Bank of England to the Rescue? — The UK Economy — A Basket Case with Poor Leadership — Argentina — The Grand Canyon of Economic Mismanagement – [08-07-2022]

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THIS WEEK’S EDITORIAL

BANK OF ENGLAND TO THE RESCUE?:  The Bank of England (BoE the UK’s central bank) raised their key interest rate by 0.5 % last week “to control CPI inflation” and announced that a recession is inevitable and will be long lasting. They also said that “inflationary pressures have intensified significantly“.

BOOM knew all that 10 months ago and stated it clearly in a number of editorials. Perhaps they should all retire and hand the reins over to BOOM?

In October last year, BOOM stated: “it is clear that the UK economy is suffering from significant CPI inflationary pressures that are showing no signs of stabilization”. BOOM then summed up the whole UK economic outlook by stating “the UK is seeing CPI inflation that does not look like it is transitory at the same time as the supply of fresh new money is not being put to productive use in the real economy. Money is stagnating in the financial system instead. That starts to strongly suggest STAGFLATION”.

And from another BOOM editorial on June 6th 2022:  “Faith in Boris Johnson and his Chancellor of the Exchequer, Rishi Sunak, will soon begin a sharp decline — even more so than is the case already. It appears that Johnson has bungled just about everything as Prime Minister.”

Since then, Boris Johnson has been dumped and Rishi Sunak is now in the final running to become the next Prime Minister. Sunak is the WEF candidate (World Economic Forum). He is yet another carefully selected and promoted politician who will take orders from the unelected, transhumanist, technocratic globalists in Davos.

But, back to the Bank of England (BoE). Aside from the rise in the key interest rate, they have proposed to start selling off their Bond portfolio in September by 10 Billion Pounds per quarter.  Long term Government Bonds are called “Gilts” in the UK. The word “Gilt” implies high quality or low risk of default. And, by the way, the British Currency is often called “Cable” relative to the US Dollar (more on that later).

However, the BOE are expecting another 40 Billion Pounds worth of Bonds to be redeemed in the next 12 months so, combined with the selloff, those redemptions will effectively reduce their Bond holdings by 80 Billion Pounds. This is (presumably) an anti CPI inflation strategy.

However, CPI inflation is clearly a global phenomenon this time. Almost all nations are seeing rising CPI inflation rates. In the advanced economies, Turkey is the leader with an annual inflation rate of 80%. Seventy nations have annual CPI inflation rates above 10%. The European Union’s inflation rate is 9.6 % and the US rate is 9.1%.

These global CPI inflationary pressures are being caused by global forces — high energy costs combined with a falling supply of essential goods from supply chain disruptions (mainly from China). High energy costs and supply chain disruptions are Geopolitical in nature. Central bank policies cannot be expected to influence them. Thus, the Bank of England strategies will probably have little effect on CPI inflation and may, in fact, become a cause of their forecast recession.

Thus, a cynic may say that the hidden strategy here is to create a deep recession which will crush CPI inflation and then claim their accurate forecast of recession as a victory.

In regard to high global energy costs, these are mainly caused by the Ukraine war which has been so strongly supported by Boris Johnson, the previous Prime Minister. The BoE is expecting average household energy costs to skyrocket to 3,500 Pounds annually in 2023, a 70% increase.

Rishi Sunak’s competitor for the PM job, Liz Truss, intends to prosecute the war in Ukraine even more enthusiastically than Boris did if she wins the PM’s seat. Such a course of action will tend to raise global energy prices and would be in direct confrontation with the Bank of England’s efforts to fight inflation. So who is advising her?

The BOE is forecasting a GDP contraction by at least 1.25 % and at most of 1.5% in 2023. BOOM expects much worse figures to emerge as we move through the remainder of 2022 and into mid-next year.

Returning to the subject of who to choose as the new UK Prime Minister. The members of the Conservative Party have a choice between a globalist controlled, WEF candidate who will cripple the nation with WEF policies and an ill-advised candidate who wants to strongly increase Geopolitical conflict. BOOM would describe that as a bad choice.

Both alternatives are guaranteed to cause more economic, political and social unrest. The people of the UK must prepare for harsh conditions to become even harsher as a very cold winter approaches. Heating their homes and feeding their families will become more and more difficult. Western Europe will encounter a very similar fate with Germany especially affected due to lower natural gas supply volumes and higher costs. As BOOM often says, poor leadership has consequences.

THE UK ECONOMY — A BASKET CASE WITH POOR LEADERSHIP:  Let’s take a quick look at the UK economy. The first place to start is the GDP — Gross Domestic Product. GDP is made up of all finished goods and services transaction costs in a given year. Asset transfers are not included.

