A veiled warning from a ‘paranoid’ Bank official….

Tuesday, 5th December 2017

A veiled warning from a ‘paranoid’ Bank official….

An interesting and illuminating comment last week from a Senior Bank of England official. It certainly raised my eyebrow….

Richard Sharp, a member of the BoE’s Financial Policy Committee, highlighted that the British government has already borrowed a whopping £1 trillion since the 2008 banking crisis….

And he went on to say that additional borrowing risks triggering a financial collapse comparable to the one still being played out in Venezuela….

Read that again. It’s not a misprint….

According to Richard Sharp, there is a real and present risk that further rises in the levels of public borrowing could turn Britain into a European version of Venezuela….

  • A state of desperation….

This is no small observation. You will know that to be true if you take even a cursory interest in world events.

The Venezuelan economy is in a desperate state right now….

Unemployment is off the charts. Food shortages are commonplace. People are standing in line for staple items – often for hours and frequently in vain….

Medicines and other essentials are difficult if not impossible to come by….

It’s been this way for a couple of years. And the situation shows no signs of improving. Ordinary people are struggling. Many are going hungry. Medical conditions are going untreated.

Inflation is running rampant – at close to 750%. The International Monetary Fund predicts that figure could rise fourfold over the next 12 months.

There is serious unrest playing out on city streets. Anti-government protests are almost a daily occurrence. So too outbreaks of violence, petty crime and general disorder – some of it leading to injuries and even fatalities.

The situation is so dire that foreign governments have evacuated consular staff and their families from the country – and issued travel warnings to their citizens.

Venezuela is a dangerous – and potentially life-threatening – place to be right now. You go there at your own risk….

This is the Venezuela Mr. Sharp was comparing Britain’s possible future prospects to….

  • A million miles away?

This grim reality seems like a million miles removed from what is happening in Britain this morning….

And you might be forgiven for thinking that anybody comparing what might possibly unfold here in Britain in the months and years ahead to what is unfolding right now in Venezuela has lost his grip on reality….

Or taken a little too enthusiastically to the festive sauce….

You might see such a comparison as par for the course if it were being expressed by some rabid crackpot on a conspiracy-theory-themed website….

But the comparison was made by a sober-suited and well-salaried official at the Bank of England – a senior official no less….

Of course, Mr. Sharp simply offered an outline comparison when he mentioned ‘Venezuela’. Most people won’t have seen his comments. Most of those who did won’t have grasped the full meaning….

Mr. Sharp fell short of using on-the-ground detail live and direct from the streets of Venezuela to color-in his vision of what a financial Armageddon in Britain would look like….

He left it to us, here at Money Truths, to put the relevant meat on the bones and to bring the warning – and the true contextual reality of it – fully to life. Like Frankenstein’s monster….

  • He meant what he said….

But you can rest assured that Mr. Sharp’s comment was not some throwaway line made on the spur of the moment….

There’s been no backtracking or mealy-mouthed revisions from Mr. Sharp in the meantime….

There’s no sense of the BoE distancing itself from the comments and casting Mr. Sharp as a loose cannon whose views do not correspond with those of the wider institution….

There have been no additional statements serving to clarify what Mr. Sharp ‘really meant to say’….

From this we can safely deduce that Mr. Sharp meant to say exactly what it was he said….

He wasn’t indulging in some off-the-cuff flight of fancy. He wasn’t over-egging the creative license or exaggerating for effect or newspaper headlines….

You can take it as read that his message accurately expresses some real level of concern at the Bank of England – that a Venezuelan type meltdown really could materialize in Britain given the right conditions and circumstances….

Mr. Sharp – whose comments were made in a speech delivered at the University College of London – took a step back from turning his speech into something that might propagate outright panic. He acknowledged that comparing Britain to Venezuela may seem ‘paranoid’.

But he swiftly qualified and tempered that admission by going on to state that his job requires him to worry about debt levels, and that sometimes ‘it pays to be paranoid’.

  • Another warning for the market….

Newspapers that devoted column inches last week to Mr. Sharp’s comments did so from the perspective that he was serving up a direct warning to Philip Hammond, Chancellor of the Exchequer, not to resort to further public borrowing which would put Britain’s financial stability at risk….

Fair enough. But Mr. Sharp’s comments also serve as a veiled warning to stock market players….

The good times are in no way guaranteed to last forever – and the bad times, if or when they show up, might be on a scale previously considered unthinkable….

In last week’s column I referenced the market’s iron chin. The last decade has delivered a bull market of unrivalled proportions. Nothing has been able to retard its upward progress. And it has seemed like nothing ever will.

But I also made the point that market values are totally disconnected from economic and corporate realities.

And that this bull market is built – lock, stock and barrel – on the back of the loosest monetary policy in history rather than any real across-the-board growth in the economy, productivity levels or corporate bottom-line performance….

I take the view that all-time-high market values fueled exclusively by borrowed money are living on borrowed time….

When a central bank official feels sufficiently moved to openly float a scenario that says Britain is teetering on the brink of triggering and enduring the same economic chaos as a Latin American basket case, that is just another indication to me that current market values are completely out of whack with and entirely removed from economic reality….

  • Just one man’s opinion….

Of course, Mr. Sharp is just one man (as am I, for that matter) expressing a single opinion….

He doesn’t have a monopoly on being right….

Like any other expert, he can get it wrong. And probably does so more times than not – just like the rest of us. His paranoia might well have gotten the better of him….

But, if Mr. Hammond fails to take heed of the warning and Mr. Sharp’s assessment of the situation proves well-founded and accurate (or even just partly so), this bull market will encounter a scenario that cannot be ignored – and one that current values will not survive….

We hope it doesn’t happen. We hope Mr. Sharp has been at the cherry brandy in the office drinks cabinet….

But, if one day not too far distant we wake up and open the curtains to find scenes from downtown Caracas playing out on the streets outside, nobody will be able to say that Mr. Sharp didn’t forewarn us of the possibility – however veiled his warning is, was or is later seen to be….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths