Sir Mervyn King, the Governor of the Bank of England, claims that the world economy is facing its worst challenges since the 1930s — if not ever. While the situation was extremely difficult back in 2008 when the crisis truly came to fruition, King claims that today’s global economy is facing an immensely complex scenario. He said:
“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing. [...]
The world economy has slowed, America has slowed, China has slowed, and of course particularly the European economy has slowed. The world has changed and so has the right policy response.”
King’s comments were made following the Bank’s Monetary Policy Committee’s decision to infuse £75billion into the economy in an attempt to prevent yet another credit crisis. In describing this decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets.”
This was the first time such an infusion was put into the economy since 2009, when the global debt crisis caused the Bank to flood £200 billion into the economy.
According to economists, the Bank’s decision to do this (i.e. quantitative easing) showcases the fear and desperation that is currently gripping the government. Many economists also predicted that more similar moves will be occurring in the future. The Telegraph defines the process of quantitative easing (QE):
Under QE, the Bank electronically creates new money which it then uses to buy assets such as government bonds, or gilts, from banks. In theory, the banks then use the cash they gain to increase their lending to businesses and individuals.
By increasing the demand for gilts, QE pushes down the interest rate yields paid to holders of these and other bonds. Critics of the policy say it pushes up inflation and drives down sterling.
The rationale given by The Monetary Policy Committee [MPC] was that inflation is creating a “squeeze on households’ real incomes” Additionally, the MPC said that spending cuts would have an impact on domestic spending for quite some time. Considering these developments, the quantitative easing was justified in the eyes of the bank.
This could, according to some, create a disaster for those approaching retirement, as it may lead to lower interest rate payouts on pensions and the like. Some, like Ros Altman, a pension expert, claim that this most recent instance of quantitative easing is a “Titanic disaster” that will increase poverty for those planning to rely on pensions. Still, the actions are being defended as a way to steer clear of yet another epic recession.
It seems these fears aren’t unfounded. In an interview on BBC, IMF advisor Robert Shapiro, who is a bailout expert, also had some dire warnings for the world economy (via Zero Hedge):
“If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected.
All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serrious than the crisis in 2008…”
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