Wednesday 23 January 2008

Interest rates: Hammer hits nail (thumb)

Seaworthy in stormy seas

One has to wonder if Central banks are so beholden to the markets that other fundamentals are ignored to our peril.

In his speech yesterday to the Institute of Directors in Bristol, Lord Mervyn King, the Governor of the Bank of England suggested that the policy framework of the Bank provides a seaworthy vessel to reach the calmer waters.

Indeed, I truly hope so, but it is one thing to have a seaworthy vessel and another to be able to weather the stormy seas – there is no doubt in anyone’s mind that the seas are hosting Force-10 gales and some vessels are out at sea sending in distress calls.

Nowhere is the distress call so evident than in the United States where the hard-graft laws of economics and monetary policy are being defied by political expediency.

Inflation still matters

To a layman like myself, I have been made to understand that the central bank lever used to control inflation is usually the interest rates, with inflation running nominally at 2.1% in the UK, 4.1% in the States, 3.1% in the Euro area and 6.9% in China [Economist] – I do not think this is the time to throw money at consumers such that they have more spending power to raise inflation even more.

This means the Bush economy stimulus package, which is to boost the American economy by 1% of GDP (about $145 billion) may not have the money in the hands of the people and businesses for at least another quarter and is probably a little too late whilst it could get stunted through the legislative process.

No one can say that this move is the right one to take until we see the results at the end of the implementation - it is a gamble as good as the Iraqi surge and George W. Bush is one gambler if you ever saw one.

Interest rate panic

Since as it appears, the interest rate mechanism is very much the hammer by which every economic problem nail is hit; but which nail should be hit when inflation is soaring and markets are in free-fall turmoil?

Time will tell if the benchmark interest rate cut by 75 basis points by Ben Bernanke of the United States Federal Reserve yesterday morning before the markets opened was the right thing to do.

I am not convinced by that move and it looks like panic or as the Economist opines “Desperate Measures”, methinks the hammer has hit the nail dead-centre but that nail is on the thumb.

It is really bad out there

I cannot however ignore the opinion of the likes of George Soros who suggests that the current market crisis is probably the worst in 60 years that the question about recession or no recession is leading to a point that analyst denials would have us deep in recession before we realise we are drowning.

Before I get into any analysis beyond the remit of my understanding, I would wait and see how the thumb goes black and blue after that almighty groan of excruciating pain and the mandatory dance-around.

Did I not say this thing has a long way to run? We are preparing for a long bear market and seriously rough seas. Whichever Bank Governor still has a nerve , please hold it.

Related Blogs

Dishonest lending clue to market tremors – August 2007

Baling out trust – September 2007

Local Situations in global straits - October 2007

Fixing Capitalist Errors with Socialist Favours – December 2007

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