‘Forward Guidance’ on who will play scapegoat….

Tuesday 3rd October 2017

‘Forward Guidance’ on who will play scapegoat….

Bitcoin recovered from its recent bout of the jitters….

Having enjoyed unprecedented growth all summer, an outburst of negativity reduced the cryptocurrency from a high of $4950.72 on 1st September to $2981.05 a fortnight later….

But bitcoin has bounce-back-ability. By Monday, the price had recovered 33% – short of peak but heading back that way….

  • Beyond the bitcoin bubble….

We’ll head back to the subject of cryptocurrencies. Today, we revisit the world beyond the bitcoin bubble….

…. Where we find the Bank of England’s Mark Carney hinting at future troubles and offering ‘forward guidance’ on who to blame….

At last Thursday’s ‘Independence: 20 Years On’ conference, Carney sought to underplay BoE powers….

‘While carefully circumscribed independence is highly effective in delivering price and financial stability, [the BoE] cannot deliver lasting prosperity and it cannot solve broader societal challenges….

This bears emphasizing, because in recent years a host of issues has been laid at the door of the Bank of England from housing affordability to poor productivity….

Calls for the Bank to solve these challenges ignore the Bank’s carefully defined objectives. And they confuse independence with omnipotence….’

In other words, the Bank plays an ‘effective’ role within carefully defined parameters but cannot be held accountable for other economic problems….

  • An economy going nowhere….

Carney knows that many forthcoming problems are not yet apparent to the greater British population – but that they soon will be….

He knows he can’t solve these problems. And he wants the public to understand that.

He’s also eager to exonerate the bank from any responsibility for any of the problems lying in wait. Which is where Carney gets slippery.

This is bald politics rather than banking. Theresa May was in the audience along with other movers and shakers. Carney took the opportunity to stake out a position….

He knows figures released last week by the ONS reveal Q2 growth up just 1.5% on the year. He knows the British economy is growing at the slowest rate since 2013….

He knows service sector output fell in July. He knows manufacturing growth fell in August. And that industrial, construction and agriculture output dipped….

In short, he knows Q3 figures will be as disappointing as Q2 figures and that the economy is stagnating….

  • ‘Cry Wolf’ policy must end….

He knows also that inflation exceeds targets and continues to grow….

It grew 2.9% on the year to August. Prices are rising – putting the squeeze on consumers and depressing economic activity.

The antidote is to raise interest rates. They haven’t risen in 10-years. But last week Carney was floating the possibility – in vague terms….

‘What we have said, that if the economy continues, on the track that it’s been on, and all indications are that it is, in the relatively near term we can expect that interest rates would increase somewhat….’

He’s purposefully avoiding saying exactly if, when or by how much. He wants to float the idea without committing to it. He wants to see how markets might react if he pushes the button for real….

The BoE has engaged in this ‘cry wolf’ policy since 2013. It may do so again. But sooner or later Carney must address inflation.

He’s hesitant to commit because raising interest rates could trigger nasty consequences….

  • A mountain of debt….

An interest rate rise won’t help millions of Brits drowning in debt….

Bank data reveals half the country’s postcode areas have seen outstanding credit balances rise 10% this year….

The Financial Conduct Authority is worried about the number of people taking loans to meet living costs….

Stepchange report 49.3% of clients are behind on debt repayment – up from 39.6%….

The bank described consumer credit as a ‘pocket of risk’ in the summer. Last week it warned that high street banks could lose £30 billion from consumer credit defaults if the economy turns bad.

At the end of July, total unsecured personal borrowing stood at £201.5 billion – the highest figure since 2008….

An interest rate rise – however minimal – only increases the risk of widespread defaults….

  • Billions could be wiped from market values….

Rising interest rates will also reverse stock market momentum….

The market has ridden high for 10-years – fueled by cheap credit and money printing….

Loose monetary policy has created a bubble. Values of individual stocks bear no relation to the balance sheets or prospects of the companies behind them.

Rising interest rates will have the effect of bringing that market back down to earth –quite possibly, with a bump or a bang.

Billions could disappear from market values – adversely affecting not only businesses and private investors but the entire financial system and the overall economy….

No wonder Carney is careful with his language when it comes to rate rises….

He’s like a man approaching a thoroughbred horse in a field. One false move and the highly-strung creature will have bolted before he can get a rein on it….

  • Meet the scapegoats….

Meanwhile, Carney diverts attention from the side-effects of a decade of loose monetary policy – mountains of debt and a stock-market bubble….

And he offers ‘forward guidance’ on the scapegoat that can be blamed when the dark days ahead dawn….

In last week’s speech, Carney pointed his guns at the Brexiteers….

‘The biggest determinants of the UK’s medium-term prosperity will be the country’s new relationship with the EU and the reforms it catalyzes….

Monetary policy cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU.’

He didn’t say it directly. He never does. But Carney said enough to indicate that whatever happens in the months and years ahead, the blame will be laid squarely at the doorstep of the anti-European vote….

Get used to hearing it. You’ll be hearing it from all quarters for a long time to come.

  • The rejigged story that will be told and sold….

Forget the years leading up to 23rd June 2016. Forget everything that happened before then….

Everything bad that unfolds from this point forward will have its roots in the European Referendum….

That’s what Carney signaled last week….

Our current travails and those to come have nothing to do with the banks and the 2008 global financial crisis….

They have nothing to do with the effects of a decade of loose monetary policy….

They have nothing to do with flaccid British productivity levels, flat-lining economic growth or the abject failure of any government to get to grips with either….

No. If the economy is laid bare by a consumer debt crisis and/or a market crash, it will be wholly and entirely the result of those ‘Out’ votes last June – economy-wrecking votes cast by short-sighted grey-heads; racist little-Englanders; and all those inward-looking Daily Mail readers….

At least that’s how the story will go. That’s how Carney will tell it. Others too. And they’ll get away with it.

The fact is that Brexit couldn’t have come at a more convenient time for backsliding insiders seeking to evade blame for their own part in the economic train-wreck that is yet to come.

Maybe David Cameron knew what he was doing after all when he called that Referendum. In hindsight, it might well be understood as an example of perfect timing.

That’s how it looks from here….

I’ll be back on Friday with more food for thought on bitcoin, what it’s doing, where it’s heading and what it could mean for you….

All the best,

Dave Gibson

Money Truths