Bank of England

[sqad617]

We have seen huge losses in banks and buiding societies from Lehmann, Icelandic Banks. RBOS, Northen Rock. Lloyds and the numbers keep increasing, all being bailed out by the tax payer.....BUT...does anyone know the state of play in th Bank of England.....any surprises there to come?

[craft1948]

morning sqad - that's a bit heavy for a Sunday morning....

[sqad617]

Hi crafty....well reading a thread where Gornless and someone else paid �63 for breakfast at an airport got me thinking. Not that I have, but if I had some spare "dosh", where would I put it and came to the conclusion that buy a safe and keep it at home.

[factor-fiction]

The Bank of England is not a bank in the same sense that RBS, HBOS etc are banks

[Buenchico]

The Bank of England can't run out of money because, if its funds are running low, it can simply print some more. (In practice, the bank doesn't actually print the money. All it has to do is to add a few zeros onto the ends of the amounts shown on its balance sheet. Only 3% of the UK's money supply actually exists as notes or coins. The rest is simply made up of figures on balance sheets).

Such a practice carries high risks because it can lead to massive inflation. Germany tried it in 1923 and prices spiralled out of control. (People had to fill wheelbarrows full of banknotes just to buy a loaf of bread). Robert Mugabe has tried it in Zimbabwe, resulting in prices more than doubling every day.

Despite such risks, the Bank of England has just announced that it's going to follow the same path (using the modern name for the practice, 'quantitative easing'). The idea is that the Bank of England will have more money to lend to other banks, which will then have more money to lend to businesses and individuals. If the theory works, the Bank of England will later start metaphorically burning money (by knocking the extra zeros off the figures in its accounts) before high inflation starts to kick in. The big problem is that such a policy has never been tried before, so getting the timing right will be critical. If the bank claws back the money too early the policy will fail and the UK's economy will, at best, stagnate. If the Bank waits too long, the UK could go rapidly down the same path as Zimbabwe.

Chris

[sqad617]

Thanks Bueno..good answer and well thought out.

[sqad617]

Bueno
P.S how reliable and accurate is the 97%?

[factor-fiction]

Sqad, I'm not sure about the 97% (3%) but it could be roughly right. I recall from Economics lessons at school ( a long time ago!) that banks only hold about 10-12% of money as reserves. And since then a much greater proportion of transactions are done electronically or by credit/debit card, so the figure may be heading to 3%

[Buenchico]

Thanks for the reply, Squad617.

The '97%' is based upon a recent quote on Radio 4 (possibly from Robert Peston) where it was stated that "only about 3% of the country's money supply actually exists in the form of currency; the rest only exists on balance sheets".

Chris