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 The Bank of England
fired the fifth shot in its series of panic interest rate cuts that have
taken the base interest down from 5% in October 2008 to 1% today. This
follows the crash in UK GDP for the fourth quarter of 2008 which contracted by
-1.5% and is inline with earlier analysis that projects towards an additional
3% GDP contraction for 2009.
Monetary Policy is
failing which is prompting the government to adopt quantative easing
"money printing" this can take many forms, but that which has the
greatest impact is the Bank of England buying government debt, which has the
direct effect of devaluing the currency as the supply of money soars. Printing
money has never EVER been the answer, history is littered with the political
elite opting to take the short-term quick fix at the direct cost of the
long-run. In today's Britain the clear objective is for the Labour Government
to work towards the May 2010 election deadline which has prompted policies
that are destroying Britain's wealth and future growth which has been
reflected in the crash in sterling against all major currencies of more than
30%, for the government cannot hide money printing from the currency markets.
Similarly UK debt has been marked lower in the wake of the increased liabilities
of the banking system that the Tax payer is guaranteeing.
Unfortunately the
government and the Bank of England are destined to repeat the mistakes of
past money printing exercises which is most notably remembered in Germany's Weimar Republic that resulted in hyper inflation which destroyed the wealth of savers and
investors. The country at a best case scenario seems destined for many years
of stagflation AFTER recession, with the worst case scenario being that the
British Isles is just a big version of Iceland with all of the consequences
of unserviceable liabilities leading to an economic depression that wipes out
as much as 30% of the countries GDP and literally wipe out all of the
increasingly illusory debt fueled gains of the 11 years of the Labour government.
UK Interest Rate
Forecast 2009
The rate cut to 1%
now 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 has cut its 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.
Inflation to Follow
Deflation
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.
The current concern
amongst investors is the implications of deflation on portfolio allocation
for primary asset classes of cash, real estate, stocks, bonds and commodities
during 2009 and beyond, with that in mind Robert Prechter has made available
for free his in-depth 60 page Deflation Survival Guide e-book.
Bankrupt Bailed Out
Banks Rewarding Staff for the Destruction of their Financial Institutions
Bankrupt Zombie banks
being kept alive by over £800 billion of tax payer capital injections,
loans and guarantees are paying staff that should have been made redundant
for gross negligence and incompetence that borders on criminality bonuses
that total in the billions. The fallout of what to all intents and purposes
amounts to fraud on a monumental scale that has brought Britain itself to the
verge of Bankruptcy is playing itself out right across the land as the
economy falls off of the edge of cliff as the banks increasingly refuse to
lend. There needs to be a wholesale clear out of the UK banking system which
means making ALL those who had ANY part in the crisis in their respective
institutions redundant, including scrapping all of the board of directors of
the banks in which Britain now has a direct capital stake and literally
unlimited exposure.
Gordon Brown
Bankrupting Britain
Gordon Brown is well
on the route towards bankrupting Britain as the liabilities by 2012 will
exceed £3.5 trillion from £1.5 trillion at the end of 2007. The
prime consideration for the Prime Minister is clearly to win the next
election at ANY COST.
The above liabilities
do NOT include the £5 trillion of additional liabilities should the
government be forced to nationalise virtually the whole banking sector. However,
again people need to realise that the future gets discounted in the present,
which is why the Bank of England, Treasury and Government policy makers do
not comprehend that they cannot embark on the route towards £3.5
trillion plus of liabilities without the market reacting by selling out of
the currency long before the country arrives at the debt destination. The
effect of this is to make the current crisis far worse as the market seeks to
discount the over 80% of the £5 trillion banking sector debt which is
denominated in foreign currencies. Therefore the facility to inflate out of
debt through "Quantative Easing" does not work, as the repayments
have to be made in foreign currencies against which the countries debt burden
rises as the currency falls and therefore puts Britain's banks under greater pressure.
The impact on the economy is deflationary whilst import prices rise thus
suggesting a stagflationary outlook or worse.
On top of ever
expanding public liabilities that at the end of 2008 stood at an estimated
£2 trillion, there is also the private sector debt of £2 trillion
weighing down on the economy and sterling.
Time is running out
for the government, forget 2011, 2010, even mid 2009, a currency collapse
would bring the debt crisis to a head within a matter of days. Just as
occurred with Iceland as it did not take 3 or 4 years for Iceland to collapse
into hyper-inflation, it took 3 or 4 days!, as I warned off in the article Iceland
Going Bankrupt? , and subsequently warned that all of the conditions
that led to the bankruptcy of Iceland are present in the UK.
Sterling's recent
fall to below £/$ 1.37 is extremely worrying as it implies the ultimate
trend after allowing for the subsequent corrective rally is towards parity to
the U.S. Dollar. What does this mean for ordinary people? It means your house
prices will not have been DEFLATED by the projected 38% nominal price trend (UK Housing Market Crash and Depression Forecast 2007 to 2012), but rather
DEFLATION of 69% on an exchange rate basis, add to that the INFLATION of an
increase in import costs across the board, and you have the potential for an
Iceland style collapsing economy with hyper inflation that destroys the REAL
VALUE of peoples investments and savings.
How Britain Could Prevent Bankruptcy and Currency Collapse
Tax Cuts - Raising the tax
free allowance would immediately put cash into peoples pockets, this is far
more effective than the 2.5% VAT reduction that has had ZERO impact on the
economy following its implementation at the beginning of December 2008.
