As Americans went about their lives this past week recovering from turkey, bemused by the latest Herman Cain dramas, the world almost changed dramatically. Fortunately, the largest central banks joined forces to stem the mounting financial crisis—for now.
World equity markets rallied powerfully yesterday after the move, to the tune of more than 4 percent. Yet stock markets were not the real story. What happened was nothing less than a Rubicon moment in what was shaping up to be a financial meltdown of global proportions that would have made what happened in the fall of 2008 look tepid.
The reason, of course, is the crisis of the euro zone. And a crisis it is, with every major European leader attesting to just that. In the past two weeks, that crisis went from slow burn to raging fire. You wouldn’t have known that from the mainstream media, but the panic in finance-land was palpable, so much so that I began to wonder if we were at an August 1914 moment, when the world was about to change forever—and not in good ways.
It wasn’t just the normal array of doomsday voices noticing a sudden deterioration of credit markets and adding their own pessimism about things like fiat currencies and towering mountains of debt. It was the clear indication that the European Union and the common currency were in peril, and that there is no road map for its dissolution. As one European minister put it, it is fairly easy to make an omelet out of a bunch of eggs, but how to do you make a bunch of eggs out of an omelet? The path to creating the euro was complicated enough, but the way out? There is none.
And that is what Europe has been confronting: the end of its bold experiment of economic union. As much as I recoil at hyperbole, that prospect demands it. If the euro zone dissolves rapidly, the global economy implodes. Period. That means stocks everywhere crash; hundreds of millions of jobs are imperiled; bond markets freeze; money markets seize; banks fail; governments panic; and people riot. Some of that happened in anticipation of such a failure—in Italy, in England, in Greece—but these were barely dress rehearsals.
Yes, in time, people would—as humans always do—find a way through. But if the euro zone collapses as an economic union, there is only the yawning unknown and the chaos that would ensue before clarity. The effects would be profoundly disruptive. In the past week, I had vaguely Matrix moments as I watched people go about their lives seemingly oblivious to a reality that might radically disrupt their lives.
So what happened to reverse the tide? An announcement that the largest central banks in the world, including the U.S. Federal Reserve and the European Central Bank, had agreed to reduce the cost of bank borrowing of dollars by half a percent. A seemingly innocuous and highly technical decision that only a few large institutions really grasp, it sent global stock markets up 4 percent, eased credit markets. and in an instant changed the tenor in finance-land from one of intense panic to sudden calm.
Arcane, yes, but central to our lives nonetheless. The crisis was unfolding in the world of daily cash flow, an esoteric world of finance, unlike the reviled Wall Street of outlandish profits, that is a global utility pumping trillions of dollars around the world. It provides the daily dose of money that allows billions to do whatever they must do: buy food, gasoline, get their kids to school, go to work, collect government benefits, and so on. The freezing of that system was what so imperiled the global economy after the collapse of Lehman in the fall of 2008, and that was only one large bank. The implosion of Euroland, in the form of depository banks unable to fund themselves and governments unable to tap markets for the cash they need to operate, would have been many orders of magnitude greater.
The world’s largest central banks acting jointly—along with the Chinese central banks easing conditions simultaneously—was a sign of two things: one, the situation was more dire than almost anyone was acknowledging in public, and two, there is a global political determination not to allow that to happen. For the moment, we can use the past tense, because the immediate crisis has subsided. But there should be no illusion of how serious this almost was and how serious it remains.
The problems of the euro zone have metastasized from Greece and peripheral nations to Italy and France. Silvio Berlusconi survived nearly two decades of scandals, financial and sexual, as well as a no-growth economy, and yet was pushed out within weeks by a bond market that sent Italian yields well above 7 percent. For the past two months, Angela Merkel and Nicolas Sarkozy have met so often to try to contain the financial panic that they have been dubbed “Merkozy.”
The core issue is at the heart of the euro paradox: how do you have a common currency with no common economic policy, and how do you prevent rich states from bailing out poorer or more profligate ones? The answer is: you can’t. Germany has balked at subsidizing the debts of its neighbors, even as its own prosperity depends on those neighbors. So it has refused to allow for common bonds or to give the nod to the European Central Bank to issue more currency. The result has been recession and a gradual freezing of financial activity in Euroland, which in the past weeks went from a slow burn to a rapid deterioration.
Now the Europeans are faced with doing in a crisis what they couldn’t do during years of calm prosperity: relinquish sovereign control of their economic lives, with Italy and Greece and Spain allowing Germans and French to pass judgment on their budgets and finances, and Germans bowing to the bitter fact that they will have to pay more than their share.
