|
The Bank of England's quarterly
inflation report forecast UK inflation of just 0.5% in 2 years time, with the
UK economy now forecast to have fallen by GDP 4% by the middle of this year. It
was not so many months ago that the Bank of England was forecasting growth of
2% for 2009.
Bank Governor Mervyn
King implied by his accompanying statement that he does not have a clue what
he is doing, as the UK economy under his and Gordon Browns collective
stewardship continues to fall off the edge of a cliff, the Bank of England
Governor stated :
“The United Kingdom economy is in deep recession. The length and depth of the recession will
depend to a significant extent on developments in the rest of the world,
where a severe economic downturn has taken hold.”
- The economy faces its
deepest recession since the post-war years of 1945 and 1946, and its
worst peacetime decline since 1931.
- The Bank is likely to
reduce interest rates further, perhaps to as low as zero, in an attempt
to prevent the downturn becoming worse than the depression in the 1930s.
It will resort to new drastic measures to pump extra cash into the
economy as soon as this week.
- Unemployment – which
hit 1.97 million yesterday – will rise further and
house prices will continue to fall in the coming months.
My commentary during
the summer months of 2008 seems to have been proved accurate in that the BoE
MPC at those monthly meetings remained paralysed by the fear of inflation and
more or less sat sipping tea and conversing about the weather whilst the
economy continued to burn towards the fourth quarter crash.
What is the
Governments Solution ?
Quantative Easing aka
Printing Money - The consequences of which are that Britain is at increased
risk of bankruptcy as I first warned off in April 2008 following the first
print run of £50 billion by the Bank of England and reiterated on a
near monthly basis since (archive), with the most recent article
( UK
Interest Rates Crash to 1% New Record Low) updating to the current
position of Britain's path towards bankruptcy.
The British Pound
responded to the Bank of England's report by resuming its bear market after
the correctly forecast bounce from £/$1.37 to above £/$ 1.45 and
now again on route towards parity to the U.S. Dollar. (21st Jan 09 - British Pound Panic Selling, Counting Down to Bankrupt Britain )
FSA - Who Should
Regulate the Regulator?
To illustrate the
point in how wide the gap is between competent regulation of the UK banking
system and how it is actually being regulated by the FSA, not just before the
credit crisis broke in August 2007, nor in the immediate aftermath which
witnessed the run on Northern Rock Bank, but to this very day some 18 months
on as witnessed by the resignation of Sir James Crosby, Gordon Browns own
appointment as the Deputy Chairman of the FSA on allegations that during his
tenure as the head of HBOS (Halifax), he sacked Paul Moore due to the alleged
complaints he had made about the banks risk taking that had not been properly
minuted at HBOS board meetings.
Deflation of 2009
Will Eventually Turn to Inflation
My earlier analysis
of the UK inflation 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 expectations are for similar deflation across
the world, as deficit spending stimulus packages cannot hope to compete
against the loss of asset values which are in the order of ten times the
amount of planned stimulus. The analysis also concluded in that the immediate
risks to the forecast are to the downside i.e. prices spiking lower than
expected.
 
This therefore
implies for further stimulus packages far beyond that which have been
committed to date, with all of the associated consequences of collapsing
currencies under the weight of growing deficits and liabilities which sets
the scene for higher future inflation as the deflationary impact of collapse
in crude oil during the second half of 2008 starts to leave the inflation
indices during the second half of 2009, thereafter the deflationary forces of
contracting economies will compete with the inflationary forces of money
printing and rising commodity prices.
For more on the
impact of deflation, download the world's foremost expert on and proponent of
the deflationary scenario,Robert Prechter's FREE 60-page Deflation Survival eBook or browse various
deflation topics like those below :
UK Interest Rate Forecast 2009
The February rate cut
to 1% fulfills the forecast target for 2009 (4th Dec 08 - UK
Interest Rates Forecast to Crash to 1% ). ,The next stop would be a
similar Zero Interest Rate Policy (ZIRP) as that adopted by the United States
that have cut their interest rate to 0.25%.
Whilst the base
interest rate stands at 1%, the 3 month libor rate is at 2.14% and the real
economic interest rate is at 3.54%, which clearly indicate evidence that the
banks are still refusing to the lend and in-effect hoarding government
bailout cash injections much of which is being used to reward bonuses to
culpable staff.
Deflation Investing
Strategy
Now again I need to
emphasis that during economic contraction most asset prices will fall i.e.
stocks and housing, other assets such as industrial commodities such as crude
oil and base metals will formulate a saucer shaped bottoming pattern. Others
will lead future inflation higher i.e. agricultural commodities, and then we
have the alternatives to deflation AND inflation as embodied by gold and gold
stocks that follow a more volatile pattern based on investor fear (See Jan 09
- Financial
Markets Forecasts for 2009 )
MY strategy as I have
iterated over the past 4 months is basically to drip accumulate assets at
rock bottom prices during the current deflationary crash of 2009. That means
rock solid dividend paying stocks, commodities (especially oil and
agricultural) and inflation linked bonds. Deflation is temporary and WILL
give way to much higher inflation. (Oct 2008 - Stocks
Bear Market Long-term Investing Strategy )
The indepth forecast
for the UK recession in terms of GDP contraction is underway, to receive this
in your email in box on the date of publication subscribe to my always free email newsletter.
Nadeem Walayat
Market Oracle.com.uk
Nadeem Walayat is the editor of
MarketOracle.co.uk.and has over 20 years experience in trading and investing.
| 
