More Central Bank Panic: Bank Of England Warns of Elevated Risks to Financial Stability, Four More Central Banks Cut Rates Last Week!

Global central banks and governments remain in a state of panic. That’s if we account for their actions and statements over economic and financial conditions.

Last year, issuance of mostly ‘sanitized’ warnings had been the fad.

This year has been marked by policy actions, particularly a wave of easing measures of mostly interest rate cuts from different central banks.

Yet warnings has not diminished. 

Add to the alarm sirens recently rang by the US Treasury’s Office of Financial Research, the Bank of England (BoE) has just jumped on the bandwagon of declaring heightened risks of financial instability.

From the Wall Street Journal’s Real Time Economic Blog: (bold mine)

The Bank of England said Thursday that risks to the stability of the U.K. financial system remain elevated, citing threats ranging from Greece’s debt troubles to diverging central-bank policies.

The BOE’s Financial Policy Committee, which safeguards the stability of the financial system, made no new policy recommendations at its quarterly meeting that ended March 24, the BOE said Thursday.

But the panel highlighted a slate of issues in the world economy and global financial system that it is monitoring closely.

Among officials’ top concerns is the risk that participants in financial markets are too sanguine about their ability to quickly sell assets if economic news sours, a fragility the BOE has been highlighting for some time.

This drying-up of market liquidity risks heightening volatility in financial markets and could undermine financial-sector stability, the panel said.

The committee instructed BOE staff and U.K. regulators to work together to get a better grasp of which markets may be especially vulnerable and to find out what strategies asset managers have in place to manage their liquidity needs. It asked officials to prepare an interim report on the risks surrounding market liquidity by June and a full report by September.

The panel also highlighted potential risks to the financial system from a slowdown in the Chinese economy and from the U.K.’s yawning current account deficit, which has widened to around 6% of annual gross domestic product.

And officials said they are monitoring lending standards closely, particularly in the leveraged loan market, where banks lend to companies before selling on the debt to investors.

The BoE seem to expect volatility ahead even as market participants haven’t taken various risks into considerations. 

Funny but, in the past government agents used to blind to such risks. It appears that risks have become so brazen that political agents can't ignore them anymore. Ironically, the same agents continue to apply the same measures which has spawned the current imbalances. 

Current policies as I have been saying represent: “Yes I recognize the problem of addiction but a withdrawal syndrome would even be more cataclysmic”.


So current warnings seem like escape clauses designed to exonerate them when risks transforms into reality.

Oh by the way, after my post on Russia and Serbia’s interest rate cuts, rate cuts by Sweden, Pakistan and Hungary adds to a total of 9 interest rate cut by global central banks this month and 27th for the year.

(table from CBrates.com)

If we add Sierre Leone which also cut rates last week, this makes for the 10th and 28th respectively.

Here is Central Bank News on Sierra Leone’s action: (bold mine)

Sierra Leone’s central bank cut its monetary policy rate (MPR) by 50 basis points to 9.50 percent to promote private sector credit growth in an effort to stimulate economic activity against a backdrop of a challenging environment created by the twin shocks of Ebola and the collapse of international commodity prices, particularly iron ore.

Measures against twin shocks and collapse. Nice.

Well again that’s only the interest rate segment. There are many more non interest rates easing actions that have not been included in the above tabulations.

Yet all these point to global central banks deploying crisis resolution measures on a massive scale even without a crisis yet.

So while stock markets have been euphoric, governments have been panicking. Two different agents moving in different directions. Obviously one will be wrong here.

Yet it’s a wonder what tools will be left for global central banks, since they have munificently used them, when the real thing appears.

Bubbles Everywhere: BoE’s Mark Carney: UK housing market approaching “warp speed”

A few months back, a group of UK realtors approached the Bank of England (BoE) and asked the latter to put a brake on what they see as a simmering housing bubble. 

Today, BoE governor Mark Carney warns of UK’s housing market approaching “warp speed”.

From the Bloomberg: (bold mine)

Bank of England Governor Mark Carney may be struggling to prevent Britain’s housing market from reaching what he calls “warp speed.”

About two-thirds of 27 economists in a Bloomberg News survey said property in the U.K. is at risk of overheating. The survey, published today, also showed that the outlook for the economy has improved, with forecasts for growth this quarter raised to 0.7 percent from 0.6 percent last month.

Carney has already taken a first tilt at the market, ending some incentives on mortgage lending in a program the central bank started last year to boost credit. House prices rose to a record in November, Acadametrics said today, while home-loan approvals and sales are increasing, bolstered by a strengthening economy, government incentives and record-low interest rates…

Carney has justified his decision to revamp the Funding for Lending Scheme by saying that taking small steps now will curtail the need for bigger measures later on.