There are bound to be flares as this occurs, but it will occur for the simple reason that it must, or else those Armageddon fears become economic realities. Yes, even then, life would go on, just as it did in the 1930s, just as it always has, but those are not outcomes to welcome or to court.
This crisis has been a sharp reminder that we live in a deeply interconnected global financial system where the risk of a meltdown remains. This one has been avoided for now. There may be another abyss in weeks or months. But each time crisis is averted, we learn collectively. Many dismiss that idea, saying that cans are being kicked down the road, debt is not being dealt with, and the system is irremediably flawed. Perhaps. Or perhaps it is simply a messy process, fraught with fear, as we learn how to manage this new world the only way humans ever have, by stops and starts, courting disaster, and trying at all costs to construct a stable future.
Edited by Corn Ball (01/02/1207:06 PM)
_________________________
I believe that if you wheel in an oxygen canister and a hydrogen canister and open the valves and then sprinkle some carbon around and a little bit of this and a little bit of that and put a little moisture in the air and add a sun lamp, then when you come back in 5 billion years the carbon, hydrogen and oxygen atoms will have assembled themselves into human beings.
U.S. money funds seen at risk from Europe's debt storm
WASHINGTON (Reuters) - When Lehman Brothers collapsed in 2008 and shattered the belief that U.S. money market funds would never "break the buck," Washington rushed to limit the damage.
But as Europe's debt crisis threatens to put the U.S. financial system under strain again, U.S. policymakers are worried they cannot turn to those same, impromptu tools to shore up the $2.6 trillion money markets industry.
"We've done a lot to prepare the banking sector," Jeffrey Lacker, president of the Richmond Federal Reserve Bank, said on Wednesday. "I'm less confident about the money market funds and their ability to weather major problems at European institutions."
Senior U.S. officials are alarmed by the deepening of the European debt crisis. Its spread to Italy, the euro zone's third-biggest economy, is seen as inevitably leading to spillovers across the Atlantic, in part through the holdings of money market funds of European securities.
Many investors believe money funds are as safe as lower-yielding bank accounts even though it is common knowledge that that they are not backed by the federal insurance that protects bank deposits.
During the chaos of 2008, dozens of money funds struggled to maintain $1 per share, but only one, Reserve Primary Fund, reported a net asset value below that level.
Less well known, and of concern to U.S. officials, is that the money funds cannot count on the protection measures that were pulled together to help them in 2008.
NO EASY OPTIONS
The Treasury Department is barred from reprising a guarantee program under the terms of the 2008 bailout of the U.S. banking system. Congress, which agreed to the bailout only reluctantly, prohibited renewing the program on grounds that it was providing a false sense of security to investors who might expect government protection again in the future.
The Federal Reserve is also unlikely to dust off either of two facilities it set up in 2008 to ensure money market funds had cash to meet redemption requests -- the Asset-Backed Commercial Paper Money Mutual Fund Liquidity Facility and the less-used Money Market Investor Funding Facility.
Today's rock-bottom interest rates and the fact that the government would need to charge fees for such guarantees mean that those types of emergency facilities would likely not be effective as a backstop.
Limitations on the Fed's emergency authority -- it can no longer intervene to protect individual firms as it did in 2008, but must provide aid to an entire asset class -- may further cramp the central bank's nimbleness in responding to a crisis.
Another Fed emergency liquidity facility dating from the U.S. financial meltdown depended on a promise that the Treasury would absorb some of the losses if the collateral financial institutions pledged lost value. U.S. lawmakers are now on a debt-cutting crusade and are unlikely to approve more bailout funds for the Treasury to use in that way any time soon.
NERVOUS INVESTORS
All this has left some investors nervous about their exposure to what they used to see as the safe havens of money funds, managers said.
Such funds "breaking the buck are far and few between, but nowadays, everyone is looking at Europe, and they are seeing things they thought wouldn't happen now happening," said King Lip, chief investment officer at Baker Avenue Asset Management in San Francisco.
The firm manages about $750 million in assets.
He said about 25 percent of the firm's investments are in money markets that had been carefully vetted.
"We've had clients asking us to move to cash," Lip said. "We're getting more and more requests to move to cash entirely rather than invest in money markets."
Top Fed officials have urged putting money funds on a tighter leash, saying they should be required to hold capital buffers to discourage clients from panic withdrawals.
