How UK households defied the Bank of England's
rate-cut ritual...
YOU'VE heard the phrase "Cargo
Cult" no doubt, says Adrian Ash at BullionVault.
Japanese and American troops fighting WWII regularly
landed food and supplies onto small Pacific islands.
Troops would clear some forest as an airstrip, set up
lights to guide the pilots, and then call in the drops or landings by
radio.
Local tribes saw all this. So when the troops left after
as war ended, they tried to bring in food and supplies by repeating the
process...
...making a clearing, lighting small fires on it, and
talking into sticks and boxes.
The European Central Bank tried much the same this week,
telling a press conference how it is going to print money to fix the economy
while holding interest rates at zero or below. Because like all central banks
today, it thinks easy money will push people into borrowing and spending, not
saving.
But this ceremony has failed to work any magic for the
Bank of Japan since it began ZIRP and QE at the start of this century. The
world's third-largest single economy remains mired in deflation, with people
still saving – not borrowing or spending – 15 years after it started.
The Bank of England has failed abysmally here in the UK
since it took rates to 0.5% and started QE precisely 6 years ago too. That's
some achievement given the taste which UK households, as a group, had for
borrowing and spending back when rates were 10 times this level.
Yet faced with near-zero rates and a surge of monetary
inflation since March 2009, UK households have moved to repay debt and save,
not borrow more.
Saving, not spending, is what UK households did when
interest rates rose in the 1970s and '80s. So by cutting rates, the logic
still runs, the Bank of England would in fact boost spending.
But no. UK households first slashed their bank debts by 10
pence in each Pound, as this second chart shows, and then failed to start
raising new loans again. They meantime continued to add to their bank
savings, albeit half-as-fast as they did before the global financial
crisis.
Net result? UK households, when you compare the sector's
total bank debts against total bank deposits, now have a net positive balance
for the first time since 1988, having hit a £300bn deficit just as the global
financial crisis broke.
"Why isn't it working?! Turn that dial, twiddle that
knob, pull that lever!"
One big problem for the 'transmission' of
zero-rates-and-QE to household spending was the UK regulators' sudden dash to impose tight lending standards
after the crash. Stable doors and bolted horses, of course. The Financial
Services Authority (RIP) ordered the banks not to lend except to the very
safest risks, even as the Monetary Policy Committee tried after 2009 to stuff
lenders full of cash they could lend out.
But as the government has also complained of the regulators suddenly finding religion,
because lending standards for household borrowers have been easier than those
applied to small businesses – another key sector the Bank of England wanted
to borrow and spend. So the retreat of UK household debt, and the overall
shift to net saving, does reflect a choice not to borrow. A choice which
basic central-banking theory says couldn't happen when interest rates were
slashed to record lows near zero.
Look, I'm far from the first person to call modern central banking a cargo cult...a make-believe
ritual calling forth growth by trying to conjure new debt and spending. But
as the Bank of Japan's increasingly insane policy shows, the worse this fake
science fails, of course, the crazier central banking will get. And as one of
the UK's most successful investors noted last week, "The unintended
consequences of monetary experiments on such a scale are
impossible to predict" (see page 5).
One consequence, at least on the evidence so far, is that
more and more savers will turn to gold and silver for some rare, tangible,
indestructible sanity. Okay, such investors might be re-enacting a cargo cult
all of their own. Nothing mechanical says bullion prices must rise when
interest rates sink and central banks pour money-from-nowhere into the
financial markets. But it's a simple guess which a growing number of people
make when they see crazy central-bank voodoo trying to burn their savings as
an offering to the gods.
Indeed, gold's long bull market starting in 2001 began
"within days" of the Bank of Japan first trying QE, says a note
this week from analysts at BNY Mellon. It lasted more than 10 years. Gold's
sharp rally from sub-$700 during the Lehmans Crash then "came within a
week or so" of the US Fed starting QE in late 2008. From there, gold
rose 175% to the peak of 2011.
This week, the European Central Bank finally gave details
of its $1 trillion QE programme. And as BNY Mellon note, gold's upturn from
late 2014's sharp lows came as the ECB...formerly "the most hawkish of
the major central banks"...finally said it was getting ready to launch
QE to fight deflation.
"History therefore suggests that...the current move
could last for far longer and travel much further than might commonly be
expected."
Perhaps. But if so, most investors will struggle to see
its early stages, especially in Dollar terms. Still, markets turn when the
fewest people can see it.