Protect your wealth as the Bank of England goes for broke

2013 is the year that the myth of the independent central bank is finally, and brutally, put to rest.

In the US, it’s never really been an issue. Both the central bank and the government have always pandered to Wall Street, so there’s never been a conflict as such.

In Japan, any pretence of independence is gone. New prime minister Shinzo Abe has effectively told the Bank of Japan to weaken the currency and kickstart inflation, whether it likes it or not.

And here in Britain, chancellor George Osborne can barely conceal his desire to get Bank of England governor-to-be Mark Carney in the hot seat. He’s desperate for the UK economy to show signs of growth before the next election.

Unfortunately, desperate men have a tendency to make mistakes. Which is why you should take steps to protect your wealth now…

The myth of independent central banks

The theory behind having an independent central bank is that it provides a bulwark against the electoral cycle.

Naturally, when election time rolls on to the horizon, the party in power wants the economy to be doing well. In Britain specifically, you ideally want house prices to be rising, so that the average voter feels richer than they did last year.

The easiest way to do all this (at least, it was the easy way at one point) is to cut interest rates. Sure, it might ignite inflation somewhere down the line, but as far as politicians are concerned, as long as that happens after the polls are closed, who cares?

So having independent central bankers with the power to say “no” to politicians seeking short-term gain is a seductive idea.

It’s also complete nonsense, of course. As Richard Woolnough at M&G points out, “politicians in the UK have played loose with fiscal and monetary policy over the years”.

Even the creation of the Bank of England’s inflation target in 1997 “aligned the economy to the electoral cycle in Tony Blair’s first term”. And then “the amendment of the consumer price index target by Gordon Brown in 2003 brought a handy monetary stimulus ahead of the 2005 election”.

In other words, a central bank is only independent for as long as the government of the day wants it to be – that is, for as long as it does what it’s told. If it isn’t doing what it’s told, then the gloves come off.

George Osborne has already explicitly called for looser monetary policy. As Chris Giles notes in the FT, yesterday he argued that the government’s action to tackle the deficit “means that… monetary policy action by the Bank of England can and should continue to support the economy”.

The problem is very simple.

As one of our Roundtable experts notes in the latest issue of MoneyWeek magazine (out tomorrow – if you’re not already a subscriber, get your first three issues free here), the coalition has realised that under its current plans, growth isn’t going to come back in time to get re-elected in 2015.

So if they want to stay in power, they have to change tack. But they can’t look as if they’re doing a U-turn from their ‘austerity’ plans. So the burden will fall on the Bank of England.

The coalition’s desperate bid for growth is bad for the pound

Trouble is, the government is running out of time. Changes in monetary policy don’t take effect right away. Depending on who you ask, the time lag can be anything from nine months to two years. So in theory, anything the Bank of England does now, won’t show any results until at least 2014.

With Carney taking over in summer, he won’t have much time to get cracking. So as far as Osborne is concerned, now’s the time to go for broke. If the government can at least talk up the prospect of looser monetary policy, then the markets might start to price it in that bit earlier – perhaps by sending the value of the pound even lower.

After all, it worked for Japan. The mere prospect of Abe’s election and the idea that inflation might return, sent the yen tumbling, and it hasn’t stopped since.

Of course, you could argue that the weak pound is the last thing we need. After all, it hasn’t made that much difference to our export picture. Meanwhile, persistently high inflation has meant that the average wage is falling in real terms, which is hardly good news for consumer spending.

But if slack monetary policy is the only tool you’ve got, then it’s the one you’re going to use. So expect sterling to suffer this year – the government wants it to.

As we noted last week in MoneyWeek magazine, this is why you need to have a diversified portfolio with exposure to currencies other than the pound. And as I’m sure we’ve mentioned before, we’d hang on to gold as portfolio insurance – it’s the one currency no one can print.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • simpleton

    Agree with the thrust but I think you’re too optimistic on the timing – inflation will be on the rise well before 2014 – the pound is going to hell in a handcart and the journey has already begun well before Carney sits on his throne. The mere appointment of this guy indicates that the government has thrown in the towel and is now backing an inflationary mandate. Time to abandon ship.