"Given the systemic importance of the money market mutual fund industry, it is critical that one way or another we make the industry less susceptible to credit shocks and liquidity runs," Boston Federal Reserve Bank President Eric Rosengren said in September.
Strains in money funds re-emerged over the summer on concerns about their holdings of commercial paper issued by troubled European banks. Outflows spiked in July as investors worried about the fight in the U.S. Congress over raising the U.S. debt ceiling.
In response, some of the largest funds cut their European bank holdings and shortened the weighted average maturities of the assets they owned. Outflows ultimately stabilized after a debt deal was reached in the U.S. Congress.
Various academics and regulators have backed a shift to a share price that can fluctuate, as opposed to the current money fund practice of guaranteeing a stable $1 per share value. But many companies worry such a change would drive away customers.
Some industry counterproposals involve building up extra capital in some type of "buffer" to backstop money funds that run into trouble. Asset management executives also say that changes put in place by the Securities Exchange Commission at the start of 2010 already have made the funds much more robust than during the crisis, including tightening credit quality standards and imposing liquidity requirements.
Investors are watching the situation closely.
Evensky & Katz, a registered investment adviser in Coral Gables, Florida, with $700 million in assets under management, is considering whether to pull out of money market funds. But for now, it is leaning toward staying in, said Harold Evensky, the firm's president.
"We don't think any of the money market funds we use have significant exposure to Europe and if there was an issue, we have little doubt that they would cover it," he said.
Edited by Corn Ball (01/02/1207:08 PM)
_________________________
I believe that if you wheel in an oxygen canister and a hydrogen canister and open the valves and then sprinkle some carbon around and a little bit of this and a little bit of that and put a little moisture in the air and add a sun lamp, then when you come back in 5 billion years the carbon, hydrogen and oxygen atoms will have assembled themselves into human beings.
DUBLIN (AP) — Alarming financial news flowed out of Europe in a torrent Friday, just a week after the EU leaders struck a deal they thought would contain the continent's debt crisis.
The bombardment shredded hopes of a lasting solution to the turmoil that is endangering the euro — the currency used by 17 European nations — and threatening the entire global economy.
In quick succession:
— The Fitch Ratings agency announced it was considering further cuts to the credit scores of six eurozone nations — heavyweights Italy and Spain, as well as Belgium, Cyprus, Ireland and Slovenia. It said all six could face downgrades of one or two notches.
— Ireland's economy shrunk again much deeper than had been expected, with its third-quarter gross domestic product falling 1.9 percent. Ireland is one of three eurozone nations kept solvent only by an international bailout.
— Bankers and hedge funds were balking in talks about forgiving 50 percent of Greece's massive debts, a key issue in the debate over Greece's second rescue bailout.
— The red ink in Spain's regional governments surged 22 percent in the last year, endangering the central government's efforts to cut overall Spanish debt.
— France, the second-largest eurozone economy after Germany, warned that it faced at least a temporary recession next year.
— The euro hovered Friday just above $1.30, a cent higher than its 11-month low.
On the positive side, Fitch said France should keep its top AAA credit rating even though the country's debt load is projected to rise through 2014. Italian lawmakers overwhelmingly passed Premier Mario Monti's new austerity package in a confidence vote, even though many still objected to its pension reforms.
French officials and investors had feared that France could get downgraded, which would have immediate repercussions for the entire eurozone. France and Germany's AAA credit ratings underpin the rating for the eurozone's bailout fund.
European Union leaders confirmed Friday they have distributed the text of their proposed new budget-stability treaty, a pact designed to deter runaway deficits and supposed to become EU law by March. But as growth prospects fade across the continent, governments are facing the likelihood that Europe's debt crisis will prove longer and tougher to overcome than even their most recently revised forecasts.
Until this week, EU leaders held up Ireland as the model for how a debt-struck nation should behave — defying economic gravity by simultaneously growing its economy while sucking billions out of that same economy in Europe's longest austerity drive.
But on Friday, Ireland announced its third-quarter gross domestic product fell 1.9 percent, its national product 2.2 percent. Economists had expected only an 0.5 percent fall for GDP and none at all for GNP. The latter figure is considered a better measure of Ireland's economic vitality because it excludes the largely exported profits of about 600 American companies based in the country.
Ireland has been cutting spending and hiking taxes since late 2008 and has plans to keep doing so through 2015. Next year's target is €2.2 billion ($2.9 billion) in cuts and €1.6 billion ($2.1 billion) in extra charges, including a hike in national sales tax to 23 percent and introduction of a new €100 ($131) tax on every property.
