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Rig for StormLarry LaBorde
Yesterday I toured the Bank of England accompanied by the lovely Miss Puddy. I suppose it was just coincidence that the Bank of England's rate-setting Monetary Policy Committee ordered another half-point cut in