It Can't Affect Us Chickens

'Nightmare on Downing Street' could be the title of a new movie on the life of Gordon Brown. It would be a sad story of a man who just could not interpret simple facts and kept muttering to himself, 'It can't affect us chickens'.

Despite the most pessimistic of estimates by the most gloomy of economists who predicted that we would, Britain has failed to emerge from recession for a record sixth successive quarter. The hollow words of our Chancellors, past and present, as they pointed toward how strong Britain's finances were, how we could avoid a recession, how a recession could not affect us so badly and how fast we would emerge from recession are lost in the vapour trail left as France, Germany and Japan left recession status last quarter.

The fact seems a nightmare in itself. Despite spending £175bn on creating new money and £1.4 trillion on bank bailouts, our economy shrank again by 0.4%. There may be some revisions up or down but the reality is that this contraction defied all best estimates. We are getting into the habit of getting sums wrong and forecasting badly as our team seems to continually under estimate our borrowing requirements as each month we have to go cap in hand for more money.

There cannot be any shying away from a stark truth. The country's finances are a mess and the remedies chosen to right the situation are either wrong or simply have not worked. Meanwhile, in the banking sector, which we handily threw a massive lifeline to, they are partying as if there is another credit crisis to come. Banks are reporting plenty of profits, hiring new whizz kids on guaranteed bonuses and swelling their bonus pools, telling us that this is a good thing.

It is now abundantly obvious that Britain's bailout plan actually tackled only one part of the economy - banking. What's worse it righted the part of the sinking ship that had directly caused the credit crunch - it has not had any effect on the kinds of banking required by real people. It has given unlimited chips to the casino bankers to go back to the table and blow it all again, as they inevitably will and then come back to ask for more. Each time they do, the gun they use to point at our heads will be ever more deadly as Britain fast runs out of ways to raise the money.

The chilling fact is that after 6 successive quarterly contractions, Britain is now lurching toward severe danger levels of finance. As of this week, Quantitative Easing is spent and in the new year the VAT decrease is reversed. There is only one place left to go as the Government repeatedly defy the facts of having to make cuts and that is to go back and raid the taxpayers' pockets again.

With an election due in June, it's not good practice. But as time runs out for our finances, Britain needs money and fast. The time for action is actually long past and each day we avoid making tough decisions on saving money or finding new cash will costs us more in the long term.

The economy has been compared by Vince Cable as a person suffering a heart attack and we are now stabilised and preparing for recovery. I would say there is a severe danger of MRSA in the analogy.

This Government has been guilty of monumental mis-management of our finances and their remedies in the face of almost ruin have been wrong. At some point the penny may drop for them but until then, any recovery we have will just be a prelude to another crash. In our analogy to a heart attack victim, should the victim recover, sending them home to continue to eat, drink and smoke in the same way as before will only bring on another heart attack.

In our case, we haven't yet left hospital and we are already smoking again.

Mervyn's Day At The Casino

In The Bank of England's incredible 315 year history no Governor has ever tried it, not even in very bad times before. Today Mervyn King will become the first man in British banking history to use the Fiscal Policy known as Quantitative Easing - for those of us who have not swallowed the Economics textbook it simply means to print more money.

Quantitative Easing (QE) - The Idiot's Guide

Imagine a pyramid made up of three layers of champagne glasses. QE is much like pouring in liquid into the glass at the top so that it overfills and cascades into the glasses below it which in turn fill and then overflow into the glasses at the lower level which also eventually fill and overflow. If you think of the top glass as the banks, the middle layer as business and the bottom layer of glasses as consumers, then what you see is pretty much the process of QE.

It's the idea that if you print a load more money, pour it into the banks, they will want to lend more to businesses who in turn offer us, the consumers, more credit.

Now the real dummies amongst us may point out that a great many transactions today do not use money and that therefore the process of printing more money will have far less relevance today than say in the period known as The Great Depression in the 1930s when the theory was honed.

All I can say is that the intelligent people who came up with this idea have pulled their heads out of the theory book, written all those years ago, and noticed that fact and have, of course, taken it into account. I think.

