Bank of England may start printing money to reverse 'deep' downturn

[Sam Spade]

Just for you opebo...

This also means that the time to short GBP/USD mercilessly is here. 

http://business.timesonline.co.uk/tol/business/economics/article5708039.ece

The Bank of England’s Governor admitted yesterday that Britain is now in “deep recession” and signalled that it is ready to start “printing money” as soon as next month in aggressive, last-ditch moves to limit the slump.

Mervyn King indicated that the Bank is poised to move beyond relying on further interest rate cuts to combat recession. It will give a green light within weeks to a strategy of “quantitative easing”, the modern equivalent of printing money, he made clear.

The Governor’s strong hints that the Bank will shortly embark on this radical action to breathe life into the stalled economy came as he unveiled its bleakest assessment yet of Britain’s prospects.

The Bank ripped up already grim forecasts issued only last November to predict that the economy will shrink at an annual rate of as much as 4 per cent during this summer — more than twice as fast as it had expected just three months ago.

Mr King warned that the odds are now heavily tilted towards an even more brutal decline in the economy than the Bank is now factoring on. On the Bank’s new worst-case scenarios, the pace of the slump could accelerate to see GDP shrinking at an annual pace of up to a staggering 6 per cent.

“The economy is in a deep recession,” the Governor said. “But the length and depth of the recession will depend to a significant extent on developments in the rest of the world, where a severe economic downturn has taken hold.”

The Bank’s gloom-laden forecasts left the City betting that it will order quantitative easing moves to begin at its next meeting in just three weeks’ time.

As well as the startling scale of the slump in national output predicted yesterday, the Bank emphasised the case for drastic action with a forecast that Britain will flirt with sustained deflation for most of the next three years.

Consumer price inflation is set to plummet far below the Bank’s 2 per cent target and drop as low as 0.5 per cent in the next few months, it predicted. Apart from a brief blip upward in 2010 as this year’s steep decline in fuel prices drops out of the figures, consumer price inflation is tipped to remain under 1 per cent until 2012.

With the Bank highlighting the danger of a still weaker economy, and Britain already on the brink of a destructive bout of deflation, economists said it was clear that action would be required beyond further cuts in interest rates that are already at historic lows of just 1 per cent.

Mr King made clear that the Bank is now ready to buy up government debt, in the form of gilt-edged stocks or gilts, as part of the imminent quantitative easing. Until now, it was thought that this strategy would first focus on buying assets from banks to stimulate new lending and help to cut loan costs for businesses and consumers.

The Bank will take the first steps down that road tomorrow with purchases of some corporate debt. This will not yet amount to quantitative easing, however, as the move is being funded by the Treasury, rather than by the Bank itself creating money.

Mr King refused suggestions that he should apologise for the state of the economy and insisted the present crisis could not have been foreseen. “It’s not sensible for anyone to pretend that they can forecast the future when unexpected events occur,” he said.

The Governor also sought to reassure savers hit by plunging interest rates that he was aware of their plight. “I’m in immense sympathy for them,” he said. But he insisted that savers would end up “even more worse off” if action was not taken to bolster the economy.

[opebo]

Haha, 'even more worse off'.  Grammatically incorrect of course, but I understand why people would be laying it on thick like that.

Glad to see reasonable economic policies are being implemented.

[k-onmmunist]

Printing money? Are they insane? That will destroy the already weak pound.

Build industry and other job creating infrastructure.

[Bunwahaha [still dunno why, but well, so be it]]

Oh, I'm not an expert of the economy but more you print more it's bad, right?

Printing money? Are they insane? That will destroy the already weak pound.

Build industry and other job creating infrastructure.

That's mainly the direction that decided Sarkozy's govt. And now, our govt is really watching results of UK and Germany to compare. That said, we can't really compare situation between UK and France, our financial situation sounds really more "cool", that's for cars that we fear hear, 10% of active population.

[Associate Justice PiT]

Oh, I'm not an expert of the economy but more you print more it's bad, right?

