|Subject: What is our money worth?|
Posted Feb 2, 2010 by pedro
This is a reply to this Posting
|Our money's worth what people are willing to pay for it ('absolute' value is meaningless). If you imagine that all the money in the UK can buy all the stuff we produce, then increasing the amount of money means that it simply takes more money to buy the same stuff, and this pushes prices up, ie it's inflation.|
So, say the value of the UK economy in 2007 was £10: the amount of money was also £10. If the govt prints an extra £1, then it takes £11 to buy all the stuff in the UK, and prices go up 10%.
The reason why the BoE basically printed money is because so much wealth was lost during the credit crunch. So imagine there's only £9 to buy all the stuff in the UK; prices would actually *fall* by 10 percent, aka deflation.
Deflation's much worse than inflation, because it means that debts effectively go up in value. As well as mortgages etc, all the loans that businesses had taken out would get higher in real terms, turning a pretty severe recession into a full-scale depression. Not pretty.
The BoE are wary of causing inflation through quantative easing, but any problems caused by it (and there will be; the stock market rise might just be another asset bubble) are far easier to deal with than deflation.