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5 "Tells" that the Stock Markets Are About to Reverse

Bank of England Confirms Policy of Stealing Savers Wealth via Negative Real Interest Rates

Interest-Rates / Savings Accounts Sep 27, 2010 - 01:54 PM GMT

By: Nadeem_Walayat

Interest-Rates

Best Financial Markets Analysis ArticleThe Deputy Governor of the Bank of England Charlie Bean effectively told savers to forget about receiving inflation beating interest rates and therefore should seek to spend their savings to boost the economy. The BoE's strategy continues to transfer wealth from savers to borrowers, with more than £20 billion transferred to date by means of negative real interest rates which typically pay savers half the rate of inflation CPI (3.1%) and 1/3rd the rate of the more recognised RPI inflation rate (4.7%) with the trend not relenting as rates continue to be cut all the way towards the bank base rate of just 0.5%.


Charlie Bean told Channel 4 News -

“The action that we’re taking now is designed to get the economy back to a reasonable level of activity as soon as we can. The faster we can achieve that, the sooner interest rates will get back to more normal levels.

I would certainly not expect bank rate to stay very close to zero for a decade or more.

I fully sympathize’’ with savers having to cope with low returns on their capital. It may make sense for savers to spend their capital a bit.

What we’re trying to do by our policy is encourage more spending, Ideally we’d like to see that in the form of more business spending but part of the mechanism that might encourage that is having more household spending so in the short term we want to see households not saving more but spending more.’’

The below graph illustrates the real rate of average UK savings interest rates for instant access savings accounts against the governments CPI and RPI inflation measures. For much of the past 2 years savers have been in receipt of negative real interest rates with the trend worsening since the start of the year.

The graph implies that UK savers are currently losing between 1.4% and 3% annually of the value of their capital on the basis of the official inflation indices of CPI and RPI, real inflation tends to be at least 1% above the RPI measure. However things are even worse for savers as the government TAXES savings interest income depending on tax codes at usually either 20% or 40%. Therefore the real rate of interest AFTER TAX is between -1.7% and -4.2% on the basis of CPI and RPI which averages at a realistic real rate of interest of -2.94% as the government continues to use the inflation stealth tax to steal the wealth of savers and purchasing power of workers as average pay rises come in at 2% (well below the rates of official inflation), whilst many workers (especially in the public sector) are on pay freezes.

The theft from savers is just one of many mechanisms that the Bank of England is employing to both monetize government debt and to transfer tax payer cash onto the balance sheets of the the bankrupt banks as recently concluded in the article (19 Sep 2010 - UK Government Stealth Debt Default Continues at Minimum Rate of 3% per Year )

Most are bankster's that are monetizing government debt and virtually all of the big players are leveraged which is why the bankster's are making huge profits by borrowing at 0.5% from the Bank of England then buying longer dated government bonds at 3.5% on leverage at say X20 (usually much higher) that converts into a profit of 3% X20 = 60%! this demand has the effect of depressing gilt yields down so bond prices rise thus another 20% profit is made for every 1% rise in the bond price. Off course during a bond market crash leverage works in reverse as a mere 10% drop converts into an instant 200% loss (at X20 leverage) and another bankrupt too big to fail bank for the tax payers to step in and bailout again.

This also suggests an anomaly is possible, of high inflation with low interest rates, because the bankster elite are enticed into perpetually financing government debt at low long-term interest rates in exchange for huge profits, as what do the bankster's care if the inflation rate is at 6% and the base interest rate is 0.5% because they can buy borrow at 0.5% and buy bonds at 3.5% for a profit of 60% against an inflation cost of just 6%, this thus prevents long-term bond market interest rates from rising as is normally the case i.e. long-term interest rates are usually positive (above inflation). Which effectively means that governments are able to ROLL OVER MATURING LONG-TERM DEBT AT INTEREST RATES BELOW THE RATE OF INFLATION!!! i.e. A mechanism for Maximising debt default through high inflation! Which is the ultimate purpose of Q.E. - The consensus (academic economists) view is that governments have to roll over maturing debt at HIGHER interest rates as a consequence of HIGHER inflation.

However the interest rate risks are transferred to the currency markets and this also suggests that the risk of hyperinflation is higher as the system is geared towards perpetually increasing debt until the bubble bursts amidst an hyperinflationary panic rather than mechanisms for less severe normalisation of debt due to just high inflation but rather an hyperinflation outcome.

The Bottom line - the average UK saver is currently losing approx 3% of the value of their savings in real terms per year. For savers to retain purchasing power after inflation and taxes then the average UK savings interest rate should be at 4.75%, instead of the actual rate of 1.7%.

The Bank of England's strategy of punishing savers for thrift and prudence whilst rewarding borrowers for recklessness is nothing new, as I have written of the Bank of England's strategy at length for the past 2 years and most notably iterated in the January Inflation Mega-Trend Ebook (FREE DOWNLOAD)

Furthermore, low interest rates plus rising inflation amounts to THEFT FROM SAVERS and WORKERS and all existing currency holders, including bond investors, therefore the best strategy to protect ones wealth is to diversifying OUT of fiat currencies. This strategy must remain in force as long as government's continue to run budget deficits that results in more accumulated debt resulting in higher debt to GDP ratios and hence more money printing and inflation as part of a perpetual inflationary debt spiral.

People have been conditioned by politicians and the mainstream press to think that inflation is not only normal but it is good, it is NOT GOOD nor NORMAL, Inflation is a stealth tax on your savings and earnings that over time seeks to STEAL the value of all that you have accumulated during a life time of hard work which is why most pensioners in Britain retire with savings that have little real value, whereas if there were NO inflation ALL of your savings would retain the SAME value throughout your life.

Inflation is created by government's and the banking cartel by a number of means but primarily as a consequence of the fractional reserve banking system that effectively allows the banks to continuously conjure new money out of thin air that continues to erode the value of all existing money as manifested by near continuous year on year high growth in the money supply far beyond that which is necessary as a consequence of economic growth.

Furthermore whilst people are forced to link their earnings against the official inflation indices such as the CPI and RPI, the real rate of inflation is usually significantly higher due to the fact that over time successive government's have sought to raise the stealth tax on their citizens by means of manipulating the official inflation indices lower. This has been illustrated earlier in this ebook which shows that the real UK inflation rate usually tends to be between 1.5% and 3.5% above the official CPI rate.

UK Inflation Forecast 2010

UK CPI Inflation at 3.1% for August 2010 is EXACTLY in line with my trend forecast for 2010 as of December 2009 that projected CPI above 3% inflation for most of 2010 and specifically CPI inflation of 3.1% for August 2010. My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) and the Inflation Mega-trend Ebook of January 2010 (FREE DOWNLOAD) as illustrated by the below graph.

UK Inflation August 2010

Current in-depth analysis is under way on forecasts for the British Pound and UK Interest Rates, to receive these in your email in-box ensure you are subscribed to my always FREE Newsletter.

Comments and Source: http://www.marketoracle.co.uk/Article23036.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 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 UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. 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.

Nadeem Walayat Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jas Singh
27 Sep 10, 19:50
UK GDP in the years to come ...

Hi Nadeem

If PSND is forecast to rise to £1.5 Trillion, and we were to return to normality (say 40% Debt to GDP), would you agree we could very likely see Annual GDP of £3.75 Trillion within the next 5 years?!

This would imply the cost of most goods would more than double!!

Your thoughts?

Best regards


Nadeem_Walayat
28 Sep 10, 00:16
UK Debt to GDP

Hi

UK Debt to GDP is not going to fall to 40% of GDP at best it will stablise between 70% and 75% of GDPf or the next 5 years at least.

NW


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