Wednesday, January 21, 2009

The Coming Inflation Will Be Global

The Bank of England appears ready to emulate aggressive US money printing methods . The Bank of England was permitted on Monday to engage in "quantitative easing."

Further, Mervyn King provided more details in a Tuesday evening speech, on other actions the BOE plans. From the Independent:

The Bank of England will start buying up corporate bonds within weeks to unblock capital markets and free banks' balance sheets so that they can lend to support the economy, Mervyn King, the Bank's Governor, said last night.

In his first speech of the year, Mr King outlined radical plans for the Bank to buy up an initial £50bn of illiquid assets in the market to increase the flow of credit, with the option of ex-tending the scheme to boost the money supply by effectively creating new money. The asset purchases will come on top of a raft of other measures designed to get banks lending to limit the impact of the recession.

Mr King told a CBI dinner in Nottingham that the Bank was ready to use "unconventional measures"....

The Government is wary of taking on extra risk by buying corporate credit outright, and Mr King stressed that the Bank would only buy assets that played a key role in the financial system and for which there would be strong dem-and in normal conditions.

"There is a fine dividing line between helping to oil the wheels in markets that are temporarily impaired and artificially supporting markets in which there is no underlying demand," the Governor said. "Such asset purchases involve taking more credit risk on to the public sector balance sheet. That is why the Bank will consider purchasing only high-quality assets." He highlighted as potential purchases high-quality corporate bonds, whose risk spreads had been driven to their highest since the mid-1970s because of illiquid markets. Bank buy-ups of commercial paper could also ease that market, though it is less important in the UK than in the US, he added.

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