Are the printing presses being warmed up in the Bank of England’s basement?
On Monday night, we had Charlie Bean telling savers to get out there and spend. Now we hear that Adam Posen – the newest member of the Bank’s rate-setting committee – is calling for more quantitative easing (QE).
Andrew Sentance – the sole Monetary Policy Committee member calling for higher rates – looks increasingly alone.
The only consolation for anyone worried about the effects of further QE is that we’re hardly alone…
Savers are spending because they have to
Charlie Bean might be pleased to hear that consumers are in fact spending their savings. Sadly it’s not out of any sense of patriotic duty. It’s because they have to.
As Myra Butterworth reports in The Telegraph, the proportion of earnings saved or used to pay off debt has fallen from 5.5% to 3.2% in the past three months. That’s the lowest level in nearly two years.
So if we’re not saving, and we’re not paying down debt, where’s the money going? Are we a nation of incorrigible spendthrifts? Not at all. The trouble is, wages have been flat, while the cost of living has been rising. So it’s costing people more to buy the same goods. And that means, as Jonathan Loynes of Capital Economics puts it, that “households have no choice but to dip into their savings.”
Of course, Mr Bean and Mr Posen might point out that this is precisely why we need more QE. If consumers are being squeezed, they won’t spend enough money to keep the economy ticking along, and so we’ll end up in the doldrums again.
But then again, consumers are being squeezed precisely because their incomes aren’t keeping up with inflation – which you could argue is a side-effect of QE and low interest rates. And meanwhile, what few savings they have are being deliberately eroded by the Bank of England, which in turn isn’t a healthy backdrop for encouraging those oh-so-vital “animal spirits” to return.
Are we soon to see a rise in protectionism?
There is some consolation. Plenty of other countries are planning to debase their currencies as well. And that makes it a lot harder for any one government to trash their paper money.
As we noted yesterday, Brazil’s finance minister declared that there’s an international currency war going on. And as David Rosenberg of Gluskin Sheff points out, since the credit ‘collapse’ began, we’ve seen “a series of rolling currency depreciations.” For example, from April 2008 to October that year, the Australian dollar fell by 35%. Then it was the pound’s turn, plunging 28% between October 2008 and January 2009. This year, the focus has been mainly on the euro, but since June, it’s the dollar that has been under pressure.
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Of course, as John Higgins of Capital Economics points out: “Not everyone can have a weaker currency.” They argue that the financial authorities in the West – outside of Switzerland and Japan – are unlikely to intervene in currency markets directly, because basically, naked intervention isn’t really approved of.
No, it’s much better to do these things in an underhand manner so you can pretend you’re still abiding by the principles of the free market. So unfortunately, what Higgins reckons is a lot more likely, is a rise in protectionism. An obvious choice of course, is for the US to impose “punitive tariffs on Chinese imports if China is not prepared to allow greater strength in the renminbi. A resulting trade war would be a currency war in all but name, and undoubtedly detrimental to the outlook for global growth.”
How to profit from a currency war
It’s an ugly prospect. And again, it’s little wonder that gold is rising against this backdrop. As Rosenberg (also a fan of gold) points out: “it is behaving more and more like a currency – a currency that is no liability of any government.” For us, that’s the best argument for holding on to it.
Yes, it’s hit new highs yet again, and that always makes us edgy. Rosenberg suggests that it could fall by 10% from here without breaking through any significant price levels, so you might want to wait for a correction before buying any more. Of course, every other time that gold has hit a fresh high, it’s ended up hitting a fresh peak, so maybe you’re less worried about what it does in the short term.
Our precious metals correspondent Dominic Frisby recently put together a report listing his favourite gold stocks as well as a guide to trading silver.
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