Who is Right: BoE, ECB, The Fed?

Who is Right: BoE, ECB, The Fed?

Trading Features / Strategies from Simon Denham of Capital Spreads.

With the three major Western currency blocs acting in different ways to the current financial, growth and inflationary problems (one slashing rates, one holding steady and the third looking to tighten) it will be educational in a few years time to look back and analyse which had their finger correctly on the pulse of economic events.

This afternoon at 13.30 we will get the latest US CPI numbers which are expected to come in at around 3.9% overall (2.3% ex-food and energy). With Fed rates at just 2%, about half the inflation rate, we can see that the Fed is more concerned with growth than with fighting the interminable inflation battle. For holders of cash and short term bonds the decay in the absolute value of your assets is running (after tax on income) at around 2.5% a year. This steady crumbling of overall net worth is now affecting just about every single asset class in the US. With the ongoing weakness of the Dollar included it is not unreasonable to state the average American citizen is significantly poorer this year than last.

In a closed economy (and, to be fair, the US is, by and large, pretty insular economically, socially and politically) the affects of such a damaging raft of conjoining events can be mitigated to a certain extent. However, in the end, the general decay of personal spending power in global terms must start to affect overall growth.

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In the UK the BOE is taking a different line, one of passivity, neither trying to fight inflation aggressively nor attempting to boost growth. The Treasury and Bank seem to have taken the old saying "Don’t Just Do Something, Stand There!" as their philosophy of the moment. On the basis that knee jerk reactions to events are almost certainly the wrong ones this ‘masterly inactivity’ may eventually prove to be the correct path to follow but it does appear sometimes that Mervyn is fiddling whilst Rome burns.

And finally we come to the ubber hawks of the ECB who seem content to throw entire economies to the wall in their never ending search for zero inflation. Much is written about the events in Frankfurt contributing to a possible break up of the Euro but the currency is now so imbedded into the various Eurozone economies that it would be virtually impossible, now, to break out. For all of the fulminating of the Garlic Belt over the current intractability of the central bank and the loud threats of ‘I can always leave if I want to’ the fact is that in the late nineties they made their bed so they must now lie on it. The one thing that might be up for grabs is the independence of the ECB itself if enough countries become frustrated with the banks policies. But if this became likely then the Germans might well pick up their ball and leave the game. The Germans, uniquely in the European arena, have been through not one but two bouts of hyper inflation in the last eighty or so years. The first, it can be argued, created the conditions for dictatorship and the second smashed savings by about 90%. It is this (admittedly fading) memory that drives the German fear of political influence in macro financial affairs. And it this phobia which appears to be the overall driving impetus pervading all of the ECB thinking.

Which of these three policies will work and which will be taught in universities in years to come as the right or wrong course to take. Personally I believe that (within reason) all three will probably end up with pretty much the same result as the influences on all the Western nations are to a great extent not internal but external. Base commodity prices are the driving factor in much of the inflation bubble and a growing economic power in the East is causing ever higher wealth transfer out of the west. The major internal factor is the current financial sector woes which can all be sourced from the same problem of over-inflated property values. As with all valuation pendulums this one will probably swing back from absurdly over priced to stonkingly cheap over the next two or three years and nothing that any central bank does will, in the end, have made a blind bit of difference.

The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.

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Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.

'Who is Right: BoE, ECB, The Fed?' edited by SD, updated 13-Jun-08

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