Challenging The Unknown

Few economic mechanisms arouse as much debate as the much debated Quantitative Easing Programme, embarked upon by central Banks across the Developed world in an effort to reinvigorate sluggish economies currently suffering from slow and stagnant growth coupled with unsustainable unemployment levels. The assumption that by employing monetary policy in such a crude an unsophisticated way as merely adjusting interest rates or money flow, as a means to provoking the desired reaction from consumers and businesses is simply flawed.

In theory, by reducing interest rates in Britain to near-zero, historically low levels, as they have been post-2009, the Monetary Policy Committee would have hoped that the consumer confidence in the economy would improve. As a result of reducing interest rates, those on flexible mortgages will see their disposable incomes increase. A large proportion of the UK have a large degree of Household Debt and thus this is likely to have a sensitive effect on Aggregate Demand. This money should be taken to the high street because with the return for saving making the opportunity cost of depositing your money through the normal high street banks and building society sufficiently large to deter people from saving. With the so called wealth effect taking place, the numerous UK firms and businesses who rely on domestic demand will enjoy a resurgent demand and the economy may engage the multiplier effect, whereby the initial injection of spending results in a proportionally larger increase in national wealth. This results from the creating of employment and the raising of tax revenues.