“There’s a history of things shifting in the U.K. and the housing market moving from stall speed to warp speed and underwriting standards slipping,” he said in New York on Dec. 9. Developments “merit vigilance but not panic,” he said.

Acadametrics and LSL Property Services said today house prices rose 0.6 percent last month as transactions exceeded 77,000, the most for a November since 2007.

More on record prices from another related Bloomberg article: (bold mine)

U.K. house prices rose to a record in November as strengthening demand pushed values higher in all regions of England and Wales, Acadametrics said.

Values increased 0.6 percent from October to an average 238,839 pounds ($390,900), the real-estate researcher and LSL Property Services Plc (LSL) said in a report today. Prices reached an all-time high in London and parts of the southeast as average values climbed 4.9 percent from a year ago. In London, prices surged an annual 9.2 percent in the quarter through November.

The source of funding for UK’s corporate sector comes mainly from bond issuance and banking loans…

...where the distribution of loans by industry from financial institutions and from the BBA panel of lenders have mostly been in real estate, hotel and restaurants and construction based on BoE data.

The above distribution closely resembles bank loan distribution in the Philippines.

Meanwhile residential mortgages have likewise turned around…

…as consumers go on a borrowing spree.

And its not just in housing.

When the BoE began its second wave of QE from late 2011 until 2012…

…this coincided with the bullmarket in UK’s equity bellwether, the FTSE 100.

What would likely put a halt on a housing and stock market approaching “warp speed”? Again aside from bubbles collapsing from its own weight, the likely answer will be higher interest rates. 

Yields of UK’s 10 year sovereign bonds appear to have gotten a ‘second wind’  and seems headed higher. 

Again the bond vigilantes lurks behind the shadows and remains a key threat to ubiquitous bubbles in the global financial markets, including those in the UK.

UK Realtors ask Bank of England to Put a Brake on Bubbles

Below is an interesting report stating that in the United Kingdom, beneficiaries of the indirect asset transfer via zero bound rates have been appealing to authorities to put a dampener on an alleged housing bubble.

From the Financial Times (hat tip zero hedge) [bold mine]

Estate agents and surveyors have become so concerned about the dangers of another unsustainable housing boom that their trade body is urging the Bank of England to limit national house price growth to 5 per cent a year…

“The Bank of England now has the ability to take the froth out of future housing market booms, without having to resort to interest rate increases,” said Joshua Miller, senior economist at Rics.

“This cap would send a clear and simple statement to the public and the banking sector, managing expectations as to how much future house prices are going to rise. We believe firmly anchored house price expectations would limit excessive risk taking and, as a result, limit an unsustainable rise in debt.”

The Rics intervention comes as data this week have reinforced a sense of recovery in the UK housing market and sparked warnings that a new bubble could be forming.

Average house prices hit another record high last month, according to figures published on Friday by the LSL/Acadametrics House Price Index, rising 3.2 per cent to £233,776 over the year to August.

It is important to point out how rare it is for beneficiaries of current policies admit to the risks of an inflating bubble. And that their call to contain bubbles signify as Posttraumatic stress disorder (PTSD) or stigma from the previous unpleasant experience expressed through the fear of another bubble bust.

As previously pointed out, a parallel universe exists in UK where asset prices continue to surge even as the economy struggles.

Asset booms in UK has led to a quasi-stagflation where statistical inflation rates have been higher than statistical economic growth rates whether annualized or by quarter.

Yet like in China or elsewhere, once the inflation genie has been let out of the proverbial lamp, hardly any regulatory caps have been successful in taming of bubbles. 

Besides bubbles have been convenient tools to generate statistical growth that embellishes the image of political authorities.

And proof of this is that despite BoE governor Mark Carney’s promise to keep interest rates low via “forward guidance” to supposedly bolster growth, which has rightly been met by skepticism by some of the Members of the Parliament (MP), yields of UK government bonds suggests that the halcyon days in the real estate and the stock markets appear to have been numbered—with or without the BoE’s action.

If the current trends of the bond markets persist, then eventually the bond vigilantes will force the hands of (global) central banks to officially hike interest rates which places all malinvestments forged via a regime of zero bound rates under intense pressure. 

By then, UK realtors will have their demands met, but sad to say that they are likely to endure anxiety relapse from another terrifying episode of a bubble bust. 

BoE's Andy Haldane: Bursting of the biggest bond bubble in history is the biggest financial risk

So Bank of England’s Andy Haldane admits to the monster central bankers have spawned.

From the Telegraph.co.uk

Andy Haldane, the Bank of England's executive director for financial stability, believes the biggest risk to the global financial system is a "disorderly" bursting of the bond bubble created by quantitative easing. 

