Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
Death of the U.S. Dollar? Gold an Inflation Hedge? Really? - 29th July 14
We’re Ready to Profit in the Coming Gold Price Correction—Are You? - 29th July 14
Their Economy Will Collapse, Including Ours - 29th July 14
Silver Prices – Megaphone Patterns - 29th July 14
Real U.S. Interest Rates - Fed Exit a Blue Pill? - 29th July 14
Why Israel Should NOT Exist, Just Like Any Other Rogue State - 29th July 14
Gold Still Looking Good - 29th July 14
Silver Price Set To Star - 29th July 14
Our Population Growth Totalitarian Future - 29th July 14
World War 1 Cause and Consequences - The Planned Destruction of Christendom - 29th July 14
Will Crashing Commodities Crash the Stock Market? - 29th July 14
Ukraine MH17 - Washington Thinks Americans Are Fools - 29th July 14
Stock Market Bubble Warning - 29th July 14
Gold Price and U.S. Dollar’s July Rally - 28th July 14
Second Quarter Corporate Earnings: Marching Toward a Strong Economic Recovery - 28th July 14
Time to Put a New Economic Tool in the Box - 28th July 14
Mossad in Gaza, Ukraine and the Cult Of The All-Powerful Elite - 28th July 14
Elliott Wave Gold Price Projection Since 1970 - 28th July 14
Investors Remain Uncertain As Stock Fluctuate Near Long-Term Highs - Will The Uptrend Extend? - 28th July 14
The Mass Psychology Of Decline - 28th July 14
Will the US Destroy the World? - Don’t Expect to Live Much Longer - 28th July 14
GDM and GDXJ Gold Stocks In-depth Look - 28th July 14
Stock Market One FINAL High? - 28th July 14
What It Means - Paradigm Collapse And Culture Crisis - 27th July 14
Wall Street Shadow Banking: You Can’t Taper a Ponzi Scheme: “Time to Reboot” - 27th July 14
6 Tips for Picking Winning Gold Mining Stocks - 27th July 14
Israel's War on Children, Exterminating the Palestinians Future - 27th July 14
Guilt By Insinuation - How American Propaganda Works - 26th July 14
Surprise Nuclear Attack On Russia To Liberate Ukraine - 26th July 14
Use "Magic" Of Gold/Silver Ratio To Greatly Increase Your Physical Holdings - 26th July 14
Derivatives Market Species Origins - Abuse, Props and Risks - 26th July 14
Stock Market Manipulation and Technical Analysis - 26th July 14
China’s Stock Market Finally Looks Like A Buy - 26th July 14
Ed Milliband Fears Israel Jewish Fundamentalist Gaza War Massacres Backlash - 26th July 14
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

Low Interest Rates, Economic Kill or Cure?

Interest-Rates / Inflation Feb 23, 2012 - 01:21 AM GMT

By: Adrian_Ash

Interest-Rates

Best Financial Markets Analysis ArticleHold still! This might sting a little...

"TREATING serious medical conditions often has unwanted side effects," said Charles Bean, deputy governor of the Bank of England and a doctor of economics, in a speech in Glasgow on Tuesday.

"But, unpleasant as those side effects sometimes are, treatment is invariably better than the alternative. So it is with the economic medicine of low interest rates and quantitative easing."


The sometime economics professor was specifically addressing the impact of sub-zero real interest rates on savers and pensioners. That's when retained capital loses real purchasing power, because the interest or yield that it earns lags the rate of inflation.

"[Savers] have every right to feel aggrieved at losing out," said Dr.Bean. "After all, they did nothing to cause the financial crisis. But neither did most of those in work, who have also seen a substantial squeeze in their real incomes."

Right! And since neither workers nor savers are to blame for this crisis, they can both pay – and pay dearly – by being fed another dose of kill-or-cure medicine which has yet to work in 3 years of treatment...



Attempting to defend quantitative easing and near-zero rates, as Bean did in Glasgow on Tuesday, is a thankless task. Not only because it's done nothing to lift the depression to date. But because it's actually adding to the gloom – as his boss, the Bank's governor, Mervyn King, 'fessed up last autumn. In a very roundabout way.

"I would certainly accept that what is happening in the economy now is a very large squeeze on household incomes," Dr.King told the UK's Treasury Select Committee. "Real take-home pay has fallen by more in the past two years than any time in living memory."

