Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21
US House Prices Momentum Analysis - 20th Feb 21
The Most Important Chart in Housing Right Now - 20th Feb 21
Gold Is the Ultimate Reserve Asset - 20th Feb 21
Is That the S&P 500 And Gold Correction Finally? - 20th Feb 21
Technical Analysis of EUR/USD - 20th Feb 21
The Stock Market Big Picture - 19th Feb 21
Could Silver "Do a Palladium"? - 19th Feb 21
Three More Reasons We Love To Trade Options! - 19th Feb 21
Here’s What’s Eating Away at Gold - 19th Feb 21
Stock Market March Melt-Up Madness - 19th Feb 21
Land Rover Discovery Sport Extreme Ice and Snow vs Windscreen Wipers Test - 19th Feb 21
Real Reason Why Black and Asian BAME are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 19th Feb 21
New BNPL Regulations Leave Zilch Leading the Way - 19th Feb 21
Work From Home Inflationary House Prices BOOM! - 18th Feb 21
Why This "Excellent" Stock Market Indicator Should Be on Your Radar Screen Now - 18th Feb 21
The Commodity Cycle - 18th Feb 21
Silver Backwardation and Other Evidence of a Silver Supply Squeeze - 18th Feb 21
Why I’m Avoiding These “Bottle Rocket” Stocks Like GameStop - 18th Feb 21
S&P 500 Correction Delayed Again While Silver Runs - 18th Feb 21
Silver Prices Are About to Explode as Stars are Lining up Like Never Before! - 18th Feb 21
Cannabis, Alternative Agra, Mushrooms, and Cryptos – Everything ALT is HOT - 18th Feb 21
Crypto Mining Craze, How We Mined 6 Bitcoins with a PS4 Gaming Console - 18th Feb 21
Stock Market Trend Forecasts Analysis Review - 17th Feb 21
Vaccine Nationalism Is a Multilateral, Neocolonial Failure - 17th Feb 21
First year of a Stocks bull market, or End of a Bubble? - 17th Feb 21
5 Reasons Why People Prefer to Trade Options Over Stocks - 17th Feb 21
The Gold & Gold Stock Corrections Are Normal - 17th Feb 21
WARNING Oculus Quest 2 Update v25 BROKE My VR Headset! - 17th Feb 21
UK Covid-19 Parks PACKED During Lockdown Despite "Stay at Home" Message - Endcliffe Park Sheffield - 17th Feb 21
How to Invest in ETFs in the UK - 17th Feb 21
Real Reason Why Black and Asian Ethnic minorities are NOT Getting Vaccinated - NHS Covid-19 Vaccinations - 16th Feb 21
THE INFLATION MEGA-TREND QE4EVER! - 16th Feb 21
Gold / Silver: What This "Large Non-Confirmation" May Mean - 16th Feb 21
Major Optimism for Platinum, Silver, and Copper - 16th Feb 21
S&P 500 Correction Looming, Just as in Gold – Or Not? - 16th Feb 21
Stock Market Last pull-back before intermediate top? - 16th Feb 21
GAMESTOP MANIA BUBBLE BURSTS! Investing Newbs Pump and Dump Roller coaster Ride - 16th Feb 21
Thinking About Starting to Trade This Year? Here Are Some Things to Keep in Mind - 16th Feb 21
US House Prices Real Estate Trend Forecast Review - 15th Feb 21
Will Tesla Charge Gold With Energy? - 15th Feb 21
Feeling the Growing Heat and Tensions in Stocks? - 15th Feb 21
Morgan Stanley Warns Gasoline Industry Is About to Become Totally Worthless - 15th Feb 21
Debts Lift Gold - Precious Metal Prices Will Rise on a Deluge of Red Ink - 15th Feb 21
Platinum Begins Big Breakout Rally - 15th Feb 21
How to Change Car Battery Without Losing Power, Memory, Radio Code Settings - 15th Feb 21
Five reasons why a financial advisor can make a big difference to your small business - 15th Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Bank of England Ignites Quantitative Inflation

Interest-Rates / Credit Crisis 2009 Mar 05, 2009 - 04:30 PM GMT

By: Nadeem_Walayat

Interest-Rates Diamond Rated - Best Financial Markets Analysis ArticleEconomic Shock and Awe as Interest Rates are cut to 0.5% coupled with £75 Billion conjured out of thin air by Mervyn King Waving his "Central Bank Magic Wand". The government through what should be more accurately termed as "Quantitative Inflation" than "Quantative Easing" sanctioned £75 billion in the initial print run which will have a multiplier effect through fractional reserve banking and leverage of anywhere from between X10 to X20 the amount depending on how it filters through the economy, therefore £75 billion increase in the money supply implies the supply of credit should jump by anywhere between £750 billion to £1.5 trillion, but more probably in the region of X10 at £750 billion over the next few months, with expectations of several more doses of "Quantitative Inflation" during 2009 that seeks to devalue the British Pound towards parity to the U.S. Dollar.