He told the Treasury Select Committee on Wednesday that bond market had seen “shades of that" in the spike in bond yields around the globe after the US Federal Reserve said it was looking to taper its massive stimulus. 

“We have intentionally blown the biggest government bond bubble in history,” he said at hearing on the reappointment of officials to the Financial Policy Committee, created to monitor broad risks to the financial system. 

If central bankers acknowledge that withdrawing stimulus would burst the bond bubble and trigger financial instability would they proceed with that? Hardly. 

But again continuing to inflate the unsustainable bond bubbles will produce an eventual bust. 

Long term US treasury yields, for instance, has been inching higher since the 2nd half of 2012 or even before the FED’s unlimited QE 3.0 as previously discussed. With the FED’s QE 3.0, the rate of increases of bond yields accelerated. So in order not to lose credibility, the FED had to put on the make up and blabber about “tapering” which media reasons backwards. 

So if QE today pushes up yields, and withdrawing QE will also drive up yields then both will end up with the same scenario: the bursting of the bond bubble. 

Damned if you, damned if you don’t 

And the initial hissing of the bond bubble has already been crushing many markets including ASEAN markets. What more of a full scale implosion?

How about the accountability of central bankers for the coming devastation?

Why Bank of England’s Small Business Loans Program May Fail

Talk about central banking wizardry. 

The Bank of England (BoE) will extend lending programs to small and business enterprises for another year even if such measure has initially failed.

From Bloomberg:

The Bank of England will extend by one year its plan to provide cheap loans to companies and consumers and make credit available for small companies, enhancing a nine-month-old program to aid the economy.

The Funding for Lending Scheme will now last until January 2015, and will make lending to small companies more attractive and open to non-bank lenders, the BOE and the Treasury said in London today. The government says its program has lowered borrowing costs by about 100 basis points and provided 13.8 billion pounds ($21 billion) between its creation and December

“This is a big boost for the small and medium sized businesses that are at the heart of the British economy,” Chancellor of the Exchequer George Osborne said in an e-mailed statement. “This innovative extension will now do even more for small and medium sized businesses so that they can play their full part in creating new jobs.”

Osborne is expanding the program on the eve of economic statistics that may show Britain’s economy was close to an unprecedented triple dip in the first quarter. The announcement also precedes an audit of the U.K. by the International Monetary Fund, whose delegation visits London next month after the fund said Osborne should ease his austerity plan to aid growth.

Today’s extension to the FLS will allow banks to borrow 10 pounds next year for every 1 pound they lend to small companies in 2013, the Treasury said. If they wait to extend the loan until next year, the amount they can borrow under the plan is halved to 5 pounds for every pound loaned. Banks can borrow 1 pound for every pound loaned with the rest of the program.

The premise here is that access to finance has been the key barrier besetting the Small and Medium scale businesses.

While it has been true that UK’s overleveraged economy has forced households and firms to pay down debts, that’s only part of the story.

The main obstacle to small and medium scale businesses has been the domestic economy and domestic demand, this is according to the latest survey by the Federation of Small Businesses (FSB).

John Walker, National Chairman of FSB says another factor influencing the weak economy and demand has been inflation

Though our members are feeling more optimistic, the outlook remains challenging with domestic demand weak. Consumer spending has been subdued by inflation, eroding disposable incomes, with inflation expected to remain above the target level in 2013. In this quarter, members report that three cost elements – fuel costs, input prices and utility bills – are increasing their overheads and while down from 12 months ago, the last three quarters of 2012 showed these cost pressures persisting.

So this should be a great example of how inflationism distorts the economic calculation that leads to a stagnating economy amidst elevated inflation or stagflation

The Bank of England has basically increased their balance sheet by almost three times since 2008. 

Over the same period, UK’s statistical consumer price inflation rate remains lofty despite the deleveraging by households and firms. 

Yet as pointed out by the article, UK’s economy is facing the risks of a triple dip recession. (charts from tradingeconomics.com)

In short, all money printing by the BoE has failed to deliver what has been promised—a recovery.

Instead what all the money printing has done has been to keep the bubble in the property sector afloat. 

While UK’s average housing prices have been down from 2007, they remain above the pre-bubble bust levels. This goes the same with housing pe ratios (chart from Nationwide.co.uk)

Another area which BoE’s QE has positively influenced has been the stock market.

UK’s FTSE 100 has been on the rise since 2011 (blue trend line), even as the economy fumbled from one recession to another. Another wonderful example of a parallel universe. The FTSE has been up 8.6% year to date as of yesterday’s close. (chart from Bloomberg)

In other words, all cheap credit and money has done has been to incentivize speculation (asset bubbles) at the expense of the productive sector of the economy. 

