The Irish bailout: what Osborne has really been up to

George Osborne has a dirty little secret.

"This money supply thing is trickier than I thought..."

You may have been tut-tutting yesterday about his making Irish profligacy a matter of British (English) public responsibility. I certainly was, but the truth is much nastier than that.

Yesterday, I mused that the bailout money might never see the insides of an Irish bank. They owe British banks, you see, mainly the RBoS. Osborne’s seven billion (actually ours) is thus supposed to protect us Brits, and our ‘large export market’ too, not save the Irish economy per se.

We really don’t owe the Irish any favours, so that’s OK, I guess. But what’s actually going on here?

The Bank of England prints (or borrows) seven billion, to put, ultimately, into British banks. Ordinarily, a bank shows lending accounts as assets, because in theory the money eventually gets paid back, but it cannot lend against existing lending. That’s both illegal and dangerous. It can, however, lend against promissory notes from the central bank, in this case the Bank of England, because in theory they’re worth something real. The fact that ours are only suitable for use in the smallest room doesn’t factor in this.

So, as any fule kno (or can quickly work out), that’s quantitative easing.

Osborne’s act of enlightened self interest is simply printing more money. It may, or may not, ‘stimulate the economy.’ For me that just conjures thoughts of  ‘extraordinary rendition’ and large electrodes.

What it most certainly, inevitably, will do is stimulate inflation, lots of it.