Monday, July 5, 2010
Any excuse to crank up the printing press!
The markets have welcomed the new coalition government. The pound has risen from its lows by about 20pc against the euro and about 10pc against the dollar. Governments are easily seduced by the apparent attractions of a strong currency. It gives them the seal of approval from the financial markets. This happened under the first Thatcher government in 1979-81, and again when Tony Blair was first elected in 1997. Yet the over-valued pound was right at the centre of the distorted economy that followed. So what could be done here? The Bank of England could buy foreign assets, i.e. foreign government bonds, by printing money. The monetary effect would be the same as ordinary QE but this would have the added effect of helping to keep the exchange rate down.