We are all on a diet

The Bank of England has just announced it is going to print more money (well they call it quantitative easing). They are doing it because the other measures don't seem to have worked to get more money into the system. The assumption seems to be that with more money around we will borrow and go shopping.

But what if we have all decided to put ourselves on a financial diet for the time being.

I have joked that for the past few years my weight and my bank balance were going in opposite and wrong directions. More money, less weight, good. Less money and more weight, depressing. But what if we have all decided that we have to stay on a financial diet for the next months or even years.

If our resolve holds good then we will ignore the temptations to take on debt (sweet temptations) and will either save (eat virtuous vegetables) or at least spend only what we have. We would still be spending most of our money, but less impulsively. This might be good for our personal bank balances (and waistlines) but less good for the economy as a whole. For years we have been spending (and eating) too much.

So it makes sense to cut back. Doesn't it? So is the Bank wise to encourage us to go shopping? Or should it all go on saving? Is there any point trying to save any more? It all seems very odd and I'm not sure anyone understands the psychology of what is going on. If they don't understand our motivations, then how can good policy decisions be made?

For the bankers and speculators it may be a new world (with few deals there are few fees and it does seem as if those days are gone). But for the real economy, it seems back to front. Savers are being punished so should we all become speculators?

Either way I think that many people are now wary and want to know they have some money to tide them over a crisis. They don't want to spend on unnecessary items. A lot of the slowdown may have come from people deciding to stop and think about what they are buying. That's what I've done. And it seems that businesses might be doing the same. Several of the businesspeople I have interviewed recently said they realised that they had extra premises they weren't using or too many vehicles, or more people than needed. So they've cut back to what they need.

But this streamlining, combined with the credit crunch may be what has made the slowdown so severe. Is it moving away from the 'global' and back to the 'local'. Not 'local' in the sense of being protectionist, but 'local' in the sense of 'what matters to me'

My hunch is that many will stick to their financial diet rather better than the nutritional one. So quantitative easing may seem like the 'friend' who tries to tempt you with chocolate cake when you have just told them you are on a diet.