You can see the squeeze on real wages above. Gross pay has risen much less quickly than inflation, which has raced ahead at almost twice the pace of the Bank of England's official 2.0% annual target. By February 2012, and three years after it started, the avowed aim of quantitative easing – of boosting inflation, to insure against the fat chance of it ever falling below target – had cost the average wage-earner £1410 in spending power.

That's the cumulative gap between what wage-earners actually made, adjusted for inflation, and what they would have made if the Bank had indeed hit its 2.0% target. Call it the cost of quantitative easing: £1410 in real spending power. Now add the real loss imposed on bank savings too, and that cost today runs – on average – to £3,241 for every household where one person works. Families with two or more workers are worse off again.

Feeling any better? Didn't think so. But here's how Dr.King, with his best bed-side manner, explained the treatment to Parliament:

"Now, that [loss in real pay] is not the result of inflation being high. Inflation is the symptom."

With it so far? The doctor went on regardless:

"The causes of that squeeze on living standards are real causes. They are a change in world prices of energy, and the utility prices of gas and electricity. They are the consequences of higher value-added tax, higher food prices, and a consequence of a fall in the real exchange rate, which was necessary for us to be able to rebalance our economy in the way that was vital after a prolonged period of a relatively over-valued exchange rate."

To put Dr.King's prognosis in layman's terms:

#1. The Pound's exchange rate fell, pushing up prices;
#2. Food and energy prices were rising anyway;
#3. The rise in VAT sales tax (from 17.5% to 20%) made things worse.

Number 3 was of course a fiscal decision, made by the Treasury, not the Bank. But "real causes" 1 and 2...? How did those boils break out?

"Countries with faster growth rates of money experience higher inflation," said a younger, less care-worn Dr.King back when he was deputy, rather than running the clinic. And "it is clear...that the correlation between money growth and inflation is greater the longer is the time horizon over which both are measured."

Quantitative easing appeals to just the same mechanism today. More money means more inflation. Meaning that injections of money are sure to raise the cost of living. They're also sure to depress the currency's exchange rate, especially if the injection goes unsterilized – a disaster in medicine, of course, but very necessary in monetary policy apparently. Because "sterilization" would mean withdrawing the same quantity of money as you inject, by selling bonds to the very same value, thus negating its impact entirely.

Nurse! Spit on this needle for me would you?

Reading today's notes from the consultants' latest meeting, we guess the Bank of England believe that inflation means recovery will follow. Because inflation rarely exists without economic growth. Hyperinflationary depressions aside of course (see Weimar Germany, post-war Austria and Hungary, Argentina time and again, Zimbabwe a decade ago...). More money must mean more spending, right? And if it doesn't, then just keep injecting the patient until he starts spending on something...anything!

"Interest rate less than the inflation rate boosts gambling businesses, on gold and foreign exchange markets," said governor of the Central Bank of Iran, Mahmoud Bahmani, last week. His colleagues in London, Washington and Frankfurt have seen the very same results come back from the lab. Because people buy gold when they fear or lose out to inflation. Others trade currencies, and still more find themselves basing all financial decisions – from buying a house, to taking a job or lending to business – on a wild speculation about what the next wild move from the central bank might be.

Unlike Bahmani, the US, UK and Euro authorities refuse to raise rates, but for now the Iranian doctor's got much further to go. Tehran's base rate now stands at 6%. Inflation is running above 21% per year – making for the kind of negative real rate not suffered by Western workers and savers outside mid-1970s Britain. Gold has again helped ease the pain of zero-rate money printing since 2009. Every fresh dose of unsterilized money is likely to indicate a greater dose of gold buying, too.



Back in the doctor's surgery, meantime, and let's not forget that the Bank of England's collective PhD brains are savers and workers as well. We are all in this together, remember.

Yet in medicine, "Doctors administer so much care that they wouldn't want for themselves," admits one physician, now widely quoted and breaking a taboo within the profession. "They know enough about modern medicine to know its limits. And they know enough about death to...want to be sure, when the time comes, that no heroic measures will happen – that they will never experience, during their last moments on earth, someone breaking their ribs in an attempt to resuscitate them with CPR (that’s what happens if CPR is done right)."

No one's ribs get broken if quantitative easing is done, right or wrong. But better to be safe than sorry perhaps. Dr.King's own pension pot got a £1.4 million boost ($2.1m) just as his team began prescribing ever-lower rates of interest on savers and retirees. The trustees of the Bank's staff pension scheme then switched the entire fund out of government gilts and into inflation-linked government bonds – the best-peforming income-bearing asset under the UK's stagflation – in the 12 months immediately preceding the start of QE in March 2009.

Now hold still – this might sting a little.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014