Saturday, 3 March 2012
UK Business Investment slumps (again)
Where should we look for evidence that quantitative easing is working?
Quantitative easing is supposed to reduce interest rates. This should make it cheaper for firms to borrow and invest. Higher investment creates more productive capacity and the UK economy grows. Therefore, data on UK business investment should tell us if the Bank of England's money creation scam - sorry scheme - is working.
The BoE has had some success in the first part of that chain of cause and effect. Interest rates on government bonds are remarkably low, facilitating a further increase in public sector indebtedness. The chain breaks down in the private sector. Firms are repaying loans and reducing business investment. Unsurprisingly, the economy is not growing.
The Bank of England has played this money creation game for close to 3 years. They have had at least 12 quarters of data to evaluate the impact of quantitative easing on investment. The evidence is blunt and unambiguous; business investment has never recovered to its 2007 peak. In the last quarter of 2011, business investment fell. Before you ask, yes, the data in a chart is seasonally adjusted.
After three years of abject failure isn't it time to rethink the gameplan?