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Bank Of England Preparing To Blow Bubble Of Unprecedented Proportions

Tyler Durden's picture


In the latest attempt to prove that nobody ever learns anything from history, the Bank Of England is practically betting the Devonshire farm that by putting the UK's economy on nitrous, it will recapture all the lost output during the recession, and that it will be able to time the stimulus exit perfectly, thus avoiding hyperinflation, or so thinks Citigroup economist Michael Saunders. We are fairly confident that the Weimar Republic also did not have hyperinflation as a policy end goal. Saunders was quoted by Bloomberg, that “Policy has been set to produce a boom to close the output
gap in the next few years.”

The Bank of England’s new
forecasts, published today, show that record-low interest rates
and bond purchases will stoke a recovery twice as fast as those
from the recessions of the early 1980s and 1990s, he said.

Alas, that is not the full story. The bank forecasts, as the charts below demonstrate, merely point out that the future economic variation around some mean will get exorbitantly high. And high vol, unless you are an options trader, is not really a good thing. Furthermore, if one removes the optimistic bias always associated with these kinds of "green shoot" smoking pamphlets, the outcome likely will be one in which the projection falls below even the worst case scenario, especially once rampant inflation finally comes to perch.

To be sure, opening the stimulus and liquidity spigot is sure to boost any economy as a one-time event. The bigger questions are i) how long can artificial stimuli be applied; ii) what happens to the new baseline level once the temporary "sugar high" is removed; iii) how does a Central Bank have any confidence that it can time the success of output gap reduction/stimulus and liquidity measure tightening, contrary to all empirical evidence. There has not been one case study in the history of monetary tightening that the Federal Reserve has not goofed without steamrolling into inflation territory. And with trillions in dollars waiting on the sidelines to be unleashed into the monetary base, and one can see why hyperinflationists are very concerned. Deflationists will, of course, counter that all such worries are offset by the tens of trillions in consumer wealth loss, and the inverted capitalization pyramid. The problem for the UK is that with its much smaller economy (compared to the US) its margin for error is even smaller than that of Ben Bernanke.

But that threat has not stopped an unjustifiably optimistic Mervyn King to mouthing off on the prospects of his recovery efforts (the cable pounding that has results on this low volume day is further proof of how realistic the UK economic "miracle" is perceived to be).

Bank of England Governor Mervyn King said in London today
he has an “open mind” on whether a 200 billion-pound ($332
billion) bond-purchase plan should be expanded, signaling
officials aren’t ready to withdraw stimulus even as the economy
recovers. Saunders says International Monetary Fund figures
indicate the so-called output gap will close by the end of 2012
if the Bank of England’s new forecasts are correct.

Back to Citigroup, who also see the flaws inherent in this approach:

“These are the strongest growth forecasts the MPC has ever
published and far above consensus,” Saunders said. “The
Inflation Report emphasizes the extent of the Monetary Policy
Committee’s commitment to a reflationary bias.”

“If growth really is as strong as the MPC expects, then
interest rates will probably rise quite markedly over the next
two to three years, even if they do not rise in the next quarter
or two,” Saunders said. The Bank of England’s benchmark rate is
currently at 0.5 percent, the lowest since it was founded in

In the meantime to race to the bottom among the three main currencies continues unabated: the dollar pounding is conventional wisdom, yet today the GBP joins in the fray, while the JPY, courtesy of the new trade de jour which is buying Japanese CDS as Zero Hedge recently pointed out, is also stalling. Also, let's not forget that the renminbi tracks the weaker dollar lower. So on whose back is all this occurring: aside from New Zealand, which will promptly crack, somehow the global reflation trade is expected to occur courtesy of the Euro. Which begs the question: what the hell are Trichet and Merkel smoking, and just how did the rest of the developed world bribe them to doom the Eurozone to prohibitively expensive exports and stalling economic growth? Is the rise in the DAX sufficient to offset the upcoming waves of unemployment and massive housing crunch wave part 2? At this point, only the G-20 knows, although any rational human being can just as easily connect the dots.

Full Inflation Report from the BOE:



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Wed, 11/11/2009 - 14:34 | Link to Comment TraderMark
TraderMark's picture

No redeeming value but eye candy - best performing equity indexes by country 2009 YTD


UK is mini me of US.

Wed, 11/11/2009 - 14:44 | Link to Comment Daedal
Daedal's picture

Or US is the MaxiMe of UK -- The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 18th and 19th centuries. Take a guess what happened to change that...

Wed, 11/11/2009 - 15:18 | Link to Comment Anonymous
Wed, 11/11/2009 - 17:41 | Link to Comment Anonymous
Wed, 11/11/2009 - 20:16 | Link to Comment Anonymous
Wed, 11/11/2009 - 14:50 | Link to Comment Anonymous
Wed, 11/11/2009 - 14:51 | Link to Comment Miles Kendig
Miles Kendig's picture

King, Bernanke and their sponsors are going to ride the monster until the monster manages to eat itself.