But the country's finances this year are seriously out of whack: It is spending €57 billion ($74.5 billion), including €10 billion ($13 billion) to keep its five nationalized banks afloat, but collecting just €34 billion ($44 billion) in taxes.
Labor union leaders say the unexpected slump confirmed Friday is irrefutable evidence that Ireland's 4.5 million citizens already have been squeezed too much, too quickly.
"Current policies are making recovery almost impossible," said David Begg, general secretary of the Irish Congress of Trade Unions. "No economy can sustain the sort of ongoing damage that is being inflicted on us."
"We need growth and we need it quickly," he added.
Ireland's year-old international bailout requires the Irish to reduce their annual deficits from an EU record 32 percent of GDP in 2010 to the traditional eurozone limit of 3 percent by 2015. But analysts agree that Ireland cannot hope to meet the 2015 goal if its economy doesn't grow sufficiently.
Ireland's recovery plan now presumes 1.6 percent growth in 2012 and 2.8 percent growth in each of the next three years — figures many consider way too optimistic.
Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said Ireland would "do well" to reach 0.5 percent growth this year "given the deteriorating world economic backdrop and the fall-off in global demand." He said he doubted Ireland could top 1 percent growth next year.
In other developments:
ITALY:
The new premier's austerity package passed 495-88 Friday, but lawmakers on both the left and right criticized the pension reforms as too harsh. The plan raises €30 billion ($39 billion) in extra taxes and pension reforms and plows about €10 billion ($13 billion) of that back into growth measures.
Prosecutors in the southern region of Calabria, meanwhile, said they were investigating 10 envelopes with bullets inside found in a post office in the town of Lamezia Terme. The envelopes were addressed to the new leader Monti, his labor minister, former Premier Silvio Berlusconi and other top political or media figures, according to the Italian news agency ANSA.
Reports said the envelopes contained notes threatening those named if the austerity package wasn't changed.
GREECE:
European officials told The Associated Press that private holders of Greek bonds were resisting EU efforts to persuade them to take a voluntary 50 percent cut in the value of their holdings. The talks in Paris between EU and Greek leaders against representatives of global banks and hedge funds have been very difficult, they said.
The proposed €100 billion ($130.6 billion) write-off of privately held Greek bonds is supposed to be agreed upon by early next year — and it's central to Greece's second bailout deal. Without it, Greece's debt is forecast to escalate to nearly 200 percent of GDP.
SPAIN:
A new conservative government committed to increased austerity is coming into office next week, but it faces a rapidly deteriorating financial outlook.
The Bank of Spain announced a 22 percent surge over the past year in the debts of the country's 17 regional governments to €135.2 billion ($176.6 billion). Spain's central government debt rose 15 percent to above €706 billion ($922.3 billion).
PORTUGAL:
The main opposition party refused Friday to support the government's plan to amend the constitution to include a budget-deficit limit. All 17 members of the eurozone are supposed to make such commitments as part of the bloc's week-old plan to enshrine spending controls in a new treaty.
In a further worrying development, ratings agency Standard & Poor's on Friday downgraded the credit rating of six leading Portuguese banks to junk status.
Portugal received its own €80 billion ($104.5 billion) international bailout deal in April.
Edited by Corn Ball (01/02/1207:09 PM)
_________________________
I believe that if you wheel in an oxygen canister and a hydrogen canister and open the valves and then sprinkle some carbon around and a little bit of this and a little bit of that and put a little moisture in the air and add a sun lamp, then when you come back in 5 billion years the carbon, hydrogen and oxygen atoms will have assembled themselves into human beings.
The next financial crisis will be hellish, and it’s on its way
"There is definitely going to be another financial crisis around the corner," says hedge fund legend Mark Mobius, "because we haven't solved any of the things that caused the previous crisis."
We're raising our alert status for the next financial crisis. We already raised it last week after spreads on U.S. credit default swaps started blowing out. We raised it again after seeing the remarks of Mr. Mobius, chief of the $50 billion emerging markets desk at Templeton Asset Management.
Speaking in Tokyo, he pointed to derivatives, the financial hairball of futures, options, and swaps in which nearly all the world's major banks are tangled up.
Estimates on the amount of derivatives out there worldwide vary. An oft-heard estimate is $600 trillion. That squares with Mobius' guess of 10 times the world's annual GDP. "Are the derivatives regulated?" asks Mobius. "No. Are you still getting growth in derivatives? Yes."
In other words, something along the lines of securitized mortgages is lurking out there, ready to trigger another crisis as in 2007-08.
