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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Bank of England Panics and Prints Another £50 billion to Prevent Economic Depression

Economics / Quantitative Easing Aug 06, 2009 - 10:04 AM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleThe Governor of the Bank of England, Mervyn King waved his magic wand again today and conjured another £50 billion into existence to the surprise of most market commentators right from the BBC downwards with Stephanie Flanders seen floundering to back track on previous commentary on BBC TV News, as lemming like behaviour had led the mainstream media to conclude that the Bank of England had put Quantitative easing on hold in the face of growing signs of economic recovery.


However readers of my on-going analysis that is typically 6-12 months ahead of the curve would know that far from having halted Quantitative Easing, the BoE was expected to double the amount printed by the end of the year to target £300 billion.

Today's £50 billion brings the total printed to date to £175 billion (that's £25 billion more than the current limit of £150 billion), the decision to print more money is not a sign of confidence but of panic that implies that the Bank of England is concluding that the recession is far deeper than it had imagined even a few weeks ago. The key market reaction was as expected on such an announcement with Sterling plunging and UK bonds rallying as the bulk of the £50 billion will be used to buy government bonds to help finance the huge budget deficit that targets £200 billion for 2009, far beyond anything as a % of GDP experienced this side of WW2.

Whilst money printing in the name of fighting DEFLATION is the operative policy at this moment in time, however Money Printing is highly inflationary, all exercises in money printing eventually leads to high if not hyper inflation and the total destruction of fiat wealth i.e. savings on deposit. The key problem with printing money to grow the the economy is that the economy gets hooked on the drug of quantitative easing requiring regular fixes the price of which will follow much later perhaps 12months down the line in much higher inflation data, the response to which is expected to be much higher interest rates. As a basic premise the fractional reserve banking system would tend to multiply the liquidity by X10, therefore the current money printing will eventually lead to a sharp rise in the money supply.

Labour Government Bankrupting Britain

The bailed out bankrupt banks have been busy reporting losses this week that continues to build on the bank bailout tax payer liability of £1.5 trillion as I have warned several times over the past 12 months and which is now starting to come to pass in that total liabilities are growing from £1.75 trillion at the end of 2007 to more than £3.9 trillion by the end of 2010 as a consequence of the £1.5 to 2 trillion of liabilities of the bankrupt banking sector being ceremoniously dumped onto the tax payers in addition to the public sector deficit spending of £600 billion over 3 years in the lead up to the next election on which the country will have to pay interest on which worsens the fiscal situation during each subsequent year hence the risk of an out of control debt spiral.

Way back in April 2008 when the Bank of England first gave tax payer cash to the banks, I warned that this could eventually lead to a loss of as much as £200 billion to the tax payer, a huge sum of money by any measure, however now collectively Britain could stand to lose as much as £500 billion to the banks, that can only be covered by printing even more money to monetize the debt and hence leads to inflation and probable investors balking at government debt issuances.

Therefore we are looking at £600 billion of deficit spending PLUS £500 billion of bankrupt bank losses leading to a near tripling of Britians debt towards 120% of GDP, whilst total liabilities project to more than 350% of GDP.

UK Debt Fueled Economic Bounce

Total GDP contraction to date now stands at -5.4% on a quarter on quarter basis, which is against my forecast for -6.3% total into Q3 2009, with recent recent analysis suggesting that GDP contraction during the 2nd and 3rd quarters for 2009 is moderating and points to a bounce back in the economy into the 2010 general election given the extreme measures adopted of deficit spending of £500 billion+ to generate just £67 billion of additional economic growth, however the post general election tax hikes and deep public spending cuts will in my opinion trigger a double dip DEPRESSION 2011 to 2012 as illustrated by the graph below.

UK House Prices Summer Bounce

The bounce in UK house prices from oversold levels continues with the Halifax reporting a 1% gain for July which is being taken by many commentators to start concluding that the bottom could be in. The unfolding bounce in UK house prices prices is inline with my May analysis that concluded that UK house prices will experience a bounce during the summer months from extremely oversold levels as a consequence of liquid buyers returning to the market and the debt fuelled economic recover.

My next in depth analysis will seek to evaluate how far UK house prices are could bounce and what follows thereafter, to get this analysis in your in box ensure your subscribed to my always free newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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