Why invest in businesses when the costs of operating one have been unpredictable and when financial markets, especially backed by an implicit Bank of England Put, would give a better yield?

Since the inception of the FLS, the BoE’s recourse to cheap credit has also failed to boost lending to the SMEs.

What this means is that the BoE’s FLS credit program hardly addresses the roots of the problems, which hasn’t been about credit. The BoE fails to see that her inflationist policies has functioned as one of the principal obstacles to economic recovery.

Yet like typical political authorities, who wants to be seen as “doing something”, the expedient action has been to do the same thing over and over again and expecting different results. Unfortunately, the outcome will likely go against their wishful expectations. 

Bank of England: Rising Equity Markets Don’t Reflect the Underlying Economic Situation

The Bank of England (BoE) says what I have been saying all along: markets have functioned in departure from reality or what I call as "parallel universe".

From the Bloomberg

The Bank of England said rising equity markets don’t reflect the underlying economic situation and warned that investors may be underestimating risks in the financial system.

Gains by equities since mid-2012 “in part reflected exceptionally accommodative monetary policies by many central banks,” the BOE’s Financial Policy Committee said today in London in the minutes of its March 19 meeting. “It was also consistent with a perception among some contacts that the most significant downside risks had attenuated. But market sentiment may be taking too rosy a view of the underlying stresses.”

UK’s highly fragile banking system has been amplified by current yield chasing parallel universe. More from the same article:

At the meeting, the FPC recommended that U.K. lenders raise 25 billion pounds ($38 billion) of additional capital to cover bigger potential losses, possible fines for mis-selling and stricter risk models. While banks have strengthened their resilience in recent years, the FPC said today that not all of them may be able to withstand unexpected shocks and maintain lending to companies and households.

The FPC discussed potential threats from the crisis in Cyprus, which agreed on an international bailout last month. While at the time of the March 19 meeting there were “minimal signs” of spillovers to other financial systems, there was “a risk that this situation could change,” the committee said….

In their discussion, the FPC members noted the potential threats to the financial system from increased risk appetite among investors.

“This was evident in the re-emergence of some elements of behavior in financial markets not seen since before the financial crisis, including a relaxation in some U.S. credit markets of non-price terms and increased issuance of synthetic products,” the committee said. “At this stage, they did not appear indicative of widespread exuberance in markets. But developments would need to be monitored closely.”

The FPC also said that banks’ leverage ratios, a measure of their debt to equity level, would remain “very high” even after the new recommendations were met. It said there would be “little margin for error against a backdrop of low growth in the advanced economies.”

As noted in the above, central bank authorities either fail to comprehend on the distortive consequences of their inflationist policies or that they are in deep denial.

Because money is never neutral, central bank’s monetary expansion means “money from thin air” flows into the financial and economic system asymmetrically.

Such polices trigger what is called as the “business cycle”.

As the great dean of Austrian economics explained

The fundamental insight of the "Austrian," or Misesian, theory of the business cycle is that monetary inflation via loans to business causes over-investment in capital goods, especially in such areas as construction, long-term investments, machine tools, and industrial commodities. On the other hand, there is a relative underinvestment in consumer goods industries. And since stock prices and real-estate prices are titles to capital goods, there tends as well to be an excessive boom in the stock and real-estate markets.

(bold mine) 

So England’s property bubble and elevated equity prices signify as a classic example of the business cycle in motion.

And given the increasingly hostile environment where productive (commercial) activities are being punished via higher taxes, financial repression and by increased regulations and mandates, such string of political actions compounds on the skewing of people’s incentives towards yield chasing activities.

Add to this the distorting effects of inflationism on economic calculation, again professor Rothbard: (bold mine)

By creating illusory profits and distorting economic calculation, inflation will suspend the free market's penalizing of inefficient, and rewarding of efficient, firms. Almost all firms will seemingly prosper. The general atmosphere of a "sellers' market" will lead to a decline in the quality of goods and of service to consumers, since consumers often resist price increases less when they occur in the form of downgrading of quality. The quality of work will decline in an inflation for a more subtle reason: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices, and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

Besides, like Spain, central banks have supported asset markets in order to finance unwieldy government spending or their highly tenuous welfare state via Ponzi financing.

In short, lofty equity prices are symptoms of monetary disorder. Another reality is that such policies have been designed to preserve on the unsustainable incumbent political economic cartel of the debt and inflation based crony banking-welfare/warfare state-central banking system through asset bubbles.

Yet if central banks desist from pursuing further monetary expansion that blows today's asset bubbles, the system falls asunder. 

Eventually when a critical state have been reached from these cumulative unsustainable political actions, markets will also unravel.

Central bankers, in essence, have been caught between the proverbial devil and the deep blue sea.