Public Sector
Pensions Liabilities- The government needs to take urgent action to bring
the public sector pensions inline with the private sector pensions, which
effectively means that the amount of retirement benefits is reduced by 2/3rds
as the current growing liability is unsustainable and will mean a huge burden
on tax payers that will start to be felt in the near future and is already
being factored onto the prospects for the UK economy by foreign investors.
Budget Surpluses by
Cutting Public Spending - The
public sector is unproductive, it always has been and always
will be, for instance for every extra £1 spent on the NHS only results
in 10p increase in output. Now that the productive private sector is
contracting fast as the once highly profitable financial sector goes bankrupt
and increasingly takes many corporations that were barely able to survive
along with it in the meantime the unproductive public sector continues to
grow and demand ever larger resources which is resulting in the large
increase in the budget deficit and hence borrowing, the government needs to
be forced to stick to balancing the budget which means severe cuts in public spending and
increases in taxes so as to pay down Britain's debt to
prevent the country from spiraling into hyperinflation.
The Bankrupt Banking
System - The banks are sitting on huge undisclosed losses that run to over
£1 trillion. Unfortunately the only answer here seems to be for a step
by step systematic nationalisation of the banking system, where each bank is
taken over, its debts written off, restructured and quickly re-privatised in
a form where retail banks only operate based on the amount actually
deposited, i.e. the interbank market can no longer be called upon by any
retail banks. The same should apply to other critical financial institutions
such as insurance companies. The statements by Mervyn King and Alistair
Darling of forcing the banks to lend is naive or foolish or just plain
ridiculous, because they cannot lend because they are virtually all BANKRUPT
! And any capital that they do have is being closely guarded in an attempt to
survive the Banking Crisis, the last thing the banks want to do is to lend to
corporations that may go bust just as we fall off the economic cliff into a
deep recession.
Saving Initiatives - To enable the
banks to increase the amounts available to lend the government needs to make
saving a far more attractive option than it currently is. This could be done
by greatly expanding the amount that can be saved tax free which currently
stands at £3,600 per annum per person. A more radical approach would be
to index savings against a fall in the currency just as bonds and savings
certificates are available that are indexed against RPI inflation.
Join the Euro - The last resort
for Britain is for monetary union with Europe. The benefit will be that the
falling currency problem related to the issue of debt and underwriting of the
banking system is diluted as the currency then has far, far more reserves
backing it then that for the British Pound alone would be left to suffer a
currency collapse. This is effectively what the Irish did when they
guaranteed all bank deposits at 100%, for if they had been outside of the
Euro then they would have been on the fast track to where Iceland is today as
no way could Ireland meet such as liability.
The above measures
would be extremely painful but but with a light at the end of the tunnel which
is far better than the debt fuelled path to bankruptcy that Britain is now
upon where as I have mentioned many times during 2008, what lies at the end
of the current path is the Weimar republic that resulted in the total loss of
value of the German currency and savings due to hyper inflation.
Rate Cut Winners
The clear winners of
economic and financial incompetence are resources that are in limited supply
i.e. cannot be printed such as the precious metals, and other commodities,
more so as sterling is expected to resume its bear trend following the on
going bounce from multi-decade lows against the Dollar and Euro which was
correctly called some 2 weeks ago. (21st Jan 09 - British
Pound Panic Selling, Counting Down to Bankrupt Britain ). The lows in crude oil
and other commodities, in my opinion gives investors a near once in a
lifetime opportunity to accumulate at near rock bottom prices!
Many borrowers are
seeing their mortgage interest payments evaporate, especially those for whom
rates are fixed inline with the base rate or the lucky few that still have
rates that are discounted to the base interest rate. However standard
variable rates remain significantly above the base interest rate i.e. in
excess of 3% with many instances of rates above 4%, therefore most borrowers
are not benefiting from the unprecedented rate cuts.
Rate Cut Losers
The clear losers are UK savers where instant access accounts now as the norm pay less than 1%, still there are
some accounts that will pay as much as 3% especially if fixed for a period of
time. It seems like another era back in October 2008 when I was warning
of imminent deep interest rate cuts and that savers had a short window of
opportunity to fix rates of above 7%. However as deflation gives way to
inflation we will see UK interest rates start to rise again during the second
half of 2009, the only question is will we also see panic interest rate hikes
on the way up ? i.e. as the risks of hyperinflation grow as a consequence of
Wiemar-esk money printing.
Bottom Line: Deflation is
temporary and will give way to much higher inflation. Panic Interest Rate cuts will be eventually
followed by Panic Interest Rate Hikes. Take the bounce in
sterling to diversify into other currencies, commodities and markets as money
printing is extremely bearish for sterling and all currencies in relative
terms.
Financial Market
Forecasts for 2009
The stocks bear
market has reasserted itself in response to bad earnings reports and economic
data accompanied by revised IMF forecasts of marked slow down in global
economic growth. The stock market trends are in line with the forecast for
2009 that targets new stocks bear market lows for the Dow of 6,600 and FTSE
3,400 as per my earlier newsletter and associated syndicated
article of 22nd January.
Gold - Reports that
Goldman Sachs sees gold breaking above $1000 within 3 months, though Goldman
Sachs also saw crude oil at $200 by the end of 2008 so drawn your own
conclusions as to what the master market manipulators are upto, distribution
into weak hands? My own take on gold remains as per analysis of 22nd Jan
($850) - Gold is targeting $960 by March to be followed by a downtrend back
below $850. Also U.S. Treasury Bonds continuing to trend lower by targeting
$120.
The soon to be
published in-depth UK Recession Watch aims to forecast how deep the UK recession will go and implications thereof.
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.
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