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?


miken said...

Why would anyone invest in an economy that is devaluing it's own currency?

On top of that there continues to be parts of our economy that are grossly inefficient. Time to get rid of the slackers, inactive/unseen managers and non-jobs.

I was on a hi-tech computer course full of intelligence agency and atomic weapons agency people this week.
I work in the private aerospace industry. Myself (+2 others) were outnumbered by 5-1 on this very expensive course. This is just one indicator that it is the public sector that is striving forward technologically (at high cost to the taxpayer!) and this seems very wrong at a time when private companies are cutting back.

Anonymous said...

@miken. It could just indicate that the public sector can afford the time and our money to go on junckets that the private sector consider are not worth spending their own money on.

Ralph Musgrave said...

We have a credit crunch caused by excessive and irresponsible borrowing and the reaction of the authorities is . . . . . wait for it . . . . to cut interest rates and implement QE so as to encourage more borrowing.

You just couldn't make it up.