The above also shows why conventional treatment of financial markets will be highly sensitive to significant analytical errors and losses. As hedge fund manager Kyle Bass recently noted, today's markets are largely Potemkin Villages.

Belgravia: London’s Ghost Village?

Central bank inflationism has only been fueling excessive speculation on global property markets. And the emergence of ghost communities, which are symptoms of bubbles, may not confined to China.

Belgravia, known as one of the wealthiest districts in the world, located at central London in the City of Westminster and the Royal Borough of Kensington and Chelsea, seem to be transforming into a ghost community largely due to foreign buyers.

From CNBC:

An odd thing was happening, or rather not happening, as dusk fell the other day across Belgravia, home to some of the world's most valuable real estate: almost no one seemed to be coming home. Perhaps half the windows were dark.

It seems that practically the only people who can afford to live there don't actually want to. Last year, the real estate firm Savills found that at least 37 percent of people buying property in the most expensive neighborhoods of central London did not intend them to be primary residences.

"Belgravia is becoming a village with fewer and fewer people in it," said Alistair Boscawen, a local real estate agent. He works in "the nuts area" of London, as he put it, "where the house prices are bonkers" — anywhere from $7.5 million to $75 million, he said.

The buyers, increasingly, are superwealthy foreigners from places like Russia, Kazakhstan, Southeast Asia and India. For them, London is just a stop in a peripatetic international existence that might also include New York, Moscow and Monaco.

Bank of England’s QE

Rampant property speculation has partly been abetted by the weakening of the British pound relative to emerging markets currencies, largely brought about by the balance sheet expansion by the Bank of England.

Except for India’s rupee, China’s yuan, the Philippine peso, and Russia’s ruble have mostly firmed against the British pound since 2008.

Yet prospects of a “triple dip” recession have only spurred political pressure on the Bank of England to pursue more quantitative easing which may add more fuel to more speculative frenzies.

Of course aside from sheer speculation, political money (e.g. slush funds) looking for overseas shelter could also play part in exacerbating speculative activities.

Ghost communities can be seen also in the US.

From the same CNBC article:

London is not the only city where the world's richest people leave their expensive properties vacant while they stay in their expensive properties someplace else; the same is true in parts of Manhattan. But the difference is that so many of them here are foreign, and that they look to be buying up entire neighborhoods.

"Many areas of central London have become prohibitively expensive for local residents," a recent report by the Smith Institute, a research group in London, said recently.

Worst, central bank fueled property bubbles incite social divisions or political chasms between haves and the have-nots epitomized by the politically correct terminology called “inequality”.

Again all these are symptoms of the global pandemic of bubbles.

Are Expanding Deals in Currency Swaps Signs of Currency Wars?

Lately I questioned the popular wisdom promoted by politicians and by media as “currency wars”

Reports say that the Bank of England (BoE) may seal a deal with the People’s Bank of China (PBoC) for currency swap lines.

From Reuters

Britain said on Friday it hopes to set up a currency swap line with China soon to help finance trade, a move that will enhance London's drive to become a leading offshore centre for yuan trade.

China, in an effort to internationalize the yuan and eventually make it a world reserve currency, has already agreed swap lines with more than 15 other countries, mostly emerging markets.

The Bank of England said on Friday it would work with China's central bank to sign a final agreement shortly on a reciprocal three-year yuan-sterling swap, building on its statement last month that it was ready "in principle" to adopt the swap line.

Last December global central banks went on to renew arrangements for forex swap lines

From Reuters

The U.S. Federal Reserve said it had extended for another year the dollar swaps with the European Central Bank, Bank of Canada, Bank of England and Swiss National Bank. The announcement was released at the same time by the other central banks.

These provisions were an important part of the powerful response launched by monetary authorities during the crisis to keep global financial markets open, curbing lofty dollar funding costs which had spiraled due to fear over counter-party risk.

Swap arrangements were revised and extended in November, 2011 as the euro zone debt crisis intensified, to ease the dollar funding pressure being experienced by some European banks.

China has said to have closed 18 swap arrangements worth a total of 1.6 trillion yuan involving different nations since 2009 (China Daily).

So essentially as these governments embark on their respective domestic money expansion programs, what they do to “hedge” against potential “shocks” (implicitly caused by such programs) has been to accommodate each other currencies through swap line deals.

Some currency war eh?

The Impact of Open Ended QEs on Asia: Bubbles or Stagflation

At least some foreign experts have an idea of the risks posed from inflationist policies, adapted by political authorities of developed economies, on Asia.

From CNBC-Finance.yahoo

The Federal Reserve's measures to revitalize the U.S. economy pose risky side effects half way across the world in Asia, warn experts, particularly in the form of asset bubbles driven by an inflow of speculative funds into the region.

