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6 Critical Money Making Rules

Bank of England Quantitative Easing Gilts Market Smoke and Mirrors Dangerous Game

Interest-Rates / US Debt Dec 30, 2009 - 11:56 AM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe Bank of England's actions throughout 2008 and 2009 have shown that it's primary objective is to massage the UK Government Bond market. The evidence for this is in the fact that the vast majority of the £200 billion of Q,E, has been utilised for the purpose of monetizing government debt i.e. buying gilts to prevent Gilt auction failures and higher yields.


The original story of Quantitative Easing or Money Printing in statements made by the Governor of the Bank of England during February 2009 was that QE would be utilised primarily for the purchase of corporate bonds to help companies that were unable to sell debt / bonds to the banks. This is NOT what has transpired as most of the QE to date of £200 billion has been utilised for the purchase of Gilts, where even what little corporate bonds that have been bought are expected to be sold in the coming months.

This tells me that those analysts that look to the Bank of England for possible answers for the UK economic growth indicators are following a red herring, as that is NOT the BoE's primary administrative function, the number 1 priority is massaging the Gilt market, yes inflation and economy come 2nd and third but only in so far as they impact the Gilt market. So the Bank of England could be a problem during 2010 as it continues to adopt a blinkered attitude towards the economy much as it did during the Great Recession of 2008-2009, in that the Bank of England sat twiddling its thumbs whilst the economy burned and it was only after the Prime Minister took control of interest rates away from the Bank of England on 8th of October by announcing the first of a series of cuts in UK interest rates from the Prime Ministers Despatch box rather than by the Bank of England as I mentioned around the time.

UK 1% Interest Rate Cut

The MPC meeting is widely expected by the consensus to cut UK interest rates by 0.5% today, however as my recent articles (Credit Quake Persists Ahead of UK Interest Rate Cut of 1%?) have concluded that effectively Gordon Brown cracked the MPC round table in half when he stood up at the House of Commons despatch box on 8th October to announce the interest rate cut of 0.5%, which was followed by the Bank of England's announcement. This suggests that the Monetary Policy Committee is now no longer totally in the control of setting UK interest rates and therefore in many aspects control has been transferred back into the Governments hands.

At the end of the day the Bank of England will first look after fellow bankers and then placate the government by giving lip service to the wider economy for were it the institution that many think it is then it would not have contributed in a big way towards pushing the UK economy over the edge of the cliff during 2008 by sitting on interest rates of 5% for a whole year AFTER the credit crisis broke and the UK housing market peaked. The Bank of England coupled with the FSA contributed to towards the creation of the financial crisis through means de-regulation of the banking sector that ensured that bank officers turned their banks into hollow husks for the purpose of maximising bonuses on the basis of fictitious profits, with the liabilities at the end of day being dumped onto the tax payers. Had the Bankers that run the Bank of England done what the people thought they were there to do then the banking crisis would not have happened! For we are not talking about a new institution on a learning curve that is just a few years old, but rather a 300 year institution that knows full well the ins and outs of the banking system that it created over the centuries that exists primarily to turn everyone, including the government into debt slaves. The mainstream press instead of holding the Bank of England to account is praising the bank for its actions in preventing an Economic Depression.

The Bank of England whilst talking about halting QE several times throughout 2009 that the mainstream press lapped up in July, which at the time I mentioned was NOT possible, as the BoE will continue with QE to ensure Gilt Auctions do not fail. The BoE will also put increasing pressure on the government to cut the deficit asap so that the Gilt market is under less pressure, regardless of the impact of a too severe cut in the deficit i.e. triggering a double dip recession.

The Bank of England embarked upon a programme of printing money or Quantitative Easing during March 2009 with an initial print run of £75 billion of a total set at £150 billion in an attempt to wave the central bank magic wand to increase the supply of credit. However as I warned at the time (5th March 2009: Bank of England Ignites Quantitative Inflation) that once started the Bank of England would continue printing money right into the May 2010 General Election targeting an print run of as much as £450 billion and therefore igniting Quantitative Inflation during 2010.

