Mervyn King dreams up imaginative new ways to print more money
Last night we were ‘treated’ to head of the Bank of England, Mervyn King, use his annual address at Mansion House (in the Egyptian Hall no less) to let the people know, just in case there was any doubt, that he is deliberately trying to devalue the £ and that he’s got more imaginatively way’s to print money up his Governor’s sleeve.
You can read the entire speech here, but below we’ve picked out the most important points:
Here in the United Kingdom, the big picture was, and remains, the need to generate a recovery while rebalancing our economy, supported by a loose monetary policy and a large depreciation of sterling, on the one hand, and a gradual but steady reduction in the structural budget deficit, on the other. Two years ago, a gradual recovery was in prospect, with business investment and net trade expanding to offset lower spending by households and government.
Note that in Mervyn’s eyes the way to economic prosperity and paying down the UK’s debt is through loose monetary policy and “a large depreciation of sterling”. Not a ‘small’ deprecation mind you, but a LARGE one.
Then in the very next paragraph the Governor explains why he was wrong when he addressed the same audience two years ago and predicted that the economy would gradually recover:
Since then [two years ago], events have taken a different course. Instead of a gradual recovery, output has been broadly flat. That reflects unexpected increases in world energy and commodity prices, leading to an unprecedentedly long and severe squeeze on real take-home pay and so weak consumer spending. But it also reflects events in the euro area where the crisis has grown to cast a long shadow over our own recovery, holding back both exports and investment.
So, in the previous paragraph King say’s that then cure needed for the UK to recover was a LARGE deprecation in sterling, and then in the very next sentence blames some random ‘unexpected’ increase in world energy and commodity prices as to why the UK hasn’t recovered.
Is it not logical that the LARGE deprecation in sterling has caused the high energy and commodity prices? It is clearly self-contradictory statements like this from the BoE that has meant that any remaining credibility it has is hanging by a thread.
King then admits what the blogosphere has been saying for 4 year now – namely that the problem is not liquidity but rather solvency:
No central bank has done more in recent months to flood the system with liquidity than the ECB – one trillion euros injected through two long-term refinancing operations. Those two operations demonstrated that liquidity is not the issue because after a few months we are back to where we were. The problem is one of solvency.
And one cures a problem of solvency with more debt does one?
He then hints that the data since the last Inflation Report is favorable to more money printing:
Since our Inflation Report only four weeks ago, conditions have deteriorated with weakening business surveys, a downward revision to measured output, and further slowing in economies overseas.
Then comes an array of new fangled monetary ideas that all add up to the same thing – more money printing:
How then should the Bank of England respond to this weaker outlook, with the black cloud of uncertainty and higher bank funding costs brought about by the euro-area crisis? The paralysing effect of uncertainty, with consumers and businesses holding back from commitments to spending, raises the question of whether any conventional macroeconomic measure could do much to stimulate private sector spending. And that has led some to question whether further monetary easing would prove effective and to advocate instead more targeted measures to revive the economy and, in particular, bank lending. But further monetary easing and attempts to lower bank funding costs are not alternatives. We can do both.
Let me start with monetary easing, before turning to the banking sector. The view that further monetary stimulus is, in present conditions, simply “pushing on a string” is, in my view, too pessimistic. The creation of money by the Bank of England has helped offset what would otherwise have been an extremely damaging contraction of the money supply. In the Great Depression, the money supply in the United States fell by around one-third.
Get ready for money printing in the summer months:
With signs of a deterioration in the outlook, especially in world markets, the case for a further monetary easing is growing. There are those who feel that any further monetary easing should take the form of purchases of private sector assets and not gilts. There are three reasons for treating that idea with caution. First, the Bank has no democratic mandate to put taxpayers’ money at risk. Buying risky assets outright has implications for future taxes. That is why the role of central banks is only to lend against risky assets, and to do so with appropriate and often large haircuts.
Not content with the ‘good ‘ol’ quantitative easing form of money printing, it sounds like the BoE have concocted more ways to steal your wealth, and propose what suspiciously sounds like a back-door bank bailout:
But today’s exceptional circumstances create a case for a temporary bank funding scheme to bridge to calmer times. Such a scheme could prevent an aggregate deleveraging of the banking system that might hold back recovery. Prior to the crisis, risk premia and bank funding costs were unsustainably low. Today, the black cloud of uncertainty has created extreme private sector risk aversion. Should the public sector, therefore, take upon itself some of those risks? Or put another way, should we collectively take on risks in return for lower compensation than we would demand as individuals? In present circumstances, when private sector spending is depressed by extreme uncertainty, there may be a case for a scheme to underwrite risks which the market itself is unwilling to take.
What I can say tonight is that the Bank and the Treasury are working together on a “funding for lending” scheme that would provide funding to banks for an extended period of several years, at rates below current market rates and linked to the performance of banks in sustaining or expanding their lending to the UK non-financial sector during the present period of heightened uncertainty. The Bank would lend, as in its existing facilities, against a much greater value of collateral comprising loans to the real economy to protect taxpayers. But the long term nature of the lending and its pricing mean that the Bank could conduct such an operation only with the approval of the Government, as offered by the Chancellor earlier. So such a scheme would be a joint effort between Bank and Treasury. It would complement the Government’s existing schemes, and tackle the high level of funding costs directly. It could, I hope, be in place within a few weeks.
Firstly, when is any government program ever temporary? And secondly doesn’t this all smack of a back-door bailout for the UK banks? Just how bad are their balance sheets?
So not only are they going to print more money they are, in addition, going to fund banks directly and stick the taxpayer with the ‘risk’. Which is just a fancy way to say that the UK taxpayer is going to be on the hook if/when the BoE and the Government lend too much to someone they shouldn’t.
On top of those two things King then adds:
On liquidity, I want to make clear that the Bank, through its discount window and other facilities, will provide banks with whatever liquidity they require given the prospect of turbulence ahead. Last December, the Bank announced the new Extended Collateral Term Repo Facility under which auctions of short-term sterling liquidity can be held at any time. It is now time to activate that scheme, in the words of the Bank’s Red Book, “in response to actual or prospective market-wide stress of an exceptional nature” over the coming weeks. The Bank will start holding auctions of sterling liquidity with a maturity of six months, and tomorrow morning the Bank will issue a market notice explaining details of the timing and size of these auctions.
Another bank bailout – again, just how bad are those balance sheets really?
So there you go folks, it couldn’t be any plainer than that. The BoE sees the solution to all that ails the UK is a LARGE depreciation in sterling, and he then lays out not one but three ways the BoE will set about doing this, with ALL the the risk dumped once again on the taxpayer’s back – they must really think we’re suckers.
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- To print or not to print (next week), that is the question (for the BoE) – The most important economic quote you will ever read is the answer
- Gold Update: Mervyn King starts talking – and gold starts moving upwards
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