Hold the front page! The printing presses are rolling and will not stop any time soon.

The Age of Quantitative Easing has begun in Britain, and true to our swashbuckling past, it’s the real thing.

Fiddlesticks to purchasing assets by issuing gilt-edged bonds that add to public borrowing. That’s only for wimps.

The United Kingdom of Great Britain and Northern Ireland is made of sterner stuff. Money will be printed — i.e. conjured from rarified air — to buy up government debt from the private sector. It’s the full Monty of central bank testosterone-fuelled, do-or-die, Charge of the Light Brigade assaults on reality. Lord Cardigan would be proud.

It’s also a bit like a snake eating its own tail. Sooner or later it will reach its stomach and face a great dilemma.

The idea is that virtually cost-free money can be created to buy bonds and commercial paper, thus increasing the money supply at a stroke. Too good to be true? It’s the people in charge that spook me.

An increased money supply will get people spending again and banks lending. That’s the theory. Like all great intellectual ideas, especially those that have never been tried before, the notion has to be fitted to the circumstances. Financial engineers don’t have a very good record at this kind of thing.

Why, for example, will people buy houses when they are falling at nearly 20 percent a year? Why, also, will they start purchasing big ticket items when price fluidity on the downside is proceeding at a cracking pace? Tell me why banks should lend to businesses that have few customers for their goods and services and are shedding staff by the busload?

The endgame is said to be the sucking back of all that money once the green shoots of recovery begin to appear. But what if it’s a dead cat bounce? Will they then reverse the process? It will look more like one of those old Charlie Drake comedies when the industrial mashed potato machine goes wrong.

In theory, sailing an aircraft carrier full of money into British waters and spraying it onshore in a mighty torrent, then hoovering it all up again when things get better, is a feasible proposition. But only if your name is Heath-Robinson.

The idea that cost-free cash is neutral to all indicators except broad money (M4), takes more suspension of disbelief than a Whitehall Farce. Remember, it’s the public sector that is charged with reversing the process. Can we trust Gordon Brown to loosen his grip on “money for free”?

Nothing that has happened over the past 12 years gives us any reassurance that they won’t become addicted to this neat magician’s trick. I can even imagine Gordon Brown musing, “Why didn’t I think of this before?”

The problem is inflation, of course. Slip on a stray banana skin and hit the button a little too hard and we’re back in the 1970s era of 35 percent hyperinflation. Experience teaches us that bananas are a peculiar feature of this administration, and not only at the Foreign Office.

There are too many variables in the equation for my liking. Too many things that can go wrong. Too few sterling characters who can be counted on to do the right thing by the country. Too many charlatans and snake oil salesmen. It’s a nightmare of dodgy open positions and foggy imponderables.

I just don’t trust a Labour government to carry out this exercise with skill and panache. It has awful echoes of the shadow banking operations that got us into this mess in the first place.

But an even worse fate could befall us. Faced with a Canadian-style meltdown at the next General Election, Gordon Brown could become a Dr Strangelove creature intent on destroying the system which he knows will never be his by popular mandate. That will show those Sassenach Tories!

You heard it here first before anyone else thought of it.

John Evans

Recent Related Stories
Printing money as a lucrative business
The State of the Union
A real-time slump is not like the history books
Is socialism the new quid on the block?

The crashing of America’s giant investment banks is beginning to sound like an Amazonian logging operation.

In quick succession Bear Stearns, Lehman Brothers and Merrill Lynch have all gone south to the lumberjacks. Of the Masters of the Universe, only Morgan Stanley and Goldman Sachs survive.

For how long?

With CDOs (Collateralized Debt Obligations) having poisoned the world’s financial system, like seeping toxic waste, a new danger is now forming on the horizon.

CDSs (Credit Default Swaps — insurance policies for bonded commercial IOUs), which are out there in their billions, are beginning to crumble in the face of massive defaults.

The world’s biggest insurer AIG is already in Lehman-style retreat — its shares plummeted by 70 percent in early trading yesterday — as is the monoline AMBAC. The CDS crisis is now with us. When optimistic Anatole Kaletsky of The Times (London) says we are getting into 1930s territory, you know we have a serious problem.