Pumping cash into the U.S. financial system tends to have a spillover effect on other parts of the world and Asia, in the past, has been a big beneficiary of the extra cash looking for a home.

"The problem is that the Fed is simply not paying attention to Asia because they are so concerned about the internal economic dynamics in the U.S. and they are trying to resuscitate the U.S. labor market," Boris Schlossberg, Managing Director, BK Asset Management told CNBC Asia's "Squawk Box" on Friday.

"It is creating a bifurcated result where you (get) higher asset prices, but not necessarily quality growth," he added.

Hot money flows into the region are likely to return.

Currency debasement policies in the developed nations would motivate investors to move funds elsewhere. This has been widely known as “the search for yields” which in reality signifies as a capital flight dynamic where investors seek refuge for savings.

More from the same article:

The Fed announced on Thursday its third round of monetary stimulus, in which it pledged to buy mortgage related debt and other securities until the country's labor market showed sustained improvement.

The last two rounds of quantitative easing in 2009 and 2010 resulted in massive capital inflows into the region of $66 billion and $96 billion, respectively, according to data from the Asian Development Bank (ADB), some of which was withdrawn in 2011, contributing to a subsequent slump in markets.

The ADB warned earlier this week that history could repeat itself should the region be hit by a surge in speculative fund inflows, adding that policymakers should brace for a scenario where money exits the region as quickly as they entered.

Vishnu Varathan, Market Economist at Mizuho Corporate Bank, says Asia could see an even higher level of capital inflows this time around, since the Federal Reserve is unlikely to be the only major central bank launching renewed quantitative easing - the European Central Bank, for instance, may also step in with asset purchases.

He says the region's property market is most vulnerable to sharp price increases, particularly in countries such as Singapore and Hong Kong - where the seeds were sown a few years ago from previous rounds of monetary stimulus - and nascent markets like Indonesia.

Earlier I postulated that intensifying inflationism in Japan and in western nations will drive savers (or the capital flight dynamic) into Asia. This should include the Philippines.

But since (inward) capital flows into ASEAN will reflect on global central bank activities, this dynamic would not be limited to Japan but would likely include western economies as well.

With the Fed and the ECB riding into the open ended-unlimited options, it’s not far fetched for central banks of Japan (BoJ), England (BoE) and others to join the club.

By putting a cap on the Euro-Swiss Franc, the central bank of Switzerland (SNB) have been the frontrunner of the open ended asset purchasing policy options where signs of internal bubbles have emerged.

Yet unlimited inflationism will likely to spur consumer price inflation that increases the risks of stagflation especially on emerging Asia.

Vasu Menon, Vice President, Wealth Management Singapore, adds that rising prices will pose a challenge for Asian central banks going forward.

"I think central bankers are worried about inflation - the Philippines for example held its rates steady because they are concerned about inflation," Menon said, referring to a decision by the Philippine central bank on Thursday to leave its benchmark interest rates steady at 3.75 percent.

As I recently wrote,

High commodity prices are likely to influence emerging markets consumer price inflation more. Food makes up a large segment of consumption basket for emerging Asia including the Philippines. This would prompt for their respective central banks to reluctantly tighten. Monetary tightening will put pressure on the stock market.

Stagflation, thus, also represents both a contagion and internal (political and market) risk for the Philippines and for emerging Asia.

Yes the risk ON environment has been re-triggered by massive inflationism by the Fed and the ECB.

And one of the above risks (a bubble or stagflation) will become a force to reckon with in Asia, possibly in 2014 or 2015. All these will essentially depend on the feedback mechanism between the dynamics at the marketplace and policy responses on them.

Inflationism Promotes Inequality, Immorality and Economic Hardship

Contra to what has been advertised by politicians and the mainstream, the policy of inflationism has essentially been political than about economics (e.g. couched by technical vernacular as “unemployment” or economic recovery) or social welfare.

That’s because inflationism is a policy which redistributes resources from society to the government and to politically favored groups.

I previously pointed out how a study from the Bank of England subtly admitted that their QE policies favored the political elites which indirectly has promoted “inequality”.

Yet we see more evidences of how central bank’s inflationist policies deepens the economic divide, from the CNBC,

The latest round of QE announced by Bernanke yesterday has sparked growing controversy about how Fed policy has mainly helped the wealthiest Americans.

Economist Anthony Randazzo of the Reason Foundation wrote that QE “is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality.”

Donald Trump – not usually one for distributional analyses of monetary policy – said on CNBC yesterday that “People like me will benefit from this.”

The reason is simple. QE drives up the prices of assets, especially financial assets. And most of the financial assets in America are owed by the wealthiest 5 percent of Americans.

According to Fed data, the top 5 percent own 60 percent of the nation’s individually held financial assets. They own 82 percent of the individually held stocks and more than 90 percent of the individually held bonds.