Wed, 11/11/2009 - 14:52 | Link to Comment Steak
Steak's picture

Geez, if its gonna work so well and be executed so flawlessly, one has to wonder why we had to suffer through all those recessions of years past.  Thank goodness the big brains up there have this whole economic downturn thing licked.  UP UP AND AWAYYYYYYYYYYYYYYYY!

Wed, 11/11/2009 - 14:57 | Link to Comment Fish Gone Bad
Fish Gone Bad's picture


Wed, 11/11/2009 - 15:03 | Link to Comment docj
docj's picture

+1 Absolutely!

"It will be different this time" is right up there with "The check is in the mail".

Wed, 11/11/2009 - 17:13 | Link to Comment cougar_w
cougar_w's picture

Or the classic "don't worry, it will be fine."

Famous last words.

Thu, 11/12/2009 - 03:38 | Link to Comment faustian bargain
faustian bargain's picture

I think Sheila Bair's recent video message pretty much sums up the whole debacle, complete with head bobbing and "no matter what happens".

Wed, 11/11/2009 - 14:54 | Link to Comment Anonymous
Wed, 11/11/2009 - 14:59 | Link to Comment Marvin the Mind...
Marvin the Mindreader's picture

This is the policy equivalent of buying a penis extender from the back of a laddie mag (and will have the same result).

Wed, 11/11/2009 - 15:00 | Link to Comment docj
docj's picture

The more I read stuff like this I become ever more certain that these folks (Chopper Ben, Turbo Tim, their immediate predecessors and foreign counterparts) either have absolutely no idea what's going on and are just filling the ether with Hopeium OR they know exactly what sort of collapse is staring us in the face and are praying they can manage to kick it down the road to the next administration because they know there's almost nothing they can do about it.

The music is going to stop, eventually.  All that needs to be determined is on who's watch.

Wed, 11/11/2009 - 15:13 | Link to Comment GoldmanBaggins
GoldmanBaggins's picture

“Never let a serious crisis go to waste.” – Rahm Emanuel ...

Wed, 11/11/2009 - 15:18 | Link to Comment docj
docj's picture

If there's any justice in the world that quote from Rhambo will go down with "Peace in our day!" in the imfamous quotes hall of shame.

Wed, 11/11/2009 - 15:20 | Link to Comment Divided States ...
Divided States of America's picture

The best action is no action. But of course, if that was the case, we didnt need these politicians or the feds to be around in the first place. Much like IT people working in your company. Honestly they dont do much, but when there is trouble, they are your saviors. However, you dont know if they were the real culprits who created the problem. The fact is, the problem created a situation where they are seen as smart and important. Thus, the government entities obviously created this panic to solidify their importance to the society.

Wed, 11/11/2009 - 16:06 | Link to Comment Anonymous
Wed, 11/11/2009 - 15:13 | Link to Comment Racer
Racer's picture

I love those fuzzy charts the BoE produce

Wed, 11/11/2009 - 15:19 | Link to Comment Anonymous
Wed, 11/11/2009 - 15:53 | Link to Comment MTPockets
MTPockets's picture

the hammers lament - now we all share their pain.

Wed, 11/11/2009 - 18:52 | Link to Comment Anonymous
Wed, 11/11/2009 - 15:20 | Link to Comment Artful_Dodger
Artful_Dodger's picture

This is planned anyway...the Olympics are in London 2012 so they need a weak sterling for external investment and tourism.

The trouble is that a currency sometimes doesnt stop where you want it to...

Wed, 11/11/2009 - 15:20 | Link to Comment Anonymous
Wed, 11/11/2009 - 16:16 | Link to Comment Anonymous
Wed, 11/11/2009 - 15:21 | Link to Comment hack3434
hack3434's picture

The UK is an embarrassment of what it means to be an empire. 

Wed, 11/11/2009 - 16:39 | Link to Comment maff
maff's picture

The UK may be embarrassing but is it an empire?

Wed, 11/11/2009 - 17:43 | Link to Comment Anonymous
Wed, 11/11/2009 - 15:26 | Link to Comment Anonymous
Wed, 11/11/2009 - 16:13 | Link to Comment WaterWings
WaterWings's picture

All the growth in jobs are education and health. So, the next marvelous innovation will be to export these trained women elsewhere - like China. From what I've read they're ready to take claim of North America anyway - some of their Obama cabinet contemporaries insist on a primary claim because their great27-grandparents discovered NA before Columbus. I'm too busy surfing the internet to worry about putting on deoderant these days anyway - stack 'em deep!

And concerning hyperinflation, we'll see a default long before the circulation of paper $10,000 USD. Their scheme will work until it doesn't. Our only hope is to Kon Tiki it to their island retreats and root 'em out before the next part of the cycle begins.