     Printing more tends to have your currency end up like Zimbabwe's. I suppose there can be some upside to it, though I don't know what it would be.

[k-onmmunist]

Oh, I'm not an expert of the economy but more you print more it's bad, right?

     Printing more tends to have your currency end up like Zimbabwe's. I suppose there can be some upside to it, though I don't know what it would be.

Increasing spending maybe?

To be honest, still isnt worth the inflation.

[opebo]

Build industry and other job creating infrastructure.

Devaluation does this.

[Bunwahaha [still dunno why, but well, so be it]]

Build industry and other job creating infrastructure.

In France, unlike in UK, we kept industries, and we're in troubles too, especially in steel and cars. The point is not to create infrastructure, the point is to create the good ones, those that will work in the future, those that will have some perspectives, those that will create the confidence necessary for investments to start again and so that to go out of the credit crunch. Well, OK, easy to say. Green Technologies and maybe Nano ones too, and maybe others I don't think about, could be good investments.

[k-onmmunist]

Build industry and other job creating infrastructure.

In France, unlike in UK, we kept industries, and we're in troubles too, especially in steel and cars. The point is not to create infrastructure, the point is to create the good ones, those that will work in the future, those that will have some perspectives, those that will create the trust necessary for investments to start again and so that to go out of the credit crunch. Will, OK, easy to say. Green Technologies and maybe Nano ones too, and maybe others I don't think about, could be good investments.

An economy cannot be reliant on the services sector.

[Beet]

People are confusing different strands of problems. This has been a common occurence lately, including by myself.

[2952-0-0]

The world's central banks are using tools that have never been studied before.

Officially this is to alleviate bank liquidity problems and stave off deflation, but what happens when banks start lending again and central banks are forced to raise interest rates to stop inflation even when the economy is still sick?

[Sam Spade]

The world's central banks are using tools that have never been studied before.

Officially this is to alleviate bank liquidity problems and stave off deflation, but what happens when banks start lending again and central banks are forced to raise interest rates to stop inflation even when the economy is still sick?

Actually, I would argue that these tools have been used before, specifically during the GD and by Japan in the 1990s.  Perhaps not to the same extent and force, but let's face it - Hoover's RTC is really, in many ways, an early version of TARP.  The key point is - these methods didn't work then either.

Banks will not start lending again unless the government forces them to, primarily because most of them are insolvent.  If the banks do start lending again, it will only make things worse down the line when they do actually collapse (or when governments can no longer backstop them).  I have predicted for a long while that interest rates will go up, fairly soon, but none of that has to do with inflation.  In fact, the chances of inflation right now are pretty much nil, unless we start subscribing to the opebo plan on steroids.

The mistake we are making right now is our view of the crisis.  It is not a question of "liquidity", it is a question of "solvency".  This excellent recent article by Martin Wolf in the Financial Times after the Obama/Geithner proposed plan last Wednesday lays out how we're misinterpreting what is actually going on.

http://www.ft.com/cms/s/9ebea1b8-f794-11dd-81f7-000077b07658,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F9ebea1b8-f794-11dd-81f7-000077b07658.html%3Fnclick_check%3D1&_i_referer=http%3A%2F%2Fwww.tickerforum.org%2Fcgi-ticker%2Fakcs-www%3Fsinglepost%3D996805&nclick_check=1

[Beet]

For some reason pretty much everyone outside the government is reccommending a more decisive action than those inside the government. Similarly last fall, pretty much everyone outside the government disagreed with the actions proposed within the government.

At this point, tons of ink have been spilled by prominent economists and other smart people calling for the government to admit the insolvency of the banks and take some action that would eliminate the currently worthless zombie banks.

Why isn't the government being more decisive in the banking sector? Why is it being so timid?