By helping to reinflate the stock market in 2009 and 2010, the Fed created a two-speed recovery. The wealthy quickly recovered much of their wealth as stocks doubled in value. But the rest of the country, which depends on houses and jobs for their wealth, remained stuck in recession.

Put another way, most Americans have most of their wealth tied up in their houses (about 50 percent for most). For the top 5 percent, homes account for only 10 percent of wealth, while financial assets account for between one third and 40 percent.

By boosting the value of financial assets, Fed has helped the economy of Richistan but not the broader United States.

Bernanke is obviously aware of this criticism, which is why the latest round of easing is focused on mortgages. But here too, there is a divide between the rich and the rest. Despite lowered rates, banks remain strict on lending, restricting access to credit for most Americans. The wealthy and the asset-rich, however, will now enjoy even lower rates on their credit.

The policy of inflationism does not only promote societal inequality, they advance immoral actions such as “orgy of speculation”, recklessness and the sense of entitlement-dependency (moral hazard) which ultimately sows seeds to social instability.

At worst, inflationism fosters boom-bust cycles if not the destruction of the currency which leads to economic depression

As the late distinguished Professor Hans F. Sennholz warned,

Evil acts tend to breed more evil acts. Inflationary policies conducted for long periods of time not only foster the growth of government but also depress economic activity. Standards of living may stagnate or even decline as growing budget deficits thwart capital accumulation and investment that are sustaining the standards.

Inflation misleads businessmen in their investment decisions, which causes much waste and many bankruptcies. In fact, it is the root cause of the boom-and-bust cycle which wreaks havoc on economic activity. Indeed, inflation breeds many evils of which most Americans are unaware.

Open ended inflationism by the US Federal Reserve and the European Central Bank, will ultimately lead to economic impoverishment and social chaos.

Bank of England Study: QE Benefited the Elites

The Bank of England study on The Distributional Effects of Asset Purchases notes of the implications of Quantitative Easing (QE) on Savers

By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets.

Inflation is political. Inflation redistributes wealth from society to politically favored groups or the political elites, and thus, promotes wealth inequality.

In this case, inflation through QE has been aimed at supporting asset prices, which essentially accounts for the Bernanke doctrine.

The morality of inflation as the great Henry Hazlitt wrote, (The Inflation Crisis and How to Solve it p.41)

Inflation, to sum up, is the increase in the volume of money and bank credit in relation to the volume of goods. It is harmful because it depreciates the value of the monetary unit, raises everybody's cost of living, imposes what is in effect a tax on the poorest (without exemptions) at as high a rate as the tax on the richest, wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals

HOT: Bank of England Reactivates QE

The Bank of England fired the first salvo to the much expected (or may I say much awaited) series of credit easing policies by global central banks

From the Bloomberg,

The Bank of England restared bond purchases two months after halting its expansion of stimulus as the deteriorating outlook spurred policy makers to ramp up efforts to kick start a recovery.

The Monetary Policy Committee led by Governor Mervyn King raised its asset-purchase target by 50 billion pounds ($78 billion) to 375 billion pounds…

The resumption of quantitative easing is a part of a twin- pronged effort by the central bank to pull Britain out of a recession that includes a new credit-boosting program. With inflation easing and reports this week showing that factory,services and construction activity weakened in June, policy makers were spurred to act…

Policy makers also left their benchmark rate at a record low of 0.5 percent today, a move forecast by all but one of 50 economists in a Bloomberg survey. Within the QE survey, two forecast no change, one forecast a 25 billion-pound increase and eight predicted an addition of 75 billion pounds.

The ECB has likewise been widely expected to cut interest rates today.

The last time the BoE delivered the QE (BoE's balance sheet from the Bank of England), this boosted UK’s major equity benchmark, the FTSE, for about one quarter or for about the same time until the program expired.

The Bank of England’s action has not been about the economy but of the saving of the skins of bankers and stock market investors. This is the Bernanke Put in motion.

Barclay’s LIBOR Scandal: Is the Bank of England the Culprit?

Barclays chief executive Bob Diamond recently resigned over allegations of the manipulation of the LIBOR (London Interbank Offered Rate) or the average interest rate estimated by leading banks in London that they would be charged if borrowing from other banks (Wikipedia.org)

From Reuters (bold highlights mine)

Barclays chief executive Bob Diamond suddenly quit on Tuesday over an interest rate-rigging scandal that threatens to drag in a dozen more major lenders but suggested the Bank of England had encouraged his bank to manipulate the figures.

"The external pressure placed on Barclays has reached a level that risks damaging the franchise - I cannot let that happen," said Diamond, 60. The terms of his severance were not announced, though Sky News said the bank would ask Diamond to forfeit almost 20 million pounds ($30 million) in bonuses.

