We live in a world where reality is very inconvenient. Particularly to certain governments and their mainstream supporters. One such country is the UK, where problems loom large, but are (currently) easily dismissed with a few comforting words from policy makers.
The UK has enjoyed a mini-boom in the past few years, but only nominally of course. When the effects of inflation are removed, there has barely been any recovery since 2009. The Bank of England allowed CPI to remain well above target until 2014, as zero interest rates and £385,000,000,000 of quantitative easing helped to soothe the suffering of the country’s debtors (notably Her Majesty’s Government). This nominal boom appears to be drawing to a close already, as mortgage demand withers and house prices slide, another bubble appears to be bursting.
But, there is no need to worry, let alone panic. The Bank of England told us everything will be fine, and here’s why: because the UK has sound economic policies. Here’s the quote from Ben Broadbent, Deputy Governor at the Bank of England, made back in the middle of summer 2014 (when the IMF were warning of risks to the UK economy from a strong pound):
“The UK has in place a hard-won policy framework that didn’t exist when it went through the traumas of the 1976 crisis. This is something that should never be taken for granted,” He also mentioned that ‘the introduction of a more robust policy framework since the currency crisis of the 1970s, including the introduction of inflation targeting and tougher fiscal rules had also helped to strengthen the UK’s economic credibility, reducing the likelihood of sudden reversals in capital flows that could trigger a collapse in sterling.’
The Bank of England, of course, enjoys perpetuating the myth that inflation targeting has been a great policy success, as well as tougher fiscal rules, but we all know (or do we?) that inflation targets have been missed, and the UK’s budget deficit has continued to expand in every year since a new government promised austerity to reduce the deficit. Is the Bank of England truly independent, or more of a poodle on a leash, with a variable length?
The markets have already realised the game is up, with 10 year gilt yields falling from over 3% in 2013, to only 1.72% currently, whilst the FTSE 100 couldn’t even manage a gain in 2014, the year of peak exuberance. Big money has already left the equity markets, selling to the retail investors arriving late to the party during 2013 & 2014. Also, peak sterling looks to have come and gone, reaching around 1.72 versus the US dollar in the summer of 2014, and following a hefty decline at the start of 2015, now standing at 1.53. Trade and current account figures look dire, production too, and previous years’ GDP data has been revised lower. Business investment is contracting, although households are still spending (on imports mostly, and on credit too). All of this before the global slowdown has moved into second gear.
No one can predict the future of course, but here today, we can see that policy makers are counting on soothing words, mindless optimism, and a desperate hope that you don’t believe your own eyes. It’s hard to prepare for what lies ahead, and much easier to just assume we will eventually get back to ‘normal’ and keep one’s head in the sand. That’s what the Bank of England want of course, so that when sterling does collapse, it’ll be your assets and living standards that pay the price (yet again) of bailing out the debtors. Hedging today will pay rich rewards in the years ahead we believe.
Good luck, to us all.