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British Gilts vs Gold, - vying for “Safe Haven” MoneyGary Dorsch “I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man that controls Britain’s money supply controls the British Empire, and I control the British money supply,” declared Baron Nathan Mayer de Rothschild, - once the richest man in Europe. In 1840, NM Rothschild was appointed as the bullion broker to the Bank of England, and went on to operate the Royal Mint Refinery in 1852. Nathan gained a position of such enormous power in the City of London that he was able to supply enough money to the Bank of England to enable it to avert a market liquidity crisis. Nowadays, the Bank of England (BoE), - also known as the “Old Lady” of Thread-needle Street, - has full control over the British money supply, with a monopoly on issuing banknotes in England and Wales. It also controls what’s left of Britain’s badly depleted gold reserves. In May 1997, the BoE was granted the autonomy to conduct monetary policy, and with it the power to set interest rates. The BoE’s mandate centers on two primary goals, - to insure stable consumer prices and to oversee the British pound. Stable prices are defined by the boundaries of the government’s 2% inflation target. In theory, the BoE aims to meet this target by hiking its base lending rate, if inflation overshoots the CPI target by more than 1%. The BoE is expected to lower its base rate, if inflation falls below 1%. But in reality, the BoE will ignore its mandate to combat above target inflation, if it’s in the best interest of the UK-economy. The BoE chief must write a letter to the Chancellor of the Exchequer explaining why it’s pursuing an asymmetrical monetary policy.
In the aftermath of the bankruptcy of Lehman Brothers in September 2009, the world economy was plunged into an unprecedented and synchronized meltdown. The UK’s economy was caught in the grips of a vicious contraction that wiped out 6% of its GDP. Suddenly, the outlook for Britain’s CPI turned exceedingly negative, and the BoE decided to take extraordinary actions in order to prevent the CPI from falling below 1%, and to fend-off the specter of deflation. In March 2009, the BoE broke new ground in its long checkered history, when it cleared the way for “quantitative easing” (QE) – radical measures used to combat deflation and unblock frozen credit markets. The BoE said it would buy huge quantities of Gilts, aiming to pump cash into the banking system and restart the flow of lending to businesses and households. “If we were to go to the wider operation, the BoE could decide that it wished to conduct such operations financed by the creation of central bank money,” said BoE chief King on Feb 11, 2009. Two weeks later, BoE chief King was granted approval by the Exchequer to start the printing presses, - creating up to £150-billion, in order to buy up everything from corporate bonds to government debt. In theory, injecting liquidity into the banks provides new funds to lend to businesses, homebuyers, or consumers. However, very little of the QE tidal wave actually trickled down to the private sector. Instead, it was hoarded by greedy bankers, seeking to rebuild their own balance sheets that been so badly damaged by the financial crisis. Much of the QE-cash was simply funneled by banks into higher yielding government and blue-chip company bonds. The original blueprints of QE were designed by the Bank of Japan (BoJ), which tried very similar tactics a decade ago, after most of the Tokyo’s fiscal stimulus tactics failed. As everyone knows, QE failed to pull Japan out of its post Nikkei-bubble rut. Whereas the BoJ injected 5% of GDP into its QE-scheme, printing money to buy up government bonds (JGB’s), the BoE on the other hand, committed to printing the equivalent of 13% of its GDP. Although QE has fueled huge bubbles in the G-7 bond markets, it’s failed to stimulate economies, because the transmission mechanism, between the central bank and the real economy, is clogged-up by tight-fisted bankers - who are focused on their annual bonuses.
About a year after the BoE began a series of rapid-fire rate cuts, - slashing its base rate to an all-time low of 0.50%, and unleashing QE, - purchasing a total of £200-billion over 12-months, the BoE began to see the fruits of its labor. The BoE’s efforts to turn back a deflationary spiral in the UK-economy were greatly aided by a massive devaluation of the British pound, which lost a quarter of its trade-weighted value since the start of 2007. Most importantly, the Federal Reserve’s $1.75-trillion QE-scheme had fueled a sizeable rally in the Dow Jones Commodity Index. By April 2010, British consumer prices (CPI) were +3.7% higher than a year earlier, aided by surging commodity prices. BoE chief Mervyn King, wrote a public letter to Chancellor of the Exchequer George Osborne, because the CPI figure rose more than 1% above the 2-percent inflation target. Retail Price Inflation, (RPI) a measure used to gauge the cost of living in wage negotiations, accelerated at a +5.3% clip in April, the fastest pace since 1991. But Mr King was still worried about deflation. Much will depend upon the future direction of commodity markets, a key driver of the British CPI. There’s renewed fears that a still crumbling housing market and high unemployment will push the US-economy into a “double-dip” recession, - rattling world stock markets. Rallies in key industrial commodities are unraveling, as China’s housing bubble has peaked and factory output is falling, following tightening moves by its central bank. Japan’s economy is suffocating from a strong yen, and Greece’s 10-year bond yield is +900-basis points above German yields, indicating the Euro-zone debt crisis is still brewing beneath the surface. Any of these time bombs, if they explode, could rock the global economy and industrial commodities.
A poker-faced BoE chief is privately worried about the possibility of Japanese style deflation spreading to Western nations. BoE chief King thinks any triumph against deflation is illusionary, and instead, believes the CPI gauge has already peaked and would eventually fall under its 2% target within a year, because of “substantial spare capacity in the economy, though policy makers are very conscious of price risks.” Mr King refuses to rule out a further expansion of the money supply – “QE-2,” even after the BoE monetized 90% of the UK’s budget deficit in the past fiscal year. “We stand ready either to expand or reduce the extent of monetary stimulus as needed,” he said. So far, Mr King’s prognostications are on target. The DJ-Commodity Index’s inflation rate has flattened out, at a lower plateau, up +10% from a year ago, after peaking at +24% in February, while the British CPI has eased to +3.1%. On August 18th, the BoE voted 8-1 to keep its base lending rate pegged at 0.50% and its bond-portfolio steady at 200-billion pounds. “The committee considered arguments in favor of a further easing” and “there were also arguments in favor of a small increase in bank rate. Increases in the prices of some agricultural commodities suggest that the increased volatility of CPI inflation in recent years might continue.” Still, “the weight of evidence continues to suggest that the margin of spare capacity is likely to bear down on inflation,” the BoE said. To read the rest of this article, click on the hyperlink below: http://sirchartsalot.com/article.php?id=142 ### Gary Dorsch 321gold Ltd |
