The credit crunch continues for UK firms. In the second quarter, companies paid back almost 2 percent of GDP.So far, quantitative easing has done nothing to resolve the financing difficulties of UK firms. So the recession continues, at least for the short term.
What implications does this have for inflation? The recession is destroying capacity. As firms close, and lay off workers, the ability of the UK economy to supply goods and services is destroyed.
At the same time, the Bank of England has produced a massive surge of liquidity. At the moment, this spare cash sits on the balance sheets of banks. Someday, banks may wake up and start to lend. When they do, they will be lending into an economy that has dramatically reduced its capacity.
What will we have? Rapidly increasing demand coupled with tight supply. I wonder what that will do to the price level?
"At the moment, this spare cash sits on the balance sheets of banks."
ReplyDeleteIt's even dafter than that - banks now have £160 billion deposited with Bank of England (double what is was a year ago and qudruple the long run average, from memory) at a derisory 0.5% interest rate - that's how scared they are.
Deflation. Obviously.
ReplyDeleteIn comparison it's a shame the government are not paying back their debts. 2% would be a start. Labour came in with ~300 biliion in debt and may well leave the UK with ~800 billion+ in debt. It's sickening and the effects of what will be huge cutbacks are yet to be felt. It's a false economy right now.
ReplyDeleteIn comparison it's a shame the government are not paying back their debts. 2% would be a start. Labour came in with ~300 biliion in debt and may well leave the UK with ~800 billion+ in debt. It's sickening and the effects of what will be huge cutbacks are yet to be felt. It's a false economy right now.
ReplyDeletestagflation will be the result when the inflationary trigger goes off.
ReplyDeletebut who knows when that will be?
Oh some banks are lending!
ReplyDeleteOne of my clients, starting off as self employed after a period of employment ended in redundancy, wanted to have a £4,000 overdraft.
Initially , he got a 3k od but when the bank lent him the further 1k they converted the original 3k od into a loan. For a £150 arrangement fee and at a rate of 24.7%pa.
So, including the "arrangement" fee, in his first year he is paying interest at north of 30%.
It would be cheaper to use a credit card...