The Bank of England (BOE) just announced a cut in its benchmark rate from 0.5% to 0.25%. The rate had been at 0.5% since March 2009, when the economy was still reeling from a recession.
Does this mean that the BOE thinks the economy is weaker now than it was in March 2009?
The BOE also said it will purchase an additional 60 billion pounds (about $80 billion) of U.K. government debt over the next 6 months. It will also buy 10 billion pounds of corporate debt over the course of 18 months.
This isn’t quite on the level of the Federal Reserve during QE3 when it was purchasing $85 billion per month in new assets, but the U.S. is quite a bit bigger than the U.K. both economically and in terms of population.
Perhaps the most significant thing is that the BOE has indicated that there could be more rate cuts in the future. This means it will likely go to zero or beyond.
And why not? That is the world trend. The European Central Bank and the Bank of Japan have engaged in massive monetary pumping and a policy of negative interest rates (NIRP).
The major central banks have done (or are doing) almost the exact opposite of what a libertarian/ free market proponent would recommend. I would say it is straight Keynesian economics, but I am not even sure that Keynes would have supported this insanity.
On this news, the British pound fell in relation to the dollar and other major currencies.
Since the Fed does not want the dollar to strengthen too much, it makes it less likely now that the Fed will hike its own target rate. Many think the Fed will not hike at all in 2016.
These central bankers have this goal of increasing price inflation. It is an absurd goal, which only makes us poorer in the long run. It is also rather ironic in that these moves just tend to increase fear amongst the public, which can oftentimes just leads to an increased demand for money, despite the monetary inflation. This means a decline in velocity and lower price inflation, at least in the short run.
Despite the Fed not raising its target rate, other than 25 basis points back in December, it is the only major central bank that is anywhere close to a sane policy right now. Sure, it approximately quintupled the monetary base from 2008 to 2014, but at least its monetary policy has been tight for almost two years now.
This is all a disaster that is just getting built up. The more these central banks inflate, the more that resources are misallocated. At some point, there is going to be a major correction.
And a correction is really what we need. We need a return to sanity. We need for resources to properly align with consumer demand. We need for the asset bubbles to pop so that prices are no longer distorted.
While a major correction will be painful, it is basically inevitable at this point. This includes the U.S. But the U.S. is in far better shape than Japan and parts of Western Europe.
The only thing worse than the correction itself is the possible responses from central banks and central governments. It could bring more authoritarianism. It could bring even more money creation and more debt, if that is even possible.
While the Brexit vote was a small positive step towards liberty, it doesn’t change the fact that the British people are just as much under the thumb of central bankers as everyone else. And the BOE is doing virtually the opposite of what it should be doing.
Janet Yellen and company now have another excuse not to raise its target rate. They probably don’t want to change anything right now anyway, at least until the election is over. If the economy were to tank before November, it could mean a Trump victory, which they do not want.
This will all be entertaining in a sick kind of way. It is important to watch Japan, as I see the Japanese getting hit the hardest of all when everything implodes.