Total GDP (expressed in US Dollars) in the United Kingdom is approximately US$ 3,100 Billion. That figure has not increased since 2007. That is an extraordinarily poor performance. The British Pound has fallen by about 40% in that time period. So, measured in British Pounds, the GDP has grown by a corresponding amount. But that is still a very poor performance over 15 years.

In the same period, the British stock market GB FTSE 100 Index comprising the largest 100 companies has gained only 6.8% in total since the start of this century. The index represents about 80% of the market capitalization of the entire market. There have been dramatic excursions up and down in price but a gain of just 6.8% over 22 years is nothing to write home about. Investors have not been rewarded for their patience.

The CPI Inflation rate has averaged around 3% over the last 15 years but has rapidly skyrocketed in the last 18 months to almost 10%, again hurting both consumers and investors alike.

In summary, the UK economy has not performed well over the last 15 years. The population has grown strongly from 58 million in 2000 to 68 million in 2022, an increase of almost 20%, but this growth in numbers has not been reflected in the economy. BOOM cannot see a bright future here. Recession is surely coming and may be much worse than predicted by the Bank of England. And CPI inflation may be much worse than predicted. It will almost certainly exceed 13% in the next 12 months. Stagflation is going to make things harder for everyone.

ARGENTINA COMPARISON:  If the people of the UK are saddened by their political leadership and economic prospects, they can always look across the Atlantic to Argentina to cheer themselves up. The Argentinian economy is always a sight to behold and wonder about — it’s the grand canyon of economic mismanagement. It’s almost as if everything bad economically has already happened there over the last 100 years and, yet, it happens again and again.

The Argentinian CPI inflation rate is now at 64%. Consumer prices are now rising around 5% every month. Meanwhile, the currency has been rapidly depreciating against the US Dollar over the last 4 – 5 years. Rapidly depreciating is a kind description. Some might call it collapse. Sadly, the US Dollar is in general circulation in the Argentine economy. This is a mortal sin of economic management. Almost all real asset transactions are settled using US Dollars and not the national currency, the Argentinian Peso. This is a ridiculous state of affairs and how any government has allowed it to continue is beyond BOOM’s imagination. Corruption appears to be the only explanation.

The persistence of an alternative currency and the general acceptance of it is a pre-condition for Hyperinflation to occur.  Hyperinflation is not just high inflation. It is Currency Collapse which eventually occurs when a nation’s citizens have lost all faith in their government and in governmental institutions.

The citizens of Argentina have taken to stock market speculation in desperation, preferring to hold stock rather than cash or real assets beyond the family home (about 70% of Argentinians own their home). Capital controls are in place and US Dollars are in short supply. The Merval Stock market Index has increased by almost 50% in the last month. Over the last 16 months, it has risen from 20,000 in April 2020 to 120,000 now. This makes the world of Crypto trading look tame by comparison.

THE CABLE: For those readers who are new to the world of finance and economics, the term “Cable” is a commonly used term which refers to the exchange rate between the Pound sterling and the US dollar.

The term originated in the mid-19th century, when the exchange rate between the US dollar and Sterling began to be transmitted across the Atlantic by a submarine ommunications cable. Since that time the US Dollar – British Pound exchange rate has been referred to as the “Cable”.

Believe it or not, the first Transatlantic Cable was laid under the Atlantic Ocean in 1858, but it failed after one month. The first truly successful cable across the Atlantic was completed in July 1866, reliably transmitting currency prices between the London and New York City Exchanges. Transatlantic communications are now mainly carried by underwater optical fiber cables, supplemented by satellites.

In economics, things work until they don’t. Until next week.  Make your own conclusions, do your own research.  BOOM does not offer investment advice.

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BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY: LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans). https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy

Watch this short 15 minutes video and learn as Professor Richard Werner brilliantly explains how global banking systems really work. https://www.youtube.com/watch?v=EnC1UlnFLyI

AND Watch for 4 minutes, this Bank of England explanation: Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This video describes what money is today. https://www.youtube.com/watch?v=ziTE32hiWdk

Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.  EMAIL: gerry {at} boomfinanceandeconomics.com

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Author: Austrian Peter

Peter J. Underwood is a retired international accountant and qualified humanistic counsellor living in Bruton, UK, with his wife, Yvonne. He pursued a career as an entrepreneur and business consultant, having founded several successful businesses in the UK and South Africa His latest Substack blog describes the African concept of Ubuntu - a system of localised community support using a gift economy model. View all posts by Austrian Peter