UK Interest Rates

Frankly interest rates being cut from 1% to 0.5% makes little if no positive difference to the economy as the problem is the lack of credit and not the level of the base interest rate, if anything it further reinforces the fact that Monetary Policy has Failed, therefore the government may have been wiser to have left interest rates at 1% which would have sent a stronger message out to financial markets rather than look here. We have panicked again and cut to 0.5% ! 0.25% Next, then what ? The end of monetary policy that's what! I would be surprised if rates were cut again, but with the lack of competent decision making I am afraid it remains a distinct possibility.

In terms of the interest rate forecast for 2009, rates are overshooting to the downside towards a target of 0.25% as recent analysis projected towards.

Quantitative Inflation / Printing Money

The government and Bank of England talking heads call it a powerful tool to kick start the british economy. However this is in effect the LAST RESORT, something that has not been undertaken during the 300+ years of the Bank of England because it is akin to detonating a nuclear bomb without worrying about the fallout. As mentioned earlier the £75 billion will eventually result in an increase in the amount of credit in the economy of some £750 billion.

How does Quantative Easing Work ?

The Bank of England will go out in the money markets and firstly buy government bonds to the tune of £100 billion to drive down long interest rates, and secondly buy corporate bonds and therefore create a demand for corporate debt thus driving down corporate bond yields. This allows companies to raise funds and should in theory result in greater investment and hence increase employment and corporate activity.

Will it Work ?

I cannot see how buying government bonds will work as at the moment demand exists for UK bonds. Buying corporate bonds does increase the demand and hence the supply of corporate bonds will increase which will put cash into the corporate coffers, it all depends on what the corporations do with the cash i.e. do they do what the banks did and bolster their balance sheets or do they spend it ? However printing money does risk igniting inflation as the supply of money goes through the roof. Whilst it has never been tried in Britain before, not even during the last Great Depression. But where it has been tried it has ALWAYS FAILED, as once the printing presses start the governments then find it harder to stop printing and wean the economy off the need for repetitive injections of fresh cash as happened in Germany's Weimar republic that ended in an hyper-inflationary collapse and the most recent example of Zimbabwe which clearly illustrate what eventual outcome of quantitative easing is i.e. total destruction of the currency. Britain is on the SAME PATH which at this point in time suggests much higher inflation as the December inflation forecast concluded (UK CPI Inflation, RPI Deflation Forecast 2009) that deflation will give way to much higher inflation with the most probable outcome of stagflation for a number of years.

In my opinion this is a doomsday event for the BRITISH CURRENCY!, Their is much talk that a country cannot function without a banking system, well how is the country going to function without a currency? For the answer to this we just need to look at history where EVERY EXAMPLE OF PRINTING MONEY ENDED IN DISASTER - EVERY TIME ! Those pointing towards Japans experience need to remember that Japan has been in an economic depression since 1990! and its currency has only been maintained due to the large trade surplus which Britain does not enjoy.

Fighting Deflation With Inflation.

The government and the Bank of England are attempting to fight against the ongoing deflation as a consequence of the collapse of asset values, and the bankrupt financial institutions continuing to deleverage from as high as X60 of capital leveraged positions, which in the process requires the Government to step in and recapitalise the banks and take the toxic debts off the banks balance sheets.

My analysis of December 08 concluded that the UK is heading for real deflation during 2009, with the RPI inflation measure expected to go negative by mid 2009 by targeting -1.2%. The trend to date is ahead of expectations however the most recent data showed the CPI measure take a step towards trend by only registering a small drop by falling to 3% from 3.1%

The more money the government prints and the more sterling falls then the greater will be the bounce in inflation during the second half of 2009, i.e. greater than that which was originally forecast (as illustrated above) this will become much clearer by the middle of 2009, but is suggesting that investors need to increasingly gear themselves up towards much higher forward inflation. As I pointed out in the December analysis - The fall in sterling will result in much higher high street consumer prices during 2009 as those retailers that have not gone bust seek to replenish stocks at much higher prices during 2009. This again suggests that the January Sales for Britons may prove to be more illusionary than real as the fall in sterling has already soaked up corporate margins, which again confirms that those UK shoppers seeking to make large purchases are probably better off to do so sooner rather than later. This therefore sends out mixed signals for consumer prices later in 2009.

This is now starting to be reflected in food prices as produce is being exported abroad and therefore resulting in less domestic supply, which will soon also be reflected in other goods and services as the price of imports soars and therefore confirms the view of much higher inflation during the second half of 2009.

UK Economy Worst Since the Great Depression

The analysis of 18th Feb 08 forecast that the UK economy, is heading for its worst recession since the great depression as illustrated by the below graph in that the severe recession is expected to bottom at an annualised rate of -4.75% GDP in the fourth quarter of 2009 (small quarterly gain on the 3rd quarter), which will be followed by a recovery as the rate of annualised GDP contraction improves as government stimulus and Quantative easing measures as well as near zero interests start to impact on the economy. The UK economic recovery is expected to continue into the fourth quarter of 2010 i.e. after the general election. The total recession from peak to trough is expected to see GDP contract by 6.3% and therefore this will be the worst recession since the 1930's Great Depression.

