It's time for everyone to stop kidding themselves about quantitative easing (QE).
QE has one core purpose to make the banks better, quicker.
That's it.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
So forget what the Bank of England says about inflation. That 2% target is history. The Bank will say whatever it takes to justify more moneyprinting, but those forecasts for falling inflation mean nothing.
Latest Videos FromMoneyWeek
If you don't believe me, consider this one statistic the sterling price of oil is now higher than it's ever been. That spells stagflation.
Here's how to cope with it
Forget inflation targets the Bank of England will keep printing
In US dollar terms, the oil price is still below the $147 a barrel level it briefly tipped in 2008 before crashlanding as global trade collapsed in the credit crunch.
But the price is now at record levels measured in both sterling and euros. That's because both the pound and the euro are weaker now than they were back then.
Why is the oil price rising? Iran is the obvious culprit. And you can talk about the possibility of a US recovery. Or emerging market demand. Or peak oil.
But the reason it's rising so sharply for British consumers is simple: the Bank of England has been printing money. That drives down the value of the currency. So anything priced in dollars is going to get more expensive.
My colleague Matthew Partridge wrote yesterday about the impact of the high oil price on the global economy and how it compares to the 1970s oil shocks yesterday, so I don't want to cover the same ground here. Suffice to say it won't be pretty for consumers or for companies.
The point is, the oil price is outwith our control. We can hope that things don't kick off in the Middle East (and we do). We can expect that a hard landing in China will bring commodity prices lower, and probably oil too (and we do). But if the Bank keeps trashing sterling with more QE, then Britain won't see the benefit of these lower prices.
Monetary policy is now run strictly for the banking sector
And chances are, the Bank will continue to print money. Because our banks are still in a hole. I noted earlier this week that the reining in of interest-only lending on property could be the start of another spurt of derisking' by banks. This is where the banks try to tidy up their balance sheets by getting rid of more of the rubbish that's sitting on them.
In some ways, this is a good sign. Because it means the banks are getting closer to being able to stand on their own two feet again. But the trouble is, as James Ferguson points out, when banks start shedding their dud assets, it can set off a whole new round of asset write-downs, particularly in the property sector.
To put it simply, as a bank, if you see the price of houses recovering, you might think: jolly good, now we can repossess some homes from all these deadbeats we've been tolerating for the past few years. But of course, the very action of putting all these homes on the market drives prices lower again.
In turn, the economy weakens, and asset prices fall, and bank balance sheets start looking ropier again.
So it's a fitful process. And that's why the Bank of England will keep its finger hovering over the print' button, because it doesn't want any more banks to go bust.
Who pays for this? Anyone with savings, really. The Bank happily acknowledges this. Just the other day, at a speech in Glasgow, Charlie Bean, the Bank deputy governor, effectively told pensioners and savers that they just had to put up with it for the greater good.
How to protect your wealth from ongoing inflation
So forget about inflation coming down hard this year. I'd be very surprised if we see inflation fall back to the 2% target level at any point in 2012. Simon Ward of Henderson reckons that 2.5% is the lowest we might get.
How can you protect yourself? Make sure you take advantage of your Individual Savings Account (Isa) allowance this year keeping the taxman's hands off your money is a big step in the right direction. We'll have an Isa supplement with the next issue of MoneyWeek magazine, detailing some of the best places to put your cash.
Meanwhile, on the stock market front, the defensives trade might have got a bit crowded in recent months. But there are still some very attractive yields available out there, if you're willing to take the risk to your capital. My colleague Phil Oakley wrote up insurer RSA's results yesterday. The stock yields more than 8%, but if you are concerned about the risk of dividend cuts, there's a safer way to invest in the company and still get a good yield read Phil's piece to find out more. There are also some more tips from our Roundtable experts in the current issue of MoneyWeek: Sixteen investments our experts would buy now (you can read it now by subscribe to MoneyWeek magazine).
Finally, stick with gold. It's rebounded really rather well since all the sensible pundits in the mainstream papers started crowing loudly about its fall from the $1,900 record last year. Given that all the world's central banks are currently keen to do more QE, there is most definitely still a place for it in your portfolio.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
Our recommended articles for today
Forget punting on banks buy this high-yielding insurer instead
Bank stocks are still toxic, and much of the financial sector remains out of favour. But this insurer offers solid returns with relatively low risk, says Phil Oakley.
How expensive oil could hit the global economy
High oil prices are already hurting the fragile global economy. And the prospect of war with Iran could send the world into a full-blown oil crisis. Matthew Partridge examines what that would mean.
