Usually, we try to present you with some sort of useful conclusion or take-away in each edition of Fortune & Freedom. But I haven’t got a clue what that might be today. Because the Bank of England is in all sorts of strife in such a variety of ways that I just can’t find the narrative that binds them.
But perhaps the sheer amount and variety of problems the Bank faces is the point.
They’re a bit of a worry because the Bank of England happens to be the guardian of our currency, banking system and government finances. So, a problem at the Bank of England is a problem for all of us.
Let’s dig into the list of debacles before we try and find the common denominator…
Things kicked off innocuously enough for investors, with the news that the Bank of England owned 599 slaves in the 1770s. And 25 of its governors and directors owned slaves too.
While none of the present lot were implicated in any of this, it does suggest that the Bank should be shut down and thrown into the Thames for its role is slavery.
This would be my solution, anyway. Although I’ve been advocating that for long before the slavery angle came out.
The more relevant news of a continuing inflation spike is old news by now. But things aren’t looking better when it comes to what the Bank is actually going to do about the problem that it created.
In fact, while the Bank is adamant about coming interest rate hikes to slow inflation, mortgage lenders just aren’t buying it. Aren’t lending it, I should say. The Telegraph reports on how some lenders are offering 5-year fixed deals at cheaper rates than 2-year fixed deals.
This implies that interest rates won’t be on the rise for long. And what does that tell you about the future?
Well, either the Bank will pull off a miracle by bringing down 8% inflation with 2.25% interest rates, or it will trigger some sort of financial crisis that forces the Bank to about-face and cut interest rates again.
As Ruffer Investment Company’s Hamish Baillie told the Telegraph, (or, at least this is how the newspaper paraphrased him in the headline), “We’ll all be bankrupt if the Bank of England keeps raising rates”.
At least we know who to blame, then…
If you think 8% inflation on a 2% target is humiliating for the Bank, just wait till they get blamed for popping the bubble they inflated with 0% rates in the first place…
That is what the market, and the lenders, are pricing in. And they’re not the only ones openly questioning the Bank’s credibility.
Having previously predicted Brexit Britain to outpace G7 nations in GDP growth, the International Monetary Fund (IMF) is now busy predicting gloom: “UK Faces Worst Inflation Shock Among G-7 Nations”.
The IMF’s argument is that the interest rate hikes needed to bring inflation under control will cut UK GDP badly – by more than our peers. Standard Bank reckons that there’s a 50/50 chance of recession in the UK.
Whose responsibility is it to manage the business cycle and avoid recessions?
The Bank of England’s.
And the IMF reckons the Bank will not only fail to manage GDP growth, but inflation too, despite having to hike rates. The IMF is forecasting inflation below 3% for all other G-7 nations while the UK can expect 5.3% in 2023.
Whose responsibility was it to prevent the inflation outbreak? Whose responsibility is it to keep inflation at 2%?
The Bank of England’s.
The pound is expected to take a hit because of all this too. It’s already at its lowest level against the dollar since the height of the Covid crisis.
Whose responsibility is it to preserve the currency’s value? The Bank of England’s.
So it’s lose/lose/lose for the UK economy over the next two years. Inflation, a falling currency and a lack of GDP growth. Well done, Bank of England. Three out of three, with the prospect of a financial crisis in the mix.
The underlying issue for the UK, according to the IMF, is that we face the “worst of the two worlds,” with an American-style tight labour market because of Brexit pushing up wages (demand pull inflation), and the Europe’s energy crisis pushing up costs (cost-push inflation).
One thing the Bank of England has decided it really is responsible for is regulating the cryptocurrency market. Unfortunately, as Blockworks put it, this is just another problem: “Bank of England Says Crypto Has Busted Its Budget in $419M Shortfall,” because “The financial regulator said it’s planning to hire about 100 more employees” in order to cope with the additional strain.
That’s quite a big budget shortfall for 100 more employees to deal with a comparatively small cryptocurrency market…
Here’s the funny thing. The extra money will be coming from regulated firms such as banks and insurers. So, the legacy financial system is the one paying for the regulation of crypto!
This is all part of a trend which Nigel has been keen to inform you of. In fact, I suspect he’s a little disappointed about the lack of crypto coverage in Fortune & Freedom.
I’m not so sure you’re especially interested in it. But, if you respect Nigel’s ability to be ahead of the curve, then you need to take a look at this.
It’s all about why ignoring cryptocurrencies might not be an option for much longer. And getting ahead of that shift will pay in all sorts of ways.
It’s up to you. But I know why I follow Nigel’s work. Because he’s ahead of the game.
But, let’s return to the Bank of England’s difficulties. Because the Australians have decided to add insult to all the injury. They’re sending an auditor to check whether Australia’s gold is really in the vaults of the Bank of England or not. We’re talking US$6 billion – 80 tonnes worth.
An Australian senator has been agitating for this inspection, after pointing out past… discrepancies. Actually, it was the Lucky Country’s own central bank, the Reserve Bank of Australia, which pointed out the… discrepancies… in a strictly confidential memo to the Federal Parliament.
The suspicion that the Bank of England doesn’t have all the gold it claims to is only half as mad as it might seem, for a variety of reasons. It is still quite mad, though.
But consider that the Australians have been making rather a lot of money by “leasing” out their gold on to the market.
But I’ll leave that story to our newest co-conspirator Shae Russell – an Australian commodity analyst with a lot of experience in the physical gold market.
Her key point is that it is fascinating to send an Australian to the other side of the world to conduct the effort while there is a rather long list of auditors operating in London, despite Brexit.
The Bank of England is also sending some rather mixed messages to its market. On the one hand, it’s planning to trigger an epic spike in mortgage costs by hiking rates extraordinarily quickly, while on the other hand, the Telegraph reports, “Bank of England seeks to unlock cheaper mortgages with post-Brexit rule change”.
Well, which is it?
But the matter I actually wanted to really focus on today is one that’ll make your head spin.
Unfortunately, it’s too long a tale to deal with today, so be sure to tune in tomorrow. But here’s an except, to get you thinking…
Things are so bad at the Bank of England that they’re going to need a government bailout!
And this will make things so bad at the Treasury that it’ll need a bailout too. Where will it get the money? From the Bank of England, ironically enough.
Even more ironic is that the Bank of England is in such dire straits in the first place because it bailed out the Treasury in 2008 and 2020.
Find out what it’s all about, tomorrow.
Editor, Fortune & Freedom