One factor may be chalked up to institutional inertia, an inertia so strong that it survives even a change of administration and party, and perhaps of regulatory capture, although I somewhat doubt the latter at this point. Sadly, this may be a more plausible explanation of at least one factor in the government's timid reaction than it would seem apparent on the face of things. Historically, governments have never acted radically until faced with radical problems practically on its doorstep. They have been inherently conservative. The Labour government of 1929 instituted conservative policies, despite being Labour. Roosevelt probably would have done similar things has Hoover had he been elected in 1928; Hoover would probably have done similar things as Roosevelt had he won re-election. As Obama said "we have thousands of banks" whereas Sweden had "five banks". His campaign motto was "Yes We Can", but apparently when it comes to banking nationalization and radical reform, the answer is "No We Can't"; the problem is too big.

When this explanation is given, the real reason is- the problem is not big enough yet. That is, the economic crisis is still not serious enough (in the eyes of the government) to undertake radical reform, no matter how much a reasonable gaze into the future on the basis of the facts on the ground today tell us things will not get better without radical change. Economists are still projecting that Third Quarter economic growth will be positive. If we are in a recent that will last less than 6 more months, there is no reason to destroy the banking system, is there? That is under those assumptions.

Of course those within the government probably fancy themselves the only responsible ones and having privy to information the rest of us do not have, but their actions in the last 6 months have not inspired much confidence.

Also what is true and how they rationalize this to themselves more explicitly, is that the government has become so terrified of what happened after it allowed the failure of Lehman Brothers that it will only undertake nationalization or more significantly, admission of permanent insolvency, which would mean major debt destruction, at the point where it has absolutely no other choice. In their mind, further debt destruction following nationalization, which is what everyone outside of government seems to be advocating, would only cause another Lehman, which in their mind, is the worst possible scenario. In the government's mind, I imagine, if they followed Martin Wolf's (and many others') advice, the worst result would not be that their pessimism caused an "overcapitalized banking system" as Wolf says, but that their pessimism caused another crash, which in turn caused even more deflation, an even sharper downturn, and thus even more bad assets.

In the popular mind's view, destroying the bondholders and shareholders and admitting insolvency would "flank" the problem by allowing all the pain to happen today, after which a recovery can begin. In the government's view, it may be that attempting to flank the problem would only make things worse because they would take what good assets remain on the banks' balance sheets and put them at risk of being bad. They see their policy as reflationary.

However, their policy does not seem to be working either. Because if the critics' contention is that the government's policy is only dragging out, in a slower way, the inevitable, then the evidence so far seems to render the critics right; and the reasoning as well. Why should things suddenly turn around? Furthermore, if the government is so convicted that it is doing the right thing, why have they been unable to explain the policies in a convincing way to the public? Recovery requires confidence, and right now the market does not have confidence, as evidenced by the Dow's 400 point drop on the day Geithner announced his plan.

What is needed is more transparency and communication with the public. If the government is confused, it should simply take the advice of intelligent outsiders such as Wolf. That is what I would do, if I were Treasury Secretary. If the government is divided on legitimate grounds, then intelligent outsiders such as Roubini should be brought inside the circle. Everyone down here is shouting for Obama to go one way and yet his opaque inner circle seems to be going the other way with pretty poor explanations of themselves. It's crazy.

[GMantis]

Build industry and other job creating infrastructure.

In France, unlike in UK, we kept industries, and we're in troubles too, especially in steel and cars. The point is not to create infrastructure, the point is to create the good ones, those that will work in the future, those that will have some perspectives, those that will create the trust necessary for investments to start again and so that to go out of the credit crunch. Will, OK, easy to say. Green Technologies and maybe Nano ones too, and maybe others I don't think about, could be good investments.

An economy cannot be reliant on the services sector.

This is not the 19th century.

[k-onmmunist]

Build industry and other job creating infrastructure.

In France, unlike in UK, we kept industries, and we're in troubles too, especially in steel and cars. The point is not to create infrastructure, the point is to create the good ones, those that will work in the future, those that will have some perspectives, those that will create the trust necessary for investments to start again and so that to go out of the credit crunch. Will, OK, easy to say. Green Technologies and maybe Nano ones too, and maybe others I don't think about, could be good investments.

An economy cannot be reliant on the services sector.

This is not the 19th century.

Its the 21st, and I don't see why the status of industry should have changed since then.