Virtually all of the mainstream press swallowed the Bank of England's hints and winks that Quantitative Easing had ended at £125 billion during the summer months, which at the time I stated was not possible (8th July 2009: Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to Rise)

This confirms my view that the Bank of England will continue printing money into year end to beyond the current arrangement of £150 billion and probably as high as £250 billion.

I projected a Quantitative Easing total towards £250 billion by the end of 2009 with the current tally now standing at £200 billion of money printed as a debt consequence of the Labour Government's objective of both aiming to maximise the number of seats retained at the next General Election as well as to deliver a scorched earth economy to the next Conservative Government. Therefore the Labour Government also wins because it gets to hide this Quantitative Easing debt as theoretically purchases and sales cancel each other out in the fantasy land of central banking accounting and feeble government auditing. I.e. by magic approx £200 billion of new government debt has vanished into thin air, for if had not been hidden under the carpet then UK Gilt interest rates would be much higher due to the increase in supply of approx 33%.

The real damage of this game of smoke and mirrors is that the markets are not stupid and when they eventually do react to the progressive trend of QE it will be Earthquake style and that is to dump UK assets, bonds, stocks, cash and therefore hit sterling hard in a matter of hours let alone days or weeks which would send interest rates sky rocketing i.e. to discount the £200 billion of new hidden Q.E. debt.

In the final analysis money printing as I have repeatedly pointed out over the past year is a scam perpetuated upon existing currency holders, i.e. savers. The Bank of England's actions of the past 12 months amount to alleged theft of the value of savings from savers by means of zero interest rates and the printing of money that seeks to destroy the value of capital / savings both gradually through the process of inflation AND at the point of time of a currency crisis.

What this means for the UK Economy is that a. serious efforts will be implemented by the next Government to cut the deficit, and b. whilst the deficit is above £80 billion per year then Quantitative Easing will remain and continue to expand which suggests several more years of QE rather than several more months as the BoE officially continues to always allude to, which given its actual primary objective is not going to happen.

This article is part of in-depth analysis that will conclude in a forecast for the UK economy for 2010 and 2011 and which follows the completion of the forecast for UK CPI inflation 2010 , which will be followed by the UK interest rate forecast for 2010 later this week. The whole scenario and implications of will be published as an ebook that I will make available for FREE, ensure you are subscribed to my always free newsletter to get the completed scenario in your email box and check current analysis at http://www.walayatstreet.com.

Debt Fuelled Economic Recovery

UK GDP for the 3rd Quarter was revised marginally higher to minus 0.2% from the earlier ONS estimate of minus 0.3%. The GDP trend for the UK economy for 2009 has been accurately mapped out in the in depth analysis and forecast of 17th February 2009 (UK Recession Watch- Britain's Great Depression?), that both called for severe peak to trough economic contraction of -6.3% at a time when the likes of the UK Treasury were forecasting contraction of less than half at -3%. The analysis also concluded in a strong debt fuelled economic recovery during 2010 to coincide with a summer 2010 General Election. As of the revised ONS GDP data (ABMI Chain linked at Market Prices) total peak to trough contraction is now 6.23% virtually exactly inline with the forecast for -6.3%. Annualised contraction for the third quarter is at -4.56% with trend on target for -4.75% for the fourth quarter.

The UK economy remains on track to bounce back strongly during 2010, as indicated by June's in depth analysis, however this economic recovery is based largely on debt, as the Labour government's strategy is to deliver the next Conservative government a scorched earth economy.

The UK GDP in-depth analysis will seek to update and forecast the UK economy at least 2 years forward. To ensure you the analysis and forecast in your email in-box subscribe to my always free newsletter.

Source: http://www.marketoracle.co.uk/Article16148.html

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 500 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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