Wed, 11/11/2009 - 16:18 | Link to Comment WaterWings
WaterWings's picture

"We're a generation of men raised by women. I'm wondering if another woman is really the answer we need."

"Now why do guys like you and me know what a duvet is? Is it essential to our survival, in the hunter-gatherer sense of the word? No. What are we then?"

Wed, 11/11/2009 - 15:33 | Link to Comment Anonymous
Wed, 11/11/2009 - 15:44 | Link to Comment Gordon_Gekko
Gordon_Gekko's picture

Contrary to popular belief, a strong currency is not necessarily bad for a country. Most people do not take into account the flip side of the coin - it actually makes imports cheaper resulting in proportionately cheaper exports down the line (for some reason people tend to unduly focus on immediate nominal increases in export prices - perhaps this bias has been fostered by the government sponsored media to give them another excuse to rape and pillage their citizens via currency"making exports cheaper"). What really matters is the human ingenuity and hard work comprising the economy.

Nevertheless, global competitive currency devaluation games have begun in earnest. May the worst debaser win!

Wed, 11/11/2009 - 15:54 | Link to Comment lookma
lookma's picture

Contrary to popular belief, a strong currency is not necessarily bad for a country.

Who woulda thunk it, growing richer (i.e. more purchasing power) is way better than becoming poorer. 

Wed, 11/11/2009 - 16:09 | Link to Comment John Self
John Self's picture

And a strong currency improves your vacation options too.

Wed, 11/11/2009 - 15:52 | Link to Comment Anonymous
Wed, 11/11/2009 - 16:44 | Link to Comment George the baby...
George the baby crusher's picture

Sweden hasn't had one either, a bubble that is.  But I bet you my grandmother, another 6 to 12 and pop she goes.  More European countries will follow suite. 

Wed, 11/11/2009 - 16:10 | Link to Comment What_Me_Worry
What_Me_Worry's picture

Yet another country that is certain that the only way to get out of a hole is to grab a bigger shovel.

Wed, 11/11/2009 - 16:13 | Link to Comment Plainview
Plainview's picture

Short gilts is the only sovereign debt short I really like.

Wed, 11/11/2009 - 16:44 | Link to Comment maff
maff's picture

Plainview - you wouldn't rather wait until after the election? I know its a long shot but David Cameron and his aristocratic pals might actually raise taxes, cut spending and ease the printig presses back from the red line on their rev-counter.


Or not.

Thu, 11/12/2009 - 09:15 | Link to Comment Anonymous
Wed, 11/11/2009 - 16:14 | Link to Comment Anonymous
Wed, 11/11/2009 - 16:34 | Link to Comment Anonymous
Wed, 11/11/2009 - 16:40 | Link to Comment Anonymous
Wed, 11/11/2009 - 17:32 | Link to Comment Anonymous
Thu, 11/12/2009 - 08:19 | Link to Comment rigger mortice
rigger mortice's picture

'and is now heading back on up. Okay, its still unaffordable,'


did you reread that before you pressed return?

Wed, 11/11/2009 - 16:46 | Link to Comment Anonymous
Wed, 11/11/2009 - 16:54 | Link to Comment Racer
Racer's picture

Someone asked a question of Mervyn King about if he was worried they were creating another bubble..

he replied by commenting that prices were a lot lower that before

(so this is typical of them.. the fact the companies aren't earning or they are valued at astronomical valuations is not important... the 'price' is much lower that is was before!)


Wed, 11/11/2009 - 18:12 | Link to Comment TraderMark
TraderMark's picture

I did some reading in UK papers this weekend after G20 and basically they want asset values to go up


That is the GOAL of the central bankers


in their world they can do that, which will magically flow into the real economy and they will know when to stop.  They are just that good.

Wed, 11/11/2009 - 18:13 | Link to Comment TraderMark
TraderMark's picture


Wed, 11/11/2009 - 16:57 | Link to Comment Anonymous
Wed, 11/11/2009 - 17:43 | Link to Comment Anonymous
Wed, 11/11/2009 - 17:43 | Link to Comment Unscarred
Wed, 11/11/2009 - 17:47 | Link to Comment gunsmoke011
gunsmoke011's picture

If it were not so pathetic, it would almost be humorous. Gee – why didn’t they think of that before? Such a simple solution – and to think they made their country go through all of this while the answer was right there under their noses all of the time. Nothing like “It’s Different This Time” mentality to bring about a good laugh. Gawd Help Us ALL.

Thu, 11/12/2009 - 08:11 | Link to Comment TumblingDice
TumblingDice's picture

In case you guys haven't noticed, they want to repeat the mistakes of the past and force another bailout. It is the best way to steal. The cycles will get smaller though, and soon a bailout will just not do the trick. The system is too dynamic for their unimaginative minds.

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