The credit crunch continues for UK firms. In the second quarter, companies paid back almost 2 percent of GDP.So far, quantitative easing has done nothing to resolve the financing difficulties of UK firms. So the recession continues, at least for the short term.
What implications does this have for inflation? The recession is destroying capacity. As firms close, and lay off workers, the ability of the UK economy to supply goods and services is destroyed.
At the same time, the Bank of England has produced a massive surge of liquidity. At the moment, this spare cash sits on the balance sheets of banks. Someday, banks may wake up and start to lend. When they do, they will be lending into an economy that has dramatically reduced its capacity.
What will we have? Rapidly increasing demand coupled with tight supply. I wonder what that will do to the price level?
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