Yesterday we disclosed how the BOE has lost control of monetary policy. They only have the interest rate to control and this is meaningless in the face of LIBOR and CDS and the Bond market.
On Monday, whatever Darling and the media report, the Government will outline the loss of control of fiscal policy. perhaps with debt ballooning to 50% above target for the year.
As a result of the above the pound has sunk, now trading at £1.48 to the US Dollar and £1.20 to the Euro; Osborne's little saga apart there has been little public reaction to this.
When we then consider the issues facing us; deflation of asset values in all classes, capital inadequate banks, low savings, consumer over-indebtedness - we are in quite a pickle. it is very Japan circa 1990-91. They had a 10 year recession and their stock market is now 85% below its peak (=FTSE100 at 800, rather than 4000 as today).
But perhaps the BOE do have an answer. Print money now, deflation is setting in for the moment as global deleverage occurs - so the inflationary effect will actually be countered in the short-term. Plus inflation would then allow the BOE to raise interest rates back to levels which may enourage saving. Asset prices would be reduced in real terms and there would be more money to spend to stimulate the real economy. Also with no need to issue gilts, the government will not need to get into such financial hole as is currently planned.
In the US, The Fed Chairman Ben Bernanke has hinted at the US going down this road to avoid depression. The time to do it is now, in the deflationary window. If we wait until the deflationary period is over we could set-off hyper-inflation.
Thus there is a strong argument for printed monetary stimulus today. Comments?