consumer spending which will hopefully increase growth.