The Risk Professional: why the UK's QE2 is a rubbish idea

The Bank of England says that it is to throw another GBP75,000 million into the economy as Mervyn King, the Governor, says that the UK's financial crisis is probably "the worst ever."

The government of the day gets the blame once it's been in power a few months but the current coalition government is faced with a situation that is in no way of its own making or continuation.

But it is about to get some justifiable criticism. Gordon Brown and Tony Blair did many questionable and downright destructive things in office but one good idea was the separation of financial regulation from central banking. That good idea is being undone as we speak.

What Brown did not do - despite repeatedly telling everyone he had done - was to create a politically independent Central Bank. He interfered, both as Chancellor of the Exchequer and as Prime Minister and, as the de facto president of the UK exercising control over all major functions, he decided that a helicopter strategy of tossing several future years' worth of GDP into the economy was a good thing.

The global financial crisis was not Brown's fault: the UK was caught in the cross-fire as a US fuelled foul-up caused a general realisation that without confidence, there is no money.

So-called quantitative easing is a fool's ploy: it is, at its heart, a monetarist policy that relies on one thing - borrowing. Monetarist policy relies on the presumption that incomes / inflation will rise faster than the interest due on debt and that, therefore, the payback will - in real terms - cost less than the amount borrowed.

The immediate response to the Bank's announcement was that markets rose. But not in the UK: the announcement was made after the UK markets closed. But the move had been, at least a little, anticipated and even RBS shares managed not to go down still further in yesterday's trading. In fact, in percentage terms, RBS was the UK's star performer. But it's still not made back the falls of the previous few weeks.

The Bank made its move after the closing of the Conservative Party conference, avoiding difficult questions for the principal party in the Coalition.

The last time the Bank injected money in a large lump was in November 2009: that brought the then total up to GBP200,000 million.

King expects rapid inflation in the UK; a serious issue because it is already a staggeringly expensive place to do ordinary things like get on a bus or train or fill a car with petrol. These might seem like silly examples but it's what people need to do to get to work and - in an economy that is increasingly dependent on people farming - for tourism.

King told the UK's Sky News that ""We're creating money because there's not enough money in the economy."

But that is not true: there is plenty of cash - it's just not enough to pay the bills especially after a decade of ridiculous tax rises and impositions. Earnings are not a problem - keeping one's hands on enough of one's income to live on is.

Then there is the fact that creating inflation has a disproportionate effect on those on fixed incomes (e.g. pensioners) and those who are living off capital (e.g. pensioners whose pensions are already insufficient to pay their bills and maintain a reasonable standard of living.

The only way that the bill for QE gets paid is out of taxpayer revenue and that means keeping the ridiculous level of taxation in the UK for longer than any sane government would want.

So the Bank of England has caused the current Coalition to continue the economic policies of Gordon Brown and to hock the income of future generations to pay for it.

The reality is that the UK needs to deflate, hugely. It needs to dramatically reduce house and commercial property prices and it needs to reduce home-loan repayments and commercial rents. It needs to reduce the costs of doing business - including the costs associated with employing staff.

Those things regenerate economies, not dashing money, willy-nilly into the financial system to be managed by the same people who have not properly managed the last GBP200,000 million they were given.

A huge reduction in government spending is needed. King reckons inflation will "fall sharply" next year - that will provide a PR benefit for the Olympics and not discourage tourism.

Worse, King admitted that the UK can't solve the problem anyway, telling Sky News "we've done what we can in the UK."

Actually, the Bank has done too much. It might just be time to stand back and let events take their course.

It's true, you can't save everybody. But so far, even the favoured few have not been saved. Just how much rope can the elderly and future generations be expected to pay out before the lifeline is fully extended.

Many would say that that limit was reached even before November 2009.