These intelligent people are the ones who have presided over the collapse of 5 major UK banks and pumped a great deal of money into the banking system already without any great effect but, keep quiet cynics, because now it's Mervyn King's turn - and he has kept a discrete distance from the fiasco to date, adding a few acidic words about policy every now and then. To a large extent, he has kept his credibility alive by doing so.

But today marks the start of his big gamble - one unprecedented in modern times. Let's all hope 'Big Merv' is right.

How Does It Work In Practice?

At midday today - as such is the pageantry of big banking business - an imaginary gong will go and the Bank will start to use its £75bn of new money it has printed to offer to buy £2bn of Government debt in the form of bonds from institutions.

It's some convenience to just go and print a load of new money and that's based on the concept of a 'Fractional Reserve'. This is vaguely about the notion that at any time The Bank of England has, say, £100bn in its coffers but it may print up to, say, £600bn of bank notes to go into circulation - remembering each bank note comes with a promise to pay the bearer the amount on the note its value should the bearer present it at The Bank. Fractional Reserve tells us that in practice no one ever does and certainly not at the same time - so we can print vastly more notes to go into circulation than their total promissory value held in the Bank's vaults. Quite how the Bank would pay these days as it no longer has any gold is another discussion entirely - but don't worry, our PM has thought of everything.

So the first of these bond auctions will start today and The Bank of England will be buying these £2bn batches of Government debt or Gilts. Two hours later, there will be a second stage when the institutions and banks will be allowed to participate in these reverse auctions - and similar activities will carry on twice weekly until all the new cash printed is consumed.

Gilt prices have risen sharply in the last few days as the financial system salivates at the prospect of more money being created out of thin air and being spent - it's just like a sucker walking into the East End with a wadge of new notes wanting to buy a car from Arthur Daley, there is not a chance in hell these Gilts will be a 'good deal'.

The top champagne glass is being filled starting today. The one snag in my analogy which is reflected in real life is that nobody knows how much the champagne glasses hold and so how long and how much money will it take to fill them all.

Deflation

This amazing gamble comes after The Bank has dropped interest rates to 0.5%, the lowest rate in history. This kind of Fiscal Stimulus goes into a new area known to some (i.e. me) as Fiscal Defibrillation - a series of very sharp and big jolts to the heart of the financial system to stimulate it into life. QE is the second major jolt, if you discount the meagre £1.3 trillion of bank bail outs, loans and guarantees on offer to the UK banking system. The disease that The Bank is trying to avoid is 'Deflation', the banking equivalent of 'MRSA' which is what the injured financial system may catch after its major surgery and tries to recover.

Thankfully, the financial system is not being treated by the NHS but by clever people like Mervyn King, Alistair Darling, Gordon Brown, Yvette Cooper and a host of really brainy, intellectual and incredibly greedy bankers. So our economy is in fine hands, as it has been for the last 10 years.

Deflation is a bit of a killer disease itself - it's the concept that just as the financial system is recovering then prices to start to fall rapidly - just as in the fire sales we have been seeing in shops. Consumers, of course, those irrelevant carriers of wealth that rich people would like to have, like lower prices - but we are not the important ones here. If bankers cannot make huge profits, where is the fun of loaning us money?

The perverse logic of deflation is that textbooks say that we, the evil consumer, will delay spending the cash given to us via our champagne glasses, in anticipation of yet lower prices - the concept that I will not go to the East End and buy that car off the nice man in the sheepskin coat and trilby this week as he will have a lower price next week. This of course has the effect of increasing the effect of the downturn.

When A Science Is Not Exact

The financial process of treatment and recovery is sadly not an exact science as we have seen so far from the vast bank bail outs across the globe, estimated at around $5 trillion and rising. Mervyn King grimly warns that he does not have any idea how long he has to keep printing money and how much will be needed to get us to spend again. All he knows, or should I say, thinks, is that eventually it will work.

That's why no one has ever tried it before. I don't know about you, but that really fills me with confidence.