Monday 10 May 2010

The Bank of England continues with their unpublished strategy – UK Bank Rate held at 0.5%

The Bank of England today held interest rates at 0.5% for the fifteenth month in a row and decided to do no more quantitative easing (QE) for now. Meanwhile in the real world the retail prices index (RPI) has risen from 3.7% to 4.4% and the measure supposedly followed by the Bank of England, the consumer prices index (CPI), has risen from 3.0% to 3.4%. The banks must be enjoying every minute of this. It gives them the chance to rebuild their balance sheets by borrowing short term at what are effectively negative interest rates. They also don’t seem to need savers so give us two fingers through low interest rates on our savings.

Meanwhile on the other side of the world the prudent Reserve Bank of Australia (RBA) decided to raise interest rates another quarter of a percent to 4.5%, while its inflation rate remains lower than the UK at 2.9%. As far as the UK goes it’s all status quo. Ignore inflation and do what’s best for the banks and those in debt while punishing the prudent. There’s not much point me going on any further with this today so if you’d like to have more of my thoughts then check out last month’s post as my opinions really haven’t changed in the last month.

Instead I’d like to turn my attention to the activities on Continental Europe. Today it was announced that European Union and the International Monetary Fund (IMF) had rustled up a loan and loan guarantee (think about what a loan guarantee means for a second, if the original owner of the debt doesn’t pay then you have to so in my opinion that is a loan also when one of the PIGS default) package worth up to 750 billion Euros. Of course the stock markets loved it with the DAX up 5.3%, the CAC up 9.7% and the FTSE 100 up 5.2%. The bond markets also responded with Greek 10 year bond market yields falling 570 basis points!

I’m only an Average Joe but I really don’t see what there is to celebrate. To me it seems like this doesn’t fix anything and we’re just putting it all off for another day. Let me elaborate:

- So we now know that Greece, Portugal and Spain will be able to finance their government debt a little longer because of the ‘generosity of others’. However this will only be short term unless these governments undertake fiscal reform. The question though is why these governments would now be in any rush to reform while they know that ‘mummy’ is there to help them out when you get into trouble.

- This is just more borrowing to pay off borrowing. It’s moving the wealth from the prudent (read Germany et al) to the indebted (read PIGS).  Is it really any different to the average person who gets themselves into too much credit card debt? They decide to fix the problem by getting another credit card to pay off the current credit card. The problem is still there but you’ve just moved it a little further into the future.

- How are people in Germany going to feel? Their cousins on the Med have partied hard while they kept their heads down and worked hard. They then end up in as much debt by bailing out the PIGS to the tune of around 123 billion Euros. I really wouldn’t be too happy. Do you think they will get a thank you card from the PIGS?

- According to the Financial Times ‘The stabilisation mechanism makes it possible to fund almost the entire issuance of euro area government bonds for the rest of the year’. Read that again, 750 billion Euros won’t even fund the borrowing needs for another year.

Sorry for being sceptical but I just don’t see how throwing money at a problem ever fixes it. All they’ve done is kept the music playing a little longer. All that I can say is that sometime in the future when the music does finally stop it’s going to make what we’ve been through over the last few years look like a holiday camp. This time though it doesn’t look like it will be caused by the banks (although they’ll follow soon after) but by governments defaulting on their debt (whether by inflationary stealth or just outright default).

As always do your own research.

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