Darling’s latest rescue plan for the economy is to print fresh money.

By GEORGE PASCOE-WATSON
Political Editor


CHANCELLOR Alistair Darling’s latest rescue plan for the economy is to print fresh money.
The Treasury and the Bank of England will agree this week on a £100billion injection of cash which currently doesn’t exist. Economists call the highly risky strategy “quantitative easing”.

Here is The Sun’s guide to modern-day printing money:


Why is it happening?
The Bank of England’s main weapon against a slump is interest rates. It has cut them down to one per cent already to put more cash in people’s pockets.

But that still hasn’t done the trick and once interest rates fall to zero per cent, it must find a new way of kick- starting the economy.


Does this literally mean fresh bank notes, i.e fivers and tenners, being printed?
No.


So why is it called printing money?
Quantitative easing means flooding the economy with more money than currently exists. But the cash injected is not new bank notes. It is done electronically by the Bank of England, our central bank.


How does it happen?
High Street banks will “sell” their assets to the Bank of England. These can be mortgage deals they have with customers, Government bonds and other debt. The Bank of England will then pay the banks for these assets with money that currently doesn’t exist. It won’t be hard cash — it will be electronic transfers of money.

In fact, the Bank of England will merely increase the size of commercial banks’ accounts held there. All banks must keep reserves of cash at the Bank of England.

So the commercial banks’ assets will be swapped for more cash reserves by the Bank of England.


What happens next?
Commercial banks will have more money to use — and lend. Printing money will also keep long-term interest rates down — meaning banks will be more likely to lend to each other.

This will encourage them to give credit to firms and individuals who will start spending money.


How much cash is there in the money supply?
We currently have £1.95trillion in the UK money supply. Only £50billion is cash — or £850 per person. The rest is in banks as savings and investments.


Are there risks?
There is a risk of hyper-inflation if printing money is done too rapidly.


Has it ever been done before?
Yes. Most recently the Japanese government did it for six years, only ending the practice in 2006. But experts believe the move did not make a significant difference to their long-term slump.


What about disasters?
Money was printed and pumped into the economy in Zimbabwe under Robert Mugabe and in pre-Second World War Germany. Both actions led to the economies’ collapse as banknotes became worthless.

In Germany people carried cash in wheelbarrows because each note was worth so little. The barrows were soon stolen because they were worth more than the cash due to hyperinflation.

http://www.thesun.co.uk/sol/homepage/news/money/article2262459.ece