UK facing worst cash shortage since 1930s

THE UNITED Kingdom is facing the worst shortage of money circulating in the economy since the 1930s, the governor of the Bank of England Sir Mervyn King has warned, as the central bank ordered the printing of £75 billion of extra cash.

“We’re creating money because there’s not enough money in the economy. That may seem unfamiliar to people, but that’s because this is the most serious financial crisis at least since the 1930s, if not ever,” he told Sky News last night.

Under yesterday’s decision, the Bank of England will buy £75 billion worth of government gilts currently held by the banks, who are then expected to buy a similar amount of bonds issued by cash-starved companies.

The first round of quantitative easing in 2009, when £200 billion worth of bank assets were bought, had the same effect as reducing interest rates by between 1.5 per cent and 3 per cent, while yesterday’s action would be equal to a cut of up to 1.1 percentage points, it argues.

Bank officials argue that yesterday’s move – already, predictably, dubbed “QE2” – should boost the UK’s growth figures by up to 0.75 per cent, although it adds further pressure to inflation since it should raise it by up to 0.6 per cent.

Last night, Mr King acknowledged the UK’s inflation rate will rise above 5 per cent in the next few months, but he said it should start to fall dramatically next year when this year’s rise in VAT no longer feature in the calculations.

For much of the time since the second World War, the UK has had too much cash circulating in the economy, he said, but he added: “Since the world financial crisis we are now facing the opposite crisis – there’s not enough.

“It happened in the 1930s and it’s happening now. The amount of money in our economy fell in the last year. That’s why we’re creating money . . . to ensure the economy can keep growing,” he told the broadcaster.

However, he denied the Bank of England’s action threatened a new currency war, with countries trying to win export sales by cutting the value of their currencies, although sterling fell yesterday to its lowest level against the dollar for over a year.

Quantitative easing works, say supporters, because it encourages investors to move away from gilts, raises the price of other assets, improves the funding of banks and causes a fall in the value of sterling, which helps exporters.

In Manchester this week, the chancellor of the exchequer George Osborne announced that the treasury would buy bonds issued by small companies, but, privately, the Bank of England doubts the plan’s effectiveness since the majority of bonds are issued by larger firms.