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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TraderMark's picture

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


UK is mini me of US.

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...

Anonymous's picture

Two World Wars?

Anonymous's picture

Winston Churchill - the most incompetent Chancellor of the Exchequer of all time.

Anonymous's picture

A good read is on the French Revolution, I think they were more valiant back then and still could not control paper currency.

Miles Kendig's picture

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

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!

docj's picture

+1 Absolutely!

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

cougar_w's picture

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

Famous last words.

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".

Anonymous's picture

I think Merv and the boyz are just marking time till the (inevitable) changing of the guard next May. Until that point, there is no way in hell that the taps are getting turned off and Merv will find himself out in the gutter if he even trys.

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).

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.

GoldmanBaggins's picture

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

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.

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.

Racer's picture

I love those fuzzy charts the BoE produce

Anonymous's picture

Merv's song.

I'm forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Fortune's always hiding,
I've looked everywhere,
I'm forever blowing bubbles,
Pretty bubbles in the air.

MTPockets's picture

the hammers lament - now we all share their pain.

Anonymous's picture

PLEASE....don't disgrace West Ham

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...

Anonymous's picture

Some historian write that that the Weimar Republic did have hyperinflation as a policy end goal, as protest suicide and also to inflate away the indemnity.

Anonymous's picture

No, the indemnity was not based in marks, so it did not shrink with the mark. The French occupied the Ruhr because Germany was not meeting it's obligations.

It started as a deliberate policy to provide cash to pensioners and returning soldiers and got out of hand.

The German stock market kept going up (in nominal terms) as a relative store of value. Something to think about if anyone is tempted to bet against this market (or gold) before the Fed turns off the spigot.

hack3434's picture

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

maff's picture

The UK may be embarrassing but is it an empire?

Anonymous's picture

And the Pope is an embarrassment of what it means to be muslim.

Anonymous's picture

The best report I've read for a long time on this site. How on earth will devaluing your currency boost your economy? Because of exports? But to whom will you export? To China? Come on, there's only so many Rollers and Mercs they can buy, and apart from that, they produce anything else themselves. To Euroland? To an Export- driven economy like Germany? Say no more Say no more....

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.

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?"

Anonymous's picture

Yup, BoE's interest rates at the lowest in its 300-odd year history, Quantitative Easing (sorry, printing money out of nothing) at unprecedented levels, unemployment back to levels before Labour came into power in 1997, house price rises (or lack thereof) still being used as the yardstick of personal wealth...

We're on the road to recovery. Not.


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!

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. 

John Self's picture

And a strong currency improves your vacation options too.

Anonymous's picture

Don´t know if many in the u.s are aware that germany never had a housing bouble?
M. Copenhagen

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. 

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.

Plainview's picture

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

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.

Anonymous's picture

raise taxes even MORE? Not sure they can go much further, there's only so many of us working to support the rest sitting around on their ass doing sweet FA.

Would have thought that the great hope Cameron would just take a knife to the massive public sector that sits around and generates nothing but paper.

I seriously hope he is more Thatcher than Obama.

Anonymous's picture

Hyperinflation always born out of Govt policy.

Anonymous's picture

You seem to want Fascism faster than we do but we won't be too far behind,I think.

Anonymous's picture

Britain is pretty screwed however our housing market didn't take the nosedive that the US did and is now heading back on up. Okay, its still unaffordable, 25% of the 20% of mortgages with an LTV of over 75% are already in difficulty but we are still hanging in there and not a huge number of people are underwater because it didn't fall as much as expected. Even the poor idiot bastards that bought second homes in France and Spain are getting a respite (in their nominal little minds) due to Euro strength, assuming they didn't take out an unhedged mortgage, so we might just crawl out the other side of this sh*t.

As for the UK market, most of it is foreign, far flung and involves getting poor people to dig shit out of the ground so I suspect it will stay pretty strong as long as the China numbers are good.

Anonymous's picture

you said it yourself: still pretty unaffordable...and as for Foreigners buying, as far as I know Britain doesnt stop at the borders of Mayfair, and that is where the foreign interest stops (ok, let's say within 10 miles of Mayfair...)
I was contemplating buying and moving to the UK, but sorry, at 50% tax and the prospects of them rising me and many other rational thinking human beings probably will shelve their plans of moving there

rigger mortice's picture

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


did you reread that before you pressed return?

Anonymous's picture

What we are seeing is a giant game of chicken to determine which of the Western nations is left standing. Both UK and US are printing to see who will outlast the other. The victor gets to be THE master of the derivative universe.

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!)


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.