  • Tiredofnonsense

    Just as someone in a hole should stop digging, a government in debt should stop spending. Cut the whole welfare binge, pay off debt, raise interest rates and strengthen the pound. So simple it’s amazing it hasn’t occurred to them.

  • john

    It seems that both monetary policy and energy policy are increasingly being driven by political expediency as the government desperately strives to create the impression that the economy is reviving before the next election. As your article states, the timescale may be too tight for the monetary policy to impact on the economy (although perhaps share prices may respond in time) and there is much the same problem for energy policy as the proposed R&D tax credits for shale gas exploration are unlikely to result in a cheap energy bonanza in time for the next election. In fact it may be the successor government that benefits from this.

  • Chester

    2013 should also put to rest the myth that central banks can create and control sustainable outcomes

    They can make a total mess of things and fall prey to the inescapable “law of unintended consequence”. They have done that for generations. But the myth that they will generate growth through debt creation, at a time when social mood calls for debt destruction will be exposed for the stupidity that it is

    Bernanke’s stated aim to lower interest rates hasn’t worked – they have risen since he announced QE3, and will continue to do so as bond markets finally wake up. Abe and Carney will fail to generate growth, and maintain insane levels of Govt spending because the inflationary cycle has turned to deflation, irrespective of what they do

  • Aff

    I like your thinking Tiredofnonsense. That would seem obvious, however I find it hard to imagine they aren’t even aware of that possibility, which makes me wonder… really, why aren’t they doing it?

    And another thing, why aren’t people really punished for Libor fixing for example?

    Central bankers have a deliberate policy of inflating huge booms and making massive busts which they’ve been doing for generations. In this way they consolidate wealth, power, assets etc taking it from under the noses of the productive population. The most bizzare thing is that people don’t question it.Why are central banks allowed to exist?

  • Aff

    I like your thinking Tiredofnonsense. That would seem obvious, however I find it hard to imagine they aren’t even aware of that possibility, which makes me wonder… really, why aren’t they doing it?

    And another thing, why aren’t people really punished for Libor fixing for example?

    Central bankers have a deliberate policy of inflating huge booms and making massive busts which they’ve been doing for generations. In this way they consolidate wealth, power, assets etc taking it from under the noses of the productive population. The most bizzare thing is that people don’t question it.Why are central banks allowed to exist?

  • cookie

    Just a repeat of the Ken & Eddie show but now the politicos can hide behind the MPC independance HaHA When it goes wrong somebody else gets blamed ie Bankers again only doing the policy makers bidding ie no more boom and bust Dream on . Real world is scary when this lot are in charge

  • Headhunter

    Gordon Brown never gave independence to the Bank of england – that was just the Press Release. He took away its authority for bank regulation and control of the money supply – that’s why we’re in deep doo-d0o now.

  • Bob

    My thoughts also Changing Man – devalued sterling has foreigners buying FTSE stocks????

  • Jo

    Good article except that it is the central bankers that are in the driving seat. The government is nothing more than middle management between the queen, bankers and the civilians.

    If anyone really thinks that the bankers/gov are stupid then think again. They know exactly how to fleece savers and mortgage holders all at the same time by rising inflation, stagnant income and high house prices. Likely that Merv lost a bit of nerve, expecting riots etc so a stronger psychopath has to be brought in. One sure bet is the bankers/gov being more than surprised that it has been so easy for them to fleece the whole world.

    The illusionary feel good factor for those with property is only a by-product of this wealth cull. The majority selling one overpriced house to buy another one.

  • Mickey

    You’re overlooking the fact that due to our large reliance on imports, inflation goes up as soon as the pound goes down and this is more of an issue with most voters than the state of the economy.

  • Alec

    The government has only one policy and that is to keep house prices fully inflated regardless of the consequences.