What could it be? We'll offer up a good guess, one the market is discounting.
Seldom does a stock index rise so much, for so little reason, as the Dow did on the open Tuesday morning: 115 Dow points on a rumor that Greece is going to get a second bailout.
Let's step back for a moment: The Greek crisis is first and foremost about the German and French banks that were foolish enough to lend money to Greece in the first place. What sort of derivative contracts tied to Greek debt are they sitting on? What worldwide mayhem would ensue if Greece didn't pay back 100 centimes on the euro?
That's a rhetorical question, since the balance sheets of European banks are even more opaque than American ones. Whatever the actual answer, it's scary enough that the European Central Bank has refused to entertain any talk about the holders of Greek sovereign debt taking a haircut, even in the form of Greece stretching out its payments.
That was the preferred solution among German leaders. But it seems the ECB is about to get its way. Greece will likely get another bailout — 30 billion euros on top of the 110 billion euro bailout it got a year ago.
It will accomplish nothing. Going deeper into hock is never a good way to get out of debt. And at some point, this exercise in kicking the can has to stop. When it does, you get your next financial crisis.
And what of the derivatives sitting on the balance sheet of the Federal Reserve? Here's another factor behind our heightened state of alert.
"Through quantitative easing efforts alone," says Euro Pacific Capital's Michael Pento, "Ben Bernanke has added $1.8 trillion of longer-term GSE debt and mortgage-backed securities (MBS)."
Think about that for a moment. The Fed's entire balance sheet totaled around $800 billion before the 2008 crash, nearly all of it Treasuries. Now the Fed holds more than double that amount in mortgage derivatives alone, junk that the banks needed to clear off their own balance sheets.
"As the size of the Fed's balance sheet ballooned," continues Mr. Pento, "the dollar amount of capital held at the Fed has remained fairly constant. Today, the Fed has $52.5 billion of capital backing a $2.7 trillion balance sheet.
"Prior to the bursting of the credit bubble, the public was shocked to learn that our biggest investment banks were levered 30-to-1. When asset values fell, those banks were quickly wiped out. But now the Fed is holding many of the same types of assets and is levered 51-to-1! If the value of their portfolio were to fall by just 2%, the Fed itself would be wiped out."
Mr. Pento's and Mr. Mobius' views line up with our own, which we laid out during interviews on our trip to China this month.
Edited by Corn Ball (01/02/1207:10 PM)
_________________________
I believe that if you wheel in an oxygen canister and a hydrogen canister and open the valves and then sprinkle some carbon around and a little bit of this and a little bit of that and put a little moisture in the air and add a sun lamp, then when you come back in 5 billion years the carbon, hydrogen and oxygen atoms will have assembled themselves into human beings.
10 Terrified at her torment, they will stand far off and cry:
“‘Woe! Woe to you, great city, you mighty city of Babylon! In one hour your doom has come!’
11 “The merchants of the earth will weep and mourn over her because no one buys their cargoes anymore— 12 cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble; 13 cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and human beings sold as slaves.
14 “They will say, ‘The fruit you longed for is gone from you. All your luxury and splendor have vanished, never to be recovered.’ 15 The merchants who sold these things and gained their wealth from her will stand far off, terrified at her torment. They will weep and mourn 16 and cry out:
“‘Woe! Woe to you, great city, dressed in fine linen, purple and scarlet, and glittering with gold, precious stones and pearls! 17 In one hour such great wealth has been brought to ruin!’
“Every sea captain, and all who travel by ship, the sailors, and all who earn their living from the sea, will stand far off. 18 When they see the smoke of her burning, they will exclaim, ‘Was there ever a city like this great city?’ 19 They will throw dust on their heads, and with weeping and mourning cry out:
“‘Woe! Woe to you, great city, where all who had ships on the sea became rich through her wealth! In one hour she has been brought to ruin!’
_________________________
I believe that if you wheel in an oxygen canister and a hydrogen canister and open the valves and then sprinkle some carbon around and a little bit of this and a little bit of that and put a little moisture in the air and add a sun lamp, then when you come back in 5 billion years the carbon, hydrogen and oxygen atoms will have assembled themselves into human beings.
World facing worst financial crisis in history, Bank of England Governor says
The world is facing the worst financial crisis since at least the 1930s “if not ever”, the Governor of the Bank of England said last night.
Sir Mervyn King was speaking after the decision by the Bank’s Monetary Policy Committee to put £75billion of newly created money into the economy in a desperate effort to stave off a new credit crisis and a UK recession.
