Friday 10 July 2009

China and the Bank of England

I have what I consider to be two related posts for you today, both from The Telegraph's economics section.

The first story gives the somewhat surprising news that the Bank of England ("BoE") Monetary Policy Committe ("MPC") yesterday elected NOT to use the option of further expanding its money-printing operations right now. Everyone but everyone, with any kind of interest in the subject, had presumed that they would just keep printing and printing and printing money ("Quantative Easing") for some time to come. Most likely in ever-increasing quantities. (See Zimbabwe, Weimar Germany, Brazil, Argentina, etc etc etc for historical precedents and an educated guess on what the results will be like.) So its really something of a surprise to read this announcement from them.

The second story for you is news that China have stood up once again in front of a roomful of world leaders at the "G8 (plus 5)" meeting in Italy, and told everyone that they are deeply, deeply concerned about the dubious fiat currencies and fiscal policies of certain countries in the Western world. They did not specifically mention names, but you should know that top of the list is the US dollar given the sheer volume of dollars the Chinese hold in their reserves and the lax restraint on the number of new dollars being issued, and second on the list is the UK given the massive volume of money printing at the BoE lately.

At first blush, I submit that very few people would ever consider these two items appearing on the same day to be a coincidence; they just seem so discrete from each other. But I am putting together a couple of dots here, joining them also up to a G8 meeting, and thinking the UK has been warned by the Chinese to stop debasing the pound so badly -- that is the reason for the surprise announcement from the BoE. The threat from the Chinese will be that otherwise they'll seriously consider moving from collecting ever more of our government Gilts in their reserves, to actually disgorging themselves of them and forcing down the market value due to the sheer volume of supply made available (thereby increasing interest rates, which move inversely to the value of the bond). Who in their right mind will hold on to, let alone continue to accumulate, an asset that they know is being deliberately depreciated in value by over-issuance? I mean, the Chinese are smart people and they play a longer game than our short-term vote-grabbing politicians in the Western democracies. They will only put up with being taken for a ride for so long, before they start to formulate their exit strategies and then implement them. My feeling is that we're on borrowed time, the exit strategy has been formulated and its just a matter of time before implementation gets under steam.

May you live in interesting times, as they say.

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