  • Rob

    been watching chinese rmb for the last 2 years … my ticker shows that it’s dropped well below 10rmb to the pound in the first time i can remember (9.825 to be precise) . That feels ominous to me …

  • Boris MacDonut

    #2 T O Nonsense. If everyone stops spending ,how do you propose we get out of the mess? One man’s debt is another’s asset.
    We need to start spending, spending big. The toff’s penny pinching ain’t working.

  • Beta adjusted

    Its all about inflating away the huge debt pile, and hoping that nominal growth will hoodwink business into investing (thus creating jobs). Trouble is, that its never worked before. So its an act of desperation. But what is the government to do? or if you are really really cynical, you will think that its an elaborate ploy to bankrupt England so that we have to go cap in hand to the EU? why not? thats whats happened with all the periphery countries and it seems to be working. Its also happened before.

  • Ellen

    There is very little to argue against when you talk about George Osborne’s lazy economic solutions. And it should bring it home to everyone that those who prepared for the future are now, and will continue to, subsidize those who ran out and bought stuff they couldn’t afford, including houses.

    And they want to gibly continue to pass the bill to those who are not yet born, in the form of QE. Is George Osborne’s miserable career really worth what we’re being asked to pay for it?

  • Colin Selig-Smith

    I’m with Boris, we have to beggar the poor, the widows, orphans, the pensioners. All the deprived riffraff.

  • Realist

    Boris,
    To spend your way out of this mess would only work in the short term. Too much spending and debt got us in this trouble in the first place, by creating ‘bubbles’ everywhere. We are in limbo land, nothing has been corrected. Tiredofnonsense is correct in their method. Ok it will be very hard and messy(which is why the Gov won’t do it) but it will get the desired effect. Then we can start again and prosper.

  • Aff

    Hi Boris has your handler told you to move into this thread and muddy up the conversation or something? We getting a bit too close to the truth for you and your banker buddies?

  • Beta adjusted

    But the whole argument about saving/spending is too simplistic since we’ve had a huge change in the distribution of wealth on the basis of a mechanism (debasing currency/credit bubble) which the vast majority of people would regard as criminal, regardless of whether they themselves have benefited from it. Its struck at the very foundations of the value system which underpins our society.

  • Malkovich

    #14 Boris, hey – why don’t the BoE mint a 1 trillion pound coin and then give that to the government to spend. Then again why not make it 100 trillion. We could really spend, spend, spend our way out of this problem then?

    Good grief!

  • Boris MacDonut

    #21. Excellent idea Malkovich ,but I think a series of £100billion coins would be more manageable. Our economy needs demand.The Government’s mantra is telling everyone to stop spending and it helps nothing. We recovered from the 30’s depression because we spent loads and we don’t need a war this time,just some decent infrastructure projects. £100billion would make a nice start. QE as, you know,just goes into the banks reserves so is a less good option.
    #19 Aff. This is all my own work . I have no “handlers” and no need to feel part of the gang by simply regurgitating what I hear others say.

  • Aff

    Alright Boris I’ll trust that you are merely deluded rather than an agent of disinformation with malicious intent then.

    I think you are wrong that the govt is telling everyone to stop spending though. People have stopped spending because they are short of money. The govt would love people to be spending so we could ‘grow our way out of trouble. HA! You think we are having green shoots of recovery I suppose. Why then are interest rates still held near zero? We are in a depression.

    Inflation in things like food and energy is rampant (despite the lies in the govt stats), horse meat is appearing in our meat, wages are stagnant not all people work in finance and get huge bonuses you know. Open your eyes man. Keynesian policies and spending money we don’t have IS the cause of this mess. Recovery won’t begin until we stop doing it.

  • CHRIS

    There will not be a recovery.

  • Dr ray

    Hi Boris @#22

    Yes a good war would do marvels for the economy. Full employment and lots of government spending. We could achieve the same outcome without loss of life simply by setting fire to each others houses (when they are out obviously) and parked cars or even going on a mass shoplifting spree. Car production would increase, House building would take off, Shops would need to restock, More police would need to be recruited. We would get richer and richer. You are truly a genius and shame on the folk you abuse you on here.

