Banking on Growth?

In his interviews with the media last week the governor of the Bank of England was quite candid. Firstly, whilst insisting the bank acted independently of parliament the fact that he felt the need to justify that independence at all is naturally quite telling. The issue is that the headache for the government is also a headache for the BoE. Extensive debt, bloated by the need to prop up the banking sector of which the BoE is the custodian.

The second telling point was that he actually did look genuinely concerned that the necessity of the Bank’s actions would, as a direct result, decimate the savings of pensioners and anyone else with a nest egg they have been nurturing.

Thirdly, he also felt the need to clearly state that the Bank was still committed to monetary stability and low inflation – it’s just that this will have to take a back seat for a while until the real value of the debt that the government owes has been materially diminished.

These are probably the closest thing to an admission that one is likely get that a key part of the strategy for dealing with debt is to reduce it’s value through high – but controlled – inflation. But there is the rub. Inflation can easily take hold and accelerate. There is a limitto which real incomes can be squeezed before people – especially those in the public sector – begin tonight back. I do not think we are at that point just yet – but come Spring of next year, if inflation has reached 6% or higher then it will be highly likely that it will not come down again for at least 3 years.

Is economic growth the answer? The Bank does not think so. It openly admits that much of it’s new round of QE is likely to simply fuel inflation. There is a possibility that this will, in turn, put downward pressure on the exchange rate but the crisis in the Eurozone may undermine this hope – possibly sending the pound in the wrong direction.

So where are we?

Well the way things are panning out, our views remain much the same as they have been for the past 3 years. Now is a good time to borrow – interest rates are low and inflation is set to stay high for at least another 3 years and if it now gets out of control it could erode the real value of your borrowings even quicker. Keep some cash in reserve of course, no need to be reckless (!) but it’s a good time for some consumerism.