http://www.theguardian.com/business/2014/feb/12/bank-england-interest-rates-hold-inflation-report
‘as they prepared for their journey and waved goodbye and “slipped the surly bonds of earth” to “touch the face of God.”
President Reagan’s remarks following the loss of the Space Shuttle Challenger and her crew. 06.07.04
Escape Velocity
You may have seen Sandra Bullock and George Clooney floating around in CGI space in the recently released film ‘Gravity’. This is a fascinating film for a number of reasons, but in the context of Mark Carney’s often-repeated‘ escape velocity’ it is particularly interesting.
Escape Velocity’ is an odd phrase to describe the economic conditions necessary for a reduction in the emergency measures that have been in place since 2009. A more orthodox approach to ‘perception management’ would employ images like ‘laying the foundations’ of solid growth or ‘building’ on previous tough decisions, or even ‘husbanding the fragile buds’ of economic recovery. But here we are getting away from the mundane, even ‘surly’ realities of economics as we have known them. We seem to be:
‘Going boldly, where no economy has gone before.’
The first part of our journey to the stars, the escape bit, is something I have referred to only recently in ‘Great Expectations #1’:
(https://unitedstatesofeverywhere.wordpress.com/2014/01/28/great-expectations/0)
I described the new reality that the Bank of England, independent as it is from any concerns you or I might have, is now free to pursue inflationary or anti-inflationary policies as it chooses. As it has grown more comfortable with this overt expression of its freedom, it’s ‘coming out’ as it were, the Bank has felt less and less compelled to invent ‘reasons’ as to why it follows this policy or that policy.
In 2008, like the Captain of the Pequod, the Bank of England claimed a mandate, (From God? From Destiny? – like Ahab they never made it clear from whom) to hunt the Great White Whale of Monetarism; INFLATION. They spent the next four years following this semi-mythical beast around without making any real attempt to harpoon it; if anything the Bank seemed content to throw trillions of tons of krill into the water to keep Moby Dick around!
Despite these inducements, the whale seems to have submerged for some time now, and so it was briefly replaced by our Captain with employment as a target. But employment provided only poor sport as a metric and as I predicted we would soon be driven to set our sights and our harpooners on something new. That something called out of the depths turned out to be:
THE OUTPUT GAP
What is the OUTPUT GAP?
It is ‘something to do with productivity’ Captain Ahab/Carney says, which is something we have never fished for before..
Well, how big is THE OUTPUT GAP?
The Output gap is 1.5 %, or is it 6 %? -Nobody seems to know which, doesn’t really seem to matter… we will know it when we see it says our captain.
From the Telegraph:
Mr Carney is asked: How will households understand the Bank’s new focus on productivity?
Carney says that firstly, the economy has been stronger than we thought and that the Bank had expected that productivity growth would pick up alongside the recovery, which hasn’t happened.
So an economy can be strong and yet not productive? Care to elaborate? No?
What we’ve done is we have been more cautious in our assessment of productivity growth. Productivity does not get back to pre crisis growth until three years from now. We‘ve given our assessment of spare capacity and we’re going to update that regularly.
So that means Ahab intends to take the ship around the Cape of Good Hope three or four more times before he has to answer to the Quakers back in New England
And that is when Ahab/Carney nails his gold doubloon to the mast..
Interest rates will not reach the 5pc levels seen before the crash for some time, the Bank also suggested. It said the “new normal” for interest rates was likely to be between 2pc and 3pc.
There she blows! – Now we have finally got something we can sink our harpoons into! – the New Normal of between 2 and 3 % bank of England base rate.
So what does a semi permanent interest rate of 2-3% mean or more importantly, (as Ahab correctly observed), what does it represent? it represents a permanent reduction in the earning power of money issued by the British State e.g. the earning power of the currency to you. So where has this earning power gone? It has been allocated to derivatives. It has been allocated to privately issued Democratised money.
Think of a £5 note as a betting slip. The odds quoted on the slip are the risk of holding the slip- the risk of gambling.
They are nothing to do with the odds of the horse winning a race or a football team winning a match. The horse race, or the football match is simply a trigger point.
The odds are literally a reflection of how a bookie will pay off everyone who bets with him. They are not a reflection of anything else. The Bank of England base rate is simply a reflection of how viable the Bank of England is- nothing else.
We need to get this absolutely clear. Here is an example:
Let’s say you went to a bookie and said you wanted to make a £1 bet that the moon will be discovered to have been made out of green cheese within five years (or if you like, will turn out to be a hollow spaceship a la David Icke.) Since this is patently going to not turn out to be the case, what is to stop the bookie offering you odds of a million to one against, just to get the business? After all there is no risk that he will have to pay out is there?
But the bookie cannot offer you odds of a million to one unless he has taken a million pounds worth of business in to pay you out in the event that you should win. But surely he doesn’t have to have a million pounds in the bank just to cover the possibility I win. I am not going to win. So why can’t he just take the chance?
BECAUSE THEN THE BOOKIE WOULD BE GAMBLING AND BOOKIES DON’T GAMBLE,
THAT’S THE WHOLE POINT.
THEY LEAVE THE GAMBLING UP TO SUCKERS LIKE YOU!!!
Now lets apply this to the Pound gamble. The Bank of England traditionally pays odds of 5% on their British economy book. These odds are a reflection of the likelihood that the British pound will be able to pay out, that the British pound will be worth something in a year’s time etc. The viability of the British book rests on the amount of business that the British book is doing, just the same as the book on the moon being made of green cheese. The Bookie cannot offer 1 million to one unless he has the business in to cover the bet. The Bank of England can only offer 5% interest if it has the business in to cover the bet.
And the Bank of England has given some of its business away.
It has given that business to Derivatives- to Democratised Money privately issued by the financial institutions. So it cannot pay out at 5% any more- it simply does not have the business to cover the odds. Now it is going to pay at 2-3 %. The British book has been shrunk. The business has gone to privately issued, Democratised money.
Like Ahab on the Pequod, once the coast has disappeared from view, the crew is at the mercy of it’s captain. Of whatever fancies come into his head. And we know from the story, don’t we that this was always Ahab’s design, right from the very beginning…
Like a rocket launched into space we will soon be permanently living in a new low/zero gravity monetary environment, with thinning bones and weakening heart, but free from earth…
Can you hear me Major Tom…?
‘Space Oddity’ – David Bowie
United States of Everywhere 