Lying governments are good news for gold

The Government wants to make it harder to find out how much money the Bank of England is printing. But hiding the truth will only further undermine faith in the financial system, says Dominic Frisby. That’s bad news for the economy – but it can only be good for gold.

What does the Bank of England have to hide?

Last month, political blogger Guido Fawkes, who's usually well worth reading, made a telling observation regarding an apparently insignificant amendment in the Government's new Banking Bill.

It abolishes a law that has been in place since 1844 which obliges the Bank of England to publish a weekly account of its balance sheet. This might not seem that important - but the law has worked perfectly well for 165 years. So why change it? What are they up to now?

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Let's take a closer look

Why would the government want to hide how much money it's printing?

The Government plans to scrap the requirement that the Bank of England publish a weekly copy of its balance sheet. The given reason for the reform, says Edmund Conway in The Telegraph, "is to allow the Bank more power to overhaul troubled financial institutions in the future, under its Special Resolution Authority".

But given the statements that we've heard from the Government that it is contemplating 'quantitative easing' - injecting billions more into the financial system and buying assets ranging from commercial and government debt to potentially private equities - the timing of the amendment does seem rather suspicious.

"Surely it can't be," suggests Guido, "that they don't want us to know how fast the Bank of England's printing presses are going to be running?"

But why would the Government try to hide the amount of money it is printing? For one thing, even if it wanted to, it can't. The data will eventually be published, though not until at least a month after the event (so the negative impact of any public outrage might be diminished). And any enquiring mind will find much of the necessary information elsewhere on the Bank's website.

Just as in the US, many have found ways of accurately calculating M3 (money supply figures) after the Fed stopped reporting it in March 2006, so over here it will be simple to calculate UK government rates of money printing. If the Bank is to buy any assets from commercial banks, as Chris Dillow says on his blog, Stumbling and Mumbling: "it must announce its intentions to do so to the banks and therefore to the rest of us." The same will apply to any equity purchase they make.

Indeed, if they are trying to raise inflation expectations and get people spending again - which they clearly are - then surely, as Stumbling and Mumbling argues, they should "make a song and dance" about their printing, to make people worry about rising prices.

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However, I think this underestimates the strength of the Government's basic desire to hide what it's doing. As Simon Ward at New Star puts it, although the data will be attainable by other means, "this will make it much more difficult to track what the bank is doing." Indeed, the reforms will make the Bank "by far the most secretive major central bank in the world," says The Telegraph.

The general consensus may be (wrongly, I add) on the side of the money printers at the moment. But that won't last forever. And when the idea of inflating the money supply is no longer seen as acceptable, the Government will be quite keen to hide the extent of its money printing particularly as the Bank's balance sheet has already doubled in size since September.

This move means further falls for sterling

Lord James of Blackheath, a Conservative peer, goes a lot further. "Remove control and there is nothing to stop an unreported and unmonitored flooding of the money market by the undisciplined use of the printing presses. If we went down that path we would be following a road which starts in Weimar, goes on through Harare and must not end in Westminster and London. That is the great fear that the abolition of that section will bring about but the Bill abolishes it."

Now I'm not sure that this move heralds money printing on quite such a scale, but it does make it that much easier. And even if we don't go into Zimbabwe territory, this means further debasement of the currency (ultimately, the more pounds there are, the less each one can buy) and further falls for sterling - as does the recent cut in interest rates.

And the trouble is, all these moves to attempt to keep things hidden from the electorate merely erode trust and belief which are the keys to the success of the modern monetary system. My dad always used to say to me: "People only ever lie for two reasons. Either because they are ashamed of the truth. Or because they don't think you are fit to know the truth. Or both."

Investors, hold on to your gold

What does all of this mean for investors? Well, the increasing influence of the Government on the financial system points to one thing. More decisions will be made for short-term political reasons, rather than the long-term good of the economy. And that means more instability.

So even if we don't see rampant inflation for some time to come, I'd hang on to your gold. The harder it is for investors to see what's coming next, the more they will crave the stability of hard assets that aren't dependent on the actions of politicians for their value. Earlier this month, Merrill Lynch's chief investment officer Gary Dugan said that wealthy investors were so concerned that he was "getting calls from clients saying they want a box of krugerrands" so they'd have "a portable asset in their house." It makes sense to me.

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