  • Aff

    Central banks have caused this

  • Caligula

    Just an occasional visitor to this place. @22 Boris must occupy himself somewhere in public service and wants his Ponzi pension kept afloat. Has no other merit that I can see. @2. Tiredofnonsense has my vote

  • Boris MacDonut

    #25drray. You very rudely seek to malign me again. I did not say we need a war. I said we can recover without one by spending on infrastructure.
    #27 Caligula. How can you concur with someone who thinks we should pay off the debt? We have never once paid off the debt since 1692, what on earth makes you think we need to do so now, unless you actually believe what the DM prints? Debt is what keeps modern western life moving. You penny pinching puritans (note the little p) are seeking to ruin our country for no good reason other than fear.

  • Boris MacDonut

    #25drray. You very rudely seek to malign me again. I did not say we need a war. I said we can recover without one by spending on infrastructure.
    #27 Caligula. How can you concur with someone who thinks we should pay off the debt? We have never once paid off the debt since 1692, what on earth makes you think we need to do so now, unless you actually believe what the DM prints? Debt is what keeps modern western life moving. You penny pinching puritans (note the little p) are seeking to ruin our country for no good reason other than fear.

  • BankFines

    I would like to Know, what happends, to all these fines? Where Banks have been fines! this Money, could be put back into the ecomany, insted of lining, some ones pockets!, it seem strange, that HSBC, was fined, So the Gov, was given back, some of the Tax payers Money!, Who’s pocket, is that lying in?, Not the Tax payers?, I bet!

  • dr ray

    @ boris

    Don’t be so precious Boris. I wasn’t suggesting we have a war. I was suggesting we set fire to each others’ houses and cars or go shoplifting as a way to increase our national wealth.
    I am disappointed the subtlety of my post has been wasted. Bastiat explained 200 years ago how increasing economic activity in a village by smashing windows did not increase the village wealth because the money spent repairing windows (or substitute: fighting a war, infrastructure projects or building windmills) could have been used more usefully and efficiently if left for the citizens to spend or invest as they see fit. Money used by the government for “infrastructure projects” is money denied to efficient wealth creating industry.

  • Boris MacDonut

    #31 drray. Which bit of “Yes a good war would do marvels for the economy” is not suggesting we have a war?
    Infrastructure projects, public spending , that is what we need in dollops. Look at David Smith in today’s Sunday Times. The years from 1975 onwards saw a massive fall in public sector spending and only the years 2000 to 2007 saw a reversal. FYI 1975 is often cited as the peak year for equality, quality of life and so on in the UK. We definitely has much higher GDP growth pre de regulation of the finanacial markets. The free market has failed utterly and totally to help anyone in the bottom 3 quintiles.It is time for major government interference to a point that makes the likes of S’Ralansugar burst.

  • smlaing

    Must be a sock puppet……Spouts the retoric of a politician everytime and at odds with virtually every other post. I have to say….I disagree with everything he ever writes!

    He’s here to subvert opinion. To help get you reconnected to the Matrix!

  • dr ray

    Ah yes. 1975.
    Inflation at 24%
    Jensen cars sacks 700
    Harold Wilson in power suffering paranoid delusions
    Miners get 35% payrise and seal the fate of the industry
    National Pay freeze introduced
    IRA bombs in London, Spagetti House and Balcolme St sieges
    Sex Pistols
    Cod War
    Norton motorbikes bankrupt 1600 redundant
    1.25 million unemployed
    Queer Bashing on Wimbledon Common
    They were the days.

  • Boris MacDonut

    #34 How very narrow minded,negative and irrelevant.
    #33 smlaing…..at odds with every other post, does not mean wrong. Try thinking occassionally.

  • Critic Al Rick

    @32. Boris

    You seem to equate ‘free market’ with de-regulated banks.

    In theory you should be correct. In practice what we have are cartels including a banking cartel controlling markets instead.

    Growth per se, as opposed to manipulated propoganda type GDP Growth, in the UK went negative about the same time as c0rporative (read cartel) globalisation reached kindergarten.

    We have treacherous politicians to blame for this state of affairs.

    Any massive public sector investment allowed now will not be for the benefit of the masses. Quite the opposite.