Politicians and newspapers have zeroed in on the scandal - which revealed macho e-mails of bankers congratulating each other with offers of champagne for helping to fiddle figures - as an example of a rampant culture of wrongdoing in an industry that stayed afloat with huge taxpayer bailouts.

Barclays released an internal 2008 memo from Diamond, then head of its investment bank, suggesting that the deputy governor of the Bank of England, Paul Tucker, had given Barclays implicit encouragement to massage the interest figures lower during the peak of the financial crisis in order to present a better picture of the bank's financial position.

Here is the principle, central banks are the only entities permitted to manipulate interest rates…

…but they need accomplices.

More from Zero Hedge

Wonder who was pushing Barclays to manipulate its rate? Why none other than the English Fed. From BBG:

• BARCLAYS SAYS BANK OF ENGLAND CALLED ON OCT. 29, 2008 ON LIBOR
• BARCLAYS SAYS DIAMOND MADE NOTE OF CALL
• BARCLAYS SAYS DIAMOND RECEIVED CALL FROM PAUL TUCKER
• BARCLAYS SAYS TUCKER SAID `CERTAIN' BARCLAYS DIDN'T NEED ADVICE
• BARCLAYS SAYS TUCKER SAID DIDN'T ALWAYS NEED TO BE SO HIGH (Supposedly LIBOR)
• BARCLAYS PROVIDES COPY OF DIAMOND'S CALL NOTE
• BARCLAYS SAYS DIAMOND DIDN'T BELIEVE HE HAD GOT INSTRUCTION
• BARCLAYS SAYS DEL MISSIER CONCLUDED INSTRUCTION HAD BEEN GIVEN
• BARCLAYS SAYS DEL MISSIER TOLD RATE SETTERS TO LOWER RATES

In other words, a central banks was directly and indirectly involved in manipulating interest rates. Say it isn't so. Fast forward two months when the BOE's Tucker testifies that the Chairsatan made him do it.

Hoping to take the political heat off what seems obvious, Barclay’s and Bob Diamond has served as BoE’s fall guy.

Bank of England Halts QE for Now

From Bloomberg

Bank of England officials halted stimulus expansion after seven months of bond purchases as the threat of inflation trumped concerns about an economy that’s succumbed to a double-dip recession.

The nine-member Monetary Policy Committee led by Governor Mervyn King today held its quantitative easing target at 325 billion pounds ($524 billion), ending a second round of stimulus, a move forecast by 43 out of 51 economists in a Bloomberg News survey. Officials also left their benchmark interest rate at a record low of 0.5 percent. The pound erased its decline against the dollar.

With inflation on course to exceed Bank of England forecasts and the economy struggling to recover, policy makers have been divided on how to resolve the dilemma. Today’s decision signals price-growth worries are mounting even as the U.K. struggles with government budget cuts, high unemployment and threats from Europe’s debt crisis.

The double dip recession serves as evidence that the Bank of England’s (BoE) quantitative easing (QE) measures has failed to meet the goal of “stimulating” the economy.

Worst, the aftereffect has been a significant loss of purchasing power for the average Briton.

True, statistical consumer price inflation (CPI) has been lower compared to last year, but remains elevated relative to the 2009-10, as well as the average inflation rate from 1989 until 2010 of 2.72% [according to tradingeconomics.com, the source of most of the charts on this post].

So the recessionary environment along with elevated inflation rates…

…plus high unemployment rates represents an accrued symptom which characterized the 1970-1980s economic landscape known as stagflation (Wikipedia.org). In short, UK has been suffering from benign stagflation.

Also, since this BoE policy has been widely anticipated by the consensus, it does appear that today’s policy decision may have partly influenced the present weaknesses seen in the global commodity markets, as well as, in the world stock markets.

Of course, I have my doubts on the current stance of the BoE. I don’t think that they have totally abandoned the inflationist doctrine. I think that this has been more of a temporary lull.

That’s because if UK’s finance markets should endure more downside volatility, then this would have an adverse transmission effect to the balance sheets of UK’s banking system.

As this study from the BoE shows, since the introduction of the QE, prices of bonds and equity (via the FTSE all share) had been energized or the QE has provided pivotal support to their asset markets.

Yet BoE’s QEs have only added to the general indebtedness of the UK’s economy.

And like the Euro counterparts there has been no genuine “austerity” in the UK.

So unless there will be greater savings from the average British to finance government borrowing or foreign buyers step up the plate, then the BoE will have their hands full in trying to smooth out the management of government debt and the balance sheets of UK’s banking system overtime. Oh, essentially the same dilemma haunts the US and the Eurozone.