By Marcus Leach
The Institute of Directors (IoD) is calling for a £50 billion extension in quantitative easing.
With the current economic situation apparently deteriorating again, highlighted by poor manufacturing figures, high unemployment and gradual decline in consumer confidence, there are fresh calls for another round of quantitative easing.
"The time to launch quantitive easing two has arrived," Graeme Leach, Chief Economist at the Institute of Directors said.
"The downside economic risks are sufficiently great to warrant an extension in quantitative easing now, in order to avoid the risk of a double-dip recession.
"We already have an L-shaped economic recovery and the hit to business and consumer confidence over the summer risks a slip back into recession, which could have dire fiscal consequences. Expanding quantitive easing by £50 billion initially is a sensible and limited response".
The IoD says that an extension in quantitive easing is supported by a number of factors:
· Money supply growth is very weak and consequently hopes for sustained economic recovery rest on an increase in the velocity of money (the number of times money changes hands). However, the IoD argues that the velocity of money is just as likely to decline as increase over the coming months. The IoD says that it is too risky to pin hopes of continued recovery on an unpredictable velocity of money.
· The knock-on effect of the euro-zone crisis is damaging business confidence and leading to the postponement of investment projects. Given the weakness of the recovery to date, business and consumer confidence could be the tipping point between recession and recovery.
· Continued de-leveraging and increased capital requirements in the banking system suggest that money supply growth will remain close to zero without quantitive easing two.
· The fiscal consequences of a double-dip recession could be dire. The future fiscal risk warrants a monetary easing now.
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