So what precisely are CDSs and how will their demise affect most of us in coming days, weeks, months and years?

George Soros estimates that the value of CDSs now equals half of U.S. household wealth, an almost unimaginable number, now put at $58 trillion.

CDSs are hedges made by investors in case a company defaults on its debts. In effect you bet on a company failing to protect your investment in the event it does just that.

The problem arises when large numbers of companies go bust and the CDSs themselves become worthless since no-one can pay them out.

A CDS seller undertakes to compensate a buyer if a corporate bond defaults. Since there is no limit to the size of cover taken out, the value of CDSs often exceeds a company’s debts.

Moreover, many CDSs are bought with borrowed money so the infection of the system drives deep into the financial heartland like veins in a blue cheese.

The danger now is debt deflation: a rapid reversal of debt issuance, or deleveraging as it is called.

Tim Congdon of the London School of Economics says, “Banking system capital is being wiped out. The risk is that this could lead to a contraction of credit and set off a self-reinforcing downward spiral, leading to the sort of debt-deflation we saw in the 1930s.

“It is already clear that money growth has ground to a halt over the past three months. We must prevent it from actually contracting. If the Fed and European Central Bank don’t cut interest rates soon, it is going to be a problem.”

The Bank of England’s rigid inflation target, set by Gordon Brown when inflation was low, is now a millstone around Governor Mervyn King’s neck at a time when energy, food and commodity price rises are being imported from global markets.

The Eurozone is similarly caught in a time warp relating to Germany’s neurotic fear of hyperinflation. Add the growing divergence between euro economies and a far deeper than necessary downturn is guaranteed for Western European countries.

America, which is free from those constraints, already has 2 percent interest rates. It is, however, suffering a double blow: the fading of the effect from the summer fiscal stimulus and a loss of export competitiveness as the dollar rises.

What began as bad government, worse regulation, grasping banks, financial structures that lacked resilience because they were built on sand, has turned into a perfect storm that is about to come ashore and swallow much of our familiar financial and economic landscapes.

As we wrote here a year ago, while the current triple crises are different from the 1930s, and may not bite so deep, the damage will take just as long to repair.

When a bubble of such exuberant overconfidence bursts, the fallaway has to be profound before a new wave can summon enough energy to restart the cycle.

What consolations can we find among this heap of misery? As usual Einstein has a thoughtful response:

“We act as though comfort and luxury were the chief requirements of life, when all that we need to make us happy is something to be enthusiastic about.”

Happy enthusiasm.

The glib phrase “chickens coming home to roost” is about to spread across our media like a contagious rash.

The words are used to convey very bad times indeed, and place the blame on those responsible for keeping the cocks and hens busy doing something else.

By October, probably even September, the West could be in meltdown, with stocks and credit sinking to record lows. During the summer, unemployment will start to rise inexorably as various “crunches” combine in the perfect storm long anticipated by some of us. The knock-on effects could be extensive for most people and some businesses.

Last week, Bank of England Governor, Mervyn King warned Parliament that no family in the land can avoid significant cuts in their standard of living. Take it on the chin and adapt, was the essence of his message. It was the kind of sentiment you would normally expect from a leader announcing the country was at war.

New figures also show that British personal debt now stands at 173pc of annual income — a number so scary that even allowing it in the same breath as rapidly falling house prices is enough to make stout hearts leap from skyscrapers.

Bob Janjuah, RBS’s credit strategist, warns, “A very nasty period is soon to be upon us — be prepared. … Cash is the key safe haven. This is about not losing your money, and not losing your job.

“Globalisation was always going to risk putting G7 bankers into a dangerous corner at some point. We have got to that point. … The Fed is in panic mode. The massive credibility chasms down which the Fed and maybe even the ECB [European Central Bank] will plummet when they fail to hike rates in the face of higher inflation will combine to give us a big sell-off in risky assets.”

Oil prices should start to fall back as output is increasingly depressed. Next year it won’t be inflation we will have to worry about, but debt deflation.

Over the next decade, small children may start asking their mothers, “What do chickens do when they’re not roosting?”