The uncertain noises coming
from the Bank of England. It's sobering in its implications. And
remember - to put it in perspective - this corner alone deals in
sums (£125 bn out of a total indebtedness like to reach £800 bn)
that is nearly one million times greater than all the thievery and
trickery of MPs put together.
XXXXXXXXXXXXXXX CS
=============================
TELEGRAPH 15.5.09n UK
Mervyn's strangely serene despite our worrying similarities to Zimbabwe
To the casual observer this hardly seems the most relaxing time to be
Governor of the Bank of England.
By Edmund Conway
You are at the helm of the economy as we plough into the worst
recession in living memory; the financial system has still far from
recovered and the housing market is embroiled in a crash.
Bank yesterday.
Interest rates are as near as they can be to zero; most banks that
are in trouble have been saved from collapse; the very worst of the
economic contraction is probably behind us. So, are we about to
return to boring monetary policy?
No. Sadly, this is only the eye of the storm, for both the Bank and
the economy.
Hanging over the Inflation Report, alongside the gloomy prospects for
growth and inflation, was the question of exit strategy. For generals
and armies, the exit is usually something to look forward to. For
central banks it is something to be dreaded.
Cutting interest rates is far easier than raising them. And when you
are talking about unwinding £125bn or more worth of quantitative
easing, the task takes on a rather terrifying aspect. When you
consider that the Bank is going to have to try to sell off a large
portion of these gilts at the very same time as the Government is
itself issuing enough debt to pay for a World War, the full nightmare
in prospect for the central bank next year becomes apparent.
It is a nasty dilemma for an independent central bank. Given that the
Bank is printing money and buying gilts, the main thing that
separates us from our Zimbabwean counterparts is that the Bank is not
doing so expressly in order to keep the Government afloat. It is
doing so because this is the best mechanism to pour cash into the
economy.
However, it is difficult to see how this independence cannot be
undermined when, next year or the year after, the Bank finally has to
sell these gilts off. At that stage, with markets already engorged
with UK government debt, the Bank risks setting off a capital strike
by pouring more of them out there.
This would have severe economic consequences for the UK, so it ought
to be in the Bank's interests to avoid such an eventuality. But give
the markets any impression that you are complicitly financing the
Government's deficit and you risk setting off a hyperinflationary
crisis of the likes we have never before seen.
No wonder King is kicking back in the meantime. Unfortunately, when
people asked the Governor precisely how he intends to tackle this
dilemma, he was blissfully unclear about it. The Bank needs to
clarify how it intends to extricate itself from this uncomfortable
hole as soon as possible.
Posts
