Bank of England Adds 50 billion Pounds to Asset Buying Program (QE)

Again as predicted, central banks of major economies has been accelerating policies of inflationism with more asset purchases or Quantitative Easing (QE).

The Bank of England (BoE) adds £ 50 billion to her existing program

The Bloomberg reports,

Bank of England officials pumped another 50 billion pounds ($79 billion) into the U.K. economy to protect a nascent recovery from the threat posed by Europe’s debt crisis.

The nine-member Monetary Policy Committee raised the target for bond purchases to 325 billion pounds, more than a quarter of current outstanding gilts, according to a statement in London today. The increase was forecast by 34 of 50 economists in a Bloomberg News survey. Fifteen economists forecast a 75 billion- pound increase and one no change. The MPC also held its benchmark interest rate at a record-low 0.5 percent.

“A gradual strengthening of output growth later this year should be supported by a gentle recovery in household real incomes as inflation falls, together with the continued stimulus from monetary policy,” the central bank said. “But the drag from tight credit conditions and the fiscal consolidation together present a headwind. The correspondingly weak outlook for near-term output growth means that a significant margin of economic slack is likely to persist.”

The stimulus expansion suggests policy makers remain concerned that Europe’s failure to stem its debt turmoil poses a risk to Britain. While U.K. services, manufacturing and construction all showed growth in January, the government’s budget squeeze and rising unemployment are acting as a drag on growth and officials forecast that inflation will slow to below their 2 percent target by the end of this year.

What allegedly has been meant for the economy is in reality a policy booster or protection for the beleaguered banking industry. Global central bankers will push inflationism to the limits until the markets forces their hands.

Bank of England Activates QE 2.0

The Bank of England has redeployed her version of QE 2.0

From Bloomberg,

The Bank of England expanded its bond-purchase plan for the first time in almost two years as government budget cuts and Europe’s debt crisis jeopardize Britain’s economic recovery.

The nine-member Monetary Policy Committee led by Mervyn King raised the ceiling for so-called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. Twenty- one of 32 economists in a Bloomberg News survey forecast no change, and the rest predicted increases ranging from 50 billion pounds to 100 billion pounds. The bank expects to complete the new round of purchases in four months.

The yield on the U.K.’s 10-year government bond dropped after the announcement, falling to as low as 2.228 percent from 2.352 percent before the statement. The central bank said slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” It also said it is now “more likely” that inflation will undershoot its 2 percent goal in the medium term.

The MSCI All-Country World Index slid into a bear market last month as European officials tried to contain a crisis that the International Monetary Fund said presents “acute” risks to the global economy.

Again note of the use of crisis in order to rationalize political action.

Well, readers of this blog have seen this coming.

Will the Global Central Banks Coordinate a Global Devaluation or Plaza Accord 2.0?

Policymakers easily change tunes especially when faced with fickle political exigencies

ECB’s President Jean-Claude Trichet, once a reluctant inflationist, will join the US in resorting to ‘open arms’ inflationism.

From the Bloomberg, (bold emphasis mine)

European Central Bank President Jean-Claude Trichet said threats to the euro region have worsened and inflation risks have eased, giving officials the option to take further action should the debt crisis worsen.

The economy faces “particularly high uncertainty and intensified downside risks,” Trichet said at a press conference in Frankfurt today after the ECB left its benchmark rate at 1.5 percent. While monetary policy is still “accommodative,” financing conditions have worsened in parts of the 17-member euro region and the ECB stands ready to pump more cash into markets if needed, he said.

The Bank of England recently refrained from extending credit easing (QE) programs, this could be temporary.

From another article from Bloomberg, (bold emphasis mine)

Bank of England officials resisted calls to extend economic stimulus as they attempt to navigate a path between accelerating inflation and a faltering recovery.

The nine-member Monetary Policy Committee, led by Mervyn King, maintained the target of its bond program at 200 billion pounds ($320 billion), as forecast by all but one of 41 economists in a Bloomberg News survey. It also held the benchmark interest rate at a record-low 0.5 percent today, as predicted by all 57 economists in a separate poll. The pound rose against the dollar after the announcement.

Central banks are refocusing on bolstering growth, with the Bank of Canada saying yesterday there is a “diminished” need for it to raise rates and Sweden’s Riksbank abandoning a planned tightening. While two U.K. policy makers who were calling for rate increases dropped that position last month, the Bank of England may be reluctant to do more so-called quantitative easing with inflation more than double its target.

Again my view is that central bankers appear to be looking for justifications to employ the increasingly unpopular QE programs.

However as shown above, some of the hardliner’s stance can easily give way when confronted by the prospects of a reemergent crisis.

