* Updated November 2021
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During the last decade the Bank of England has increased its Government debt from £200bn to over £800bn as a result of its Quantitive Easing Program . The aim of the program, to stimulate demand for goods and keep inflation low during and post the covid pandemic has been hindered by rising energy prices in addition to supply shortages and bottleneck issues due to Brexit.
With inflation still rising (from 2%-3.1%) and the bank expecting it to reach 5% early next year, this is not good news for the consumer. High inflation erodes purchasing power, so it will cost more to buy the same things. We’re already seeing prices for fuel, building materials and food rising, demonstrating how the scourge of inflation affects everyone, regardless of background or buying habits
Protect your wealth with gold during these uncertain economic times.
More money printing on the cards
There has been much talk recently of the Bank of England printing more money in an attempt to stoke the flames of recovery. The British Chambers of Commerce have put out a plea for the Bank to inject a further £50b into their Quantitative Easing (QE) program.
This program already stands at £200b, and many speculate that this size will grow considerably over the coming year as the Bank seeks ways to fend off a double dip. With the UK debt being the number one priority we will all see our tax bills rise and Government handouts dwindle as George Osborne attempts to rein in spending.
So what does this mean to the average man in the street? Surely any cash injections will be beneficial and help keep the economy bubbling while we tackle the huge debt mountain.
Can lead to high inflation
In the short term, the QE program may well be disguising the depth of the problems we face. I see it as a sticky plaster over the gaping wound which our excessive borrowing has inflicted. The main problem in the medium term of simply printing more currency is high inflation.
By injecting more money into the economy, we are helping devalue our own currency. The last country to use QE in a major way was Zimbabwe and they now have inflation well over 1 million percent! This means its people struggle to carry enough currency to even pay for a loaf of bread.
The danger in the UK is the combination of the QE with the record low interest rates and already simmering inflation levels. With inflation already over 3% during the worst economic downturn of our generation, just imagine where it will be once they QE kicks in and we start to emerge from depression. The difficulty is the lack of control we have over cost push inflation. With populations and consumption increasing, natural resources come under further pressure. Commodity prices are helping push up prices of goods and stoke the flames of inflation.
With savings rates at banks usually below 1%, the value of your money is diminishing day by day. If inflation hits double figures, the pace at which your savings depreciate will increase considerably. Many people will see their hard earned money and kid’s inheritance being able to buy less and less.
Protect your wealth with gold
Many of these savers are now moving some of their Sterling based savings sideways into gold. This commodity has always historically been seen as a great hedge against inflation, and unlike Sterling you cannot simply print more of it! As a precious metal it needs to be discovered and mined and World Gold Council stats show that new discoveries and supply are low, helping to push its value higher.
Only time will tell if we see further Quantitative Easing and high inflation in double digits, but it makes sense to prepare for the possibility considering all the factors point in that direction.