Economists said the Bank’s decision to resume its quantitative easing [QE], or asset purchase programme, showed it was increasingly fearful for the economy, and predicted more such moves ahead.
Sir Mervyn said the Bank had been driven by growing signs of a global economic disaster.
“This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”
Announcing its decision, the Bank said that the eurozone debt crisis was creating “severe strains in bank funding markets and financial markets”.
The Monetary Policy Committee [MPC] also said that the inflation-driven “squeeze on households’ real incomes” and the Government’s programme of spending cuts will “continue to weigh on domestic spending” for some time to come.
The “deterioration in the outlook” meant more QE was justified, the Bank said.
Financial experts said the committee’s actions would be a “Titanic” disaster for pensioners, savers and workers approaching retirement. Sir Mervyn suggested that was a price worth paying to save the economy from recession.
Under QE, the Bank electronically creates new money which it then uses to buy assets such as government bonds, or gilts, from banks. In theory, the banks then use the cash they gain to increase their lending to businesses and individuals.
By increasing the demand for gilts, QE pushes down the interest rate yields paid to holders of these and other bonds. Critics of the policy say it pushes up inflation and drives down sterling.
The National Association of Pension Funds yesterday called for urgent talks with ministers to address the negative impact of lower gilt yields on pension funds. Joanne Segars, its chief executive, said QE makes it more expensive for employers to provide pensions and will weaken the funding of schemes as their deficits increase. “All this will put additional pressure on employers at a time when they are facing a bleak economic situation,” she said.
Ros Altman, of Saga, said the latest round of QE was “a Titanic disaster” that would increase pensioner poverty. As well as fuelling inflation, she said, falling bond yields would make annuities more expensive, “giving new retirees much less pension income for their money and leaving them permanently poorer in retirement”.
The MPC also voted to keep the Bank Rate at its historic low of 0.5 per cent, another decision that hurts savers. Yesterday, protesters outside the Bank’s headquarters smashed a giant piggy bank to symbolise the situation of pensioners and others forced to raid savings to keep up with the rising cost of living.
Asked about the plight of savers, Sir Mervyn said it was more important to support the wider economy than to support them. He suggested that savers would not be helped by deliberately pushing the British economy into recession. Yesterday’s decision was the first move on QE since 2009, during the global credit crisis, when the Bank injected £200 billion into the economy.
Some analysts believe that this round of QE could be less effective than the previous one, forcing the Bank to create even more money this time.
Michael Saunders of Citigroup, forecast that there could be as much as £225 billion more QE by next year. “I think they will do lots more QE,” he said. “It’s both that the economy is weak but also that the MPC’s view is that QE is not a very powerful tool, or rather it takes a large amount of QE to have much effect on the economy.”
The Bank is supposed to keep inflation near a target of 2 per cent. Inflation now stands at 4.5 per cent, and the Bank admitted it is likely to hit 5 per cent as soon as this month. The Bank’s own research shows that as well as stimulating the economy, QE pushes up prices.
Sir Mervyn insisted that yesterday’s move was still consistent with the 2 per cent inflation target, saying that the slowing economy means inflation could actually fall below that mark “by the end of next year or in 2013”.
The Governor insisted that the MPC’s decisions had been the correct response to events. “The world economy has slowed, America has slowed, China has slowed, and of course particularly the European economy has slowed,” he said. “The world has changed and so has the right policy response.”
City traders took heart from the Bank’s move to boost growth, with the FTSE 100 rising 3.7 per cent to 5,29, its biggest two-day gain since 2008.
The Bank’s decision came after mounting political pressure from ministers worried that Sir Mervyn was not reacting urgently enough to the darkening global economic outlook.
George Osborne, the Chancellor, welcomed the Bank’s move, saying: “The evidence shows that it [QE] will help keep interest rates down and boost demand and that will be a help for British families.”
Edited by Corn Ball (01/02/1207:12 PM)
_________________________
I believe that if you wheel in an oxygen canister and a hydrogen canister and open the valves and then sprinkle some carbon around and a little bit of this and a little bit of that and put a little moisture in the air and add a sun lamp, then when you come back in 5 billion years the carbon, hydrogen and oxygen atoms will have assembled themselves into human beings.
_________________________
I believe that if you wheel in an oxygen canister and a hydrogen canister and open the valves and then sprinkle some carbon around and a little bit of this and a little bit of that and put a little moisture in the air and add a sun lamp, then when you come back in 5 billion years the carbon, hydrogen and oxygen atoms will have assembled themselves into human beings.
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