For political authorities, an adapted political stance have mostly been symbolical. For the public hardwired to expect actions from these authorities, it would be politically difficult or unpopular not give in, as crisis can instantaneously change popular perception. Put differently, an aura of desperation can shift what seems unpopular today to become popular tomorrow, and thus political actions can be as capricious as political sentiment.

Yet given the predilection towards QE policies, analysts at Morgan Stanley speculate that a Plaza Accord 2.0 will likely be the course of action for global central bankers.

From Barrons, (bold emphasis mine)

Is a Plaza Accord 2.0 ahead? Some 26 years ago this month, the major industrialized nations hatched a plan to lower the dollar and unleash a wave of liquidity that raised global equity markets in the mid-1980s. Could it happen again?

Yes, say Joachim Fels, Manor Pradhan and Spyros Andreopolous, who head Morgan Stanley's global economics. In a report released Wednesday, they write that monetary authorities of the developed economies -- the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England -- could react to "weak growth and soggy asset markets" with coordinated easing.

In addition, they note that surprise easing moves by leading emerging-market economies, Brazil and Turkey, would complement the process. And while the Morgan Stanley team doesn't mention it explicitly, the Swiss National Bank's decision to peg the Swiss franc to the euro also would be consistent with an internationally coordinated easing move.

In my view, competitive devaluation has not only been happening, but has been intensifying. Although coordination may only be part of the story, perhaps applied to Western and developed economy central banks. Nevertheless the path towards policy harmonization could be in the works as proposed.

Yet I’m not sure about the effects of a global concerted and coordinated devaluation.

Although one thing seems certain: This policy addiction or obsession to debauch or destroy the currency serves as THE reason to own gold.

Low Hyperinflation Risk For the US?

According to some analysts, the risk of a Zimbabwe like hyperinflation to happen to the US dollar is slim if not implausible. Because the idea is, once 'inflation' gains a footing and eventually overcomes 'deflation' it will be easier to control.

Perhaps. But such is giving too much credit to the ability of authorities to steer us out of trouble.

But before acceding to such premises, it is best that we must try to understand Zimbabwe’s hyperinflation model.

We quoted Albert Makochekanwa of the Department of Economics of the University of Pretoria, South Africa in our Will Debt Deflation Lead To A Deflationary Environment?, who wrote in his paper “Zimbabwe’s Hyperinflation Money Demand Model” the following: ``Borrowing from Keynes (1920) suggestions, namely that ‘even the weakest government can enforce inflation when it can enforce nothing else’; evidence indicates that Zimbabwean government has been good at using the money machine print. Coorey et al (2007:8) point out that ‘Accelerating inflation in Zimbabwe has been fueled by high rates of money growth reflecting rising fiscal and quasi-fiscal deficits’. As a result of that, the very high inflationary trend that the country has been experiencing in the recent years is a direct result of, among other factors, massive money printing to finance government expenditures and government deficits.”

So, exploding DEFICITS…

From caseyresearch

Plus a jump in government payrolls which has surpassed the private sector, which further entrenches government spending...

Source: contraryinvestor.com (Fabius Maximus)

Plus, a soaring growth money supply, which according to Jeff Tucker of Mises.org seems starting to respond…And importantly a snowballing clamor for the printing press:

Previously we posted Ken Rogoff see Kenneth Rogoff: Inflate Our Debts Away!

And now:

From Peter Boone and Simon Johnson (Wall Street Journal Blog)…

``The Fed should announce that it will create inflation in 2009, i.e., it will do whatever it takes to make sure that wages and prices rise, rather than fall, in the next 12 months. And it should back that up with more aggressive monetary expansion, buying even more government and private securities. We cannot wait for a deflationary death spiral to take hold

From the Economic Times…

``There is not much government can do to accelerate the real rate of growth. The remaining option is to tolerate, even encourage, a faster rate of inflation to improve debt-service capacity. Even more than debt nationalization, inflation is the ultimate way to spread the costs of debt workout across the widest possible section of the population.

And at ZERO interest rates, ``we are entering a world with interest rates that are far too high for the economy's good," Goldman Chief U.S. Economist Jan Hatzius wrote in a Jan. 16 research note.” (Businessweek)

``The solution is obvious: The Fed needs to deliberately raise the rate of inflation—maybe not all the way to 6%, but significantly above zero. One way to do that is to print lots of money. The Fed can create money from thin air by purchasing assets such as Treasuries and mortgage-backed securities and paying for them by crediting the seller with newly created reserves at the central bank.” writes Peter Coy of Businessweek

Essentially Dr. Gideon Gono of Zimbabwe seems to be gaining quite a following among personalities in Wall Street, the academe and in the media...Aside from of course, public authorities like Mervyn King Governor of the Bank of England who will likewise do a Gono.

As for the risk of hyperinflation in the US or elsewhere, I’d rather be guided by Ludwig Von Mises in Human Action p. 427….

``But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.”

``It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”