UK Recession Forecast 2009-2010

Unfortunately for the Labour government the economic cycle is completely out of sync with the election cycle as the economy is not expected to emerge from this severe recession until AFTER the next election as 2010 1st quarter GDP is estimated to be at an annual rate of contraction of -3.9% (despite a quarterly gain), this therefore increases the probability of Labour losing the next election as the state of the economy is nearly always the primary determining factor for the electorate. However as we witnessed today, the Labour government is doing its utmost to battle against the recession especially as GDP data heads for an headline contraction of more than 4% on annual basis, which means the Labour government is in the process of sacrificing the long-term growth for the short-term possibility of turning the economy around before the 2010 election. This also suggests that the 2010 recovery may not be able to take hold and therefore sets the scene for economic weakness during 2011-2012, suggesting a double dip recession that may be triggered by deep cuts in public sector spending following the next election.

Therefore the best outcome at this point from the credit crisis would be for a period of stagflation i.e. low economic growth with high inflation and interest rates. The high inflation will be a necessary evil so as to devalue the value of the record amounts of debt that the government is ratcheting up as illustrated below. The worst case scenario is that of hyperinflation and a collapse of the British currency / economy along the lines of where Iceland is today which has seen a collapse of some 30% in its annual GDP.

UK Debt Liabilities

Britain's growing liabilities as a consequence of bailing out of the bankrupt banks that already project to 300% of GDP as the below graph illustrates as per the recent analysis - Gordon Brown Bankrupting Britain as Tax Payer Liabilities Soar- Update.

Attempting to save the bankrupt banks has already saddled the tax payer with £1.2 trillion of liabilities and is expected to pass above £2 trillion by the end of 2009. The eventual amount of liabilities may extend to as high as £5 trillion if the whole banking system's liabilities were dumped onto the British tax payer which would trigger far more Quantative Easing as the government instructs the Bank of England to print money to buy government debt due to the increasingly skeptical financial markets which would send the currency spiraling lower and inflation spiraling higher.

Punishing the Savers

Quantitative Inflation and Zero Interest rates means that Savers are being punished by the government for being responsible instead those that were reckless in borrowing unsustainable amounts of cash are being rewarded. The government is attempting to force savers to a. Spend their savings and consume more as there is little incentive to save at zero interest rates, and b. to Invest their capital into more risky assets such as the stock market and corporate bonds. Which with the stock market trading towards new bear market lows does NOT seem to be working.

The Paradox of Cutting Interest Rates towards Zero

As mentioned above, the interest rate cut to 0.5% is a mistake which is expected to make little difference to the economy, however it does make a difference to savers who are now even less inclined to put their hard earned cash on deposit with risky banks and hence in effect today's rate cut has the opposite effect to that which was intended as banks are likely to see less cash deposited with them as a consequence of a pittance paid in interest.

Additionally, low savings interest rates and threat of banks going bankrupt has apparently triggering a withdrawal of cash from HBOS and RBS to the tune of 10% a piece in favour of the fully nationalised banks of Northern Rock and National Savings. In the UK at present only the first £50,000 of savings is guaranteed at 100%, whilst fully nationalised banks have the full backing of the state and hence a 100% guarantee of all deposits.

Small Silver Lining for Savers

As mentioned earlier, the eventual outcome of Zero interest rates and Quantative easing will be much higher inflation and interest rates, therefore I do not see low interest rates staying near zero for long i.e. during the second half of 2009 interest rates should start to rise again in tandem with rising inflation. However the loss of value in terms of sterling's depreciation is a far greater cost to savers than a few percent gain on the rate of interest which savers will soon come to realise as the price of goods in the shops soars relative to paltry rates of interest payments.

What Will Happen to the British Pound ?

Quantitative easing sends a message to the foreign exchange markets that a flood of British Pounds is about to be unleashed onto the market that is outside the normal expected mechanisms of government debt issuance, this in effect insures that the value of all currency in circulation will be devalued and hence investors and speculators act ahead of the curve by continuing to liquidate out of sterling whilst at the same time increasing short positions against sterling i.e. betting on a continuation devaluation in favor of the worlds reserve currency the U.S. Dollar the trend for which is for continuing strength as per the US Dollar Bull Market Forecast for 2009.

Conclusion

The governments initial print run is for £150 billion in two halves is expected to be followed again by another two runs of £150 billion each as the May 2010 election is still more than 12 months away, which is the primary focus for the Brown Government. This will eventually lead to much higher inflation and interest rates than most expect at this time. Therefore investors and savers need to start to look at gearing themselves towards this development i.e.

1. Falling UK government bond prices as the amount of debt the government issues continues to mushroom.

2. Continuing sterling bear market which targets parity to the U.S. Dollar as a consequence of Quantative easing and government debt.

3. Rising commodity prices as the crackpot policy of Quantative easing is copied around the world which devalues ALL currencies.

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.

Attention Editors and Publishers! - You have permission to republish THIS article. Republished articles must include attribution to the author and links back to the http://www.marketoracle.co.uk . Please send an email to republish@marketoracle.co.uk, to include a link to the published article.

Nadeem Walayat Archive

© 2005-2019 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

6 Critical Money Making Rules