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Yesterday I toured
the Bank of England accompanied by the lovely Miss Puddy. I suppose it
was just coincidence that Mervyn King decided to drop the interest rate to
½% on that same day for the lowest rate in 315 years by the BOE.
Trichet followed suite just a half hour later and lowered the European Central
Bank rate to 1.5% (its lowest rate ever).
But Mr King is taking
it a step further by injecting 75 billion pounds (with another 75 billion pounds
in the near future) directly into the economy with its open market operations
by purchasing government & commercial bonds.
We will now see if
Milton and Anna were correct. We will see if the economy is a simple
machine where the mandarins can spin a few dials and pull a few levers and
everything will be just rosy in a quarter or two. After all it
worked in Japan – didn’t it?
During my travels
this past few weeks meeting with business associates as well as talking with
different people from around the world I have come to an opinion that is a
bit different. I sense that there is something in the air that has not
been felt since the mid to late 1970’s when people actually wondered if
inflation was going to get out of hand. I SMELL FINANCIAL FEAR.
While touring the Bank
of England’s museum one of the exhibits was a hot air balloon where you
could try your hand at flying the inflation balloon at an altitude of
2%. When the economy cooled down you simply lowered the interest rate and
juiced it a bit. When the economy heated up you raised the interest
rates and released a bit of hot air. Just that simple - dials and
levers to adjust at the central bank and it is smooth sailing. The economy
is a bit of an organic living thing. The invisible hand of Adam Smith
is an example of the decisions of millions of individuals all acting on their
own to fill needs in society. The economy works IN SPITE of the actions
of governments and central banks and NOT BECAUSE of them. But now I
have to wonder if the arrogance of government intervention will not overcome
the markets. Misallocation of capital on such a grand scale has only been
tried in the old USSR and we all know how that ended up.
Excessive consumerism
through borrowed money has never been sound policy but that is exactly what
the mandarins now want. In spite of the fact that no country has ever
spent itself into prosperity with borrowed money that is exactly the heart of
the government’s plan. The people that I have talked to are having
none of it. Everyone I spoke with is talking about paying down debt,
driving their cars longer, wearing last years fashions and making
due. I would not even be surprised for austerity to become in
vogue. It really doesn’t matter how low the interest rate is this
week – people are not in the mood to take on more debt in this economic
climate. People are all running for the safety of a financial
harbor. Cars are piling up in manufacturer’s lots and the government
wants to subsidize the manufacturers to make more of them. If there are
no buyers that sort of plan is doomed for failure.
To make matters
worse this new lower interest rate has arrived at the very time that governments
around the world are suffering from decreased tax revenues and are foolishly increasing
spending. This is causing deficits to soar. The lower interest
rates are making government bonds look as attractive as Cinderella’s
step sisters. With no Prince Charming (or sovereign wealth funds) to
gallop in and buy them up is monetizing the debt far behind? Do you really
trust the same people who manage the post office to run the economy? The
big plan is to inflate our way out of this mess but not to worry they won’t
let things get out of hand. I would imagine they said the same thing a
few years ago in Zimbabwe.
In the meantime rig
for storm, head for a financial harbor and get some of your assets to the
safety of precious metals.
Larry Laborde
Silver Trading
Company
www.silvertrading.net
Larry lives in the occupied South with his wife Puddy and sells
precious metals at the Silver Trading Company. Larry can be contacted
at llabord@aol.com. You can view
his web site at www.silvertrading.net.
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