    Anyhow, what’s all this CoLC you keep spouting about?

  • aff

    It is an interesting concept using debt for money isn’t it Boris? You bankers certainly gain a tremendous amount of priviledge from this system. Unfortunately in this internet era its a bit more tricky keeping people in the dark while you steal there weath while risking none of your own.

    “Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal – that there is no human relation between master and slave.” Leo Tolstoy, Russian writer.

    “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” Henry Ford, founder of the Ford Motor Company.

    “Let me issue and control a nation’s money and I care not who writes the laws.” Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.

  • aff

    On the subject of war. This is the bankers dream scenario. There is no other way they can induce such high levels of debt creation (money creation) as with war. Bankers know how to pull the right levers to make it happen.

    Funnily enough who funds both sides of every war since the Napoleonic wars, including the world wars? Yes big banks fund both sides. They funded the Nazi’s in the second world war.

  • Critic Al Rick

    Aff – why shouldn’t they…it’s a free market!!

  • Boris MacDonut

    #36 Rick. CoLC is shorthand for the City of London Corporation. I try not to use it’s full title as last time I posted directly on it I had several threats come my way and MW had to pull the post. They have very long tentacles. Read Nick Shaxson’s Treasure Islands and you’ll find out all you need about our tax haven extraordinaire.

  • Critic Al Rick

    Boris, ok, but surely you can see that de-regulation of banks is not synonymous with ‘free markets’.

    Oh, you were just winding us all up @32; weren’t you?

    Any infrastructure spending by a country which has been in a loss making situation for 3 decades will be borne by the diminishing wealth of the Middle Classes.

    Treasure Islands indeed!

  • Malkovich

    Boris.

    No, spending on infrastructure will not “help” it will only cause a yet greater miss-allocation of resources. The government can only spend money on projects by taking money away from citizens and companies, who would have spent their money on what they needed. So we will have more roads and bridges (many of which would not wanted or needed) and fewer manufactured goods etc.

    It’s economic thinking like that, which has got us into this mess.

  • aff

    Critic Al Rick what I was trying to get at is the role bankers have played in instigating the wars as much that from profiting from them, wars can’t happen if they aren’t funded, wars can stop when the funding stops. Its all very well to say funding both sides is just free market. But at what point is murder and genocide unnaceptable in a free market?

  • aff

    Of course there are more than just profits at stake. Its about power really. Central banking is just a tool in the game of global power. When we look around the world today we see every country except maybe 3 are controlled in the global finance network via central banks. Exceptions being Iran and Korea who both funnily enough are under extreme international pressure from war mongering politicians. No doubt they will soon follow Iraq and Libya into falling under the banks control. And then where will we be? How close are we already to totalitarian world government?

  • Critic Al Rick

    Hi aff

    @43.

    I appreciate that; just a bit of satirical posturing on my part in a vain attempt to be amusing!

    @44.

    I couldn’t agree more. Regrettably, no posturing.

    Einstein:
    “The world is a dangerous place in which to live; not because of the people who are evil, but because of the people who don’t do anything about the evil people.”

    I fear it is now too late to prevent the evil people from eventually achieving totalitarian world government.

    It all goes to show – you can’t trust anyone, especially politicians and particularly central banks. And as for the IMF, etc.

    We’re stuffed.

  • Christopher

    An interesting point aff. Sadly, I think we are already at the tipping point of totalitarianism.
    I often wonder if my early life fascination with Star Wars was , in hindsight, prophetic.
    That being so, could it be that the actual evil empire is fronted by an organisation with the initials GS? Oooooo!!

  • aff

    Hi Critic Al Rick thought you were turning into Boris for a moment there :-p Glad you clarified.

    Chrisopher, there is a trememndous amount of ‘ex’ Golman people in influential places, not to mention in charge of our very own central bank. Sure it just co-incidence right?

    I know what you mean about star wars :)I think we’re roughly at the period described in the clone wars film just now just before we fall under control of the empire. Wont be long until they build a death star. That might be a good infrastucture project for Boris come to think of it.

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