Bank of England Considers "Nuclear Option" of Massive Money Printing

Gold fell nearly 0.6% yesterday on light volume as the dollar was mixed and oil and most commodities fell sharply again. Gold in euros and particularly British pounds rose sharply when interest rates were slashed by the ECB and BoE. Both central banks indicated that more cuts were likely. Gold has given up some of yesterday’s gains but remains firm in British pounds and Euros at £526/oz and €604/oz respectively.

Internationally, central banks are racing towards an unprecedented ZIRP policy or zero interest rate policy and this will likely put pressure on the value of all currencies and be very supportive of gold in the coming months.

Buyers again held back yesterday and all eyes are now focused on the release of U.S. nonfarm payrolls data later today. Nonfarm payrolls are expected to be poor (economists expect US employers slashed nonfarm payrolls by 320000 in November, which would be the sharpest drop in employment since 2001) and this should put pressure on the dollar and equity markets.

Bank of England Considers "Nuclear Option" of Massive Money Printing, Monetising Debt and Direct Injection into Economy

The Telegraph’s economics editor, Edmund Conway, reports today that the Bank of England is working on radical plans to inject cash directly into the economy as a last resort to reverse a slide into recession.
The Daily Telegraph said the Bank was "working on radical plans to inject cash directly into the economy -- the nuclear option to be used only when interest rates approach zero."

The report said the Bank was considering engaging in "quantitative easing" -- printing more money to reflate the economy.

"Measures under consideration include direct purchases of assets, such as government debt or commercial investments, by the Bank or the Treasury, as well as expanding the Bank's balance sheet, a means of pumping extra cash into the banking sector," the newspaper said. The report said the proposals could be put into action within weeks.

Added weight was given to the proposals by European Central Bank President Jean-Claude Trichet, who seemed to hint in the press conference to announce the ECB's 75 basis point rate cut yesterday that it may also consider "nuclear options".  "We will look at what is necessary at any period of time," he said. "If new decisions are needed, we will take new decisions."

An adviser to U.S. President-elect Barack Obama told BBC’s ”Newsnight” late on Thursday that central banks may have to engage in direct lending to lift the economy. Robert Reich, a former U.S. Labour Secretary and a member of Obama's transition economic advisory board, told "Newsnight" that "it is probably going to be necessary for central banks all over the world to get more involved in direct lending."

Speaking on the same programme, Martin Sorrell, chief executive of WPP Group, the world's second-largest advertising company, said that "if we do have quantitative easing, which I think will increasingly come to the fore, we are going to have very significant inflation in the future." On the economic outlook, 2009 will be a "very, very tough year," Sorrell said.

Given the extent of the declines seen in asset prices, commodity prices and especially oil prices and the nature of the international credit crunch it is understandable the deflation is the the topic du jour and increasingly the sole worry of most economists (particularly uber Keynesians) and now investors. They are right to be concerned regarding this deflation however the real threat, particularly over the medium to long term is that of inflation due to quantitative easing, monetizing debt and money printing internationally on a scale never before seen by mankind.

The end of result of ZIRP, quantitative easing and monetizing debt by printing money to buy their own bonds is likely to be a very sharp global inflation (as warned of by Martin Sorrell) and possibly even hyperinflation and a global monetary crisis (with the dollar and pound at its epicenter).