Economies: Bank of England running out of options

The situation is dire: the idea of the "helicopter strategy" is to drop money into the economy. But the UK government has no money, and so the strategy requires a radical move: a move that no government except Zimbabwe has tried in recent times. It is simply to print more money.

Today, the Bank of England cut 1% off base rates. But banks appear unwilling to reduce the rates they charge. So a base rate of 2% is really not going to stimulate the economy.

The Bank is in a quandry: the UK economy is headed for the rocks of stagflation, except it's not going to be that good.

UK inflation is not going away, although there are sales and special offers everywhere. But the economy is shrinking - economists like to make it sound cuddly by calling it "negative growth." The government has no money - in fact, it has so much debt that it would, if it were a business, be bankrupt.

There is absolutely no prospect of the UK economy recovering sufficiently in the next two years to pay off the enormous debts that the government has created in the past three months - and its reserves were already hugely depleted by spending despite substantial tax rises over the past decade. And with industries and individuals businesses lining up for funding from the state, that spending will continue.

The government says that it is the fault of the banks that they are not lending. But the problem the banks face is that they need to maintain prudent lending, and with all areas of the economy in freefall (except insolvency practitioners, it seems) they are being told to lend into situations that could turn sour at any moment. Banks, already hugely bitten by "toxic assets" are taking the view that any additional lending might result in further writedowns.

Which brings us to the helicopter. The Bank of England is a "lender of last resort." That means that, when no other financial institution can lend, the Bank will. Maybe. Yet the Bank has no money. Since Gordon Brown sold of the Bank's gold at discount prices in 1999, the Bank has been predicated on empty vaults. In short, the UK can't raise money on the world markets because it has no acceptable security. So the only way of getting that money is the Zimbabwe scheme.

The accepted wisdom of throwing money at an economy to kick start it, by rapidly expanding the money supply, is that it creates inflation - the one thing the Bank of England is specifically charged to avoid. It has already been told to suspend that instruction in favour of preventing recession.

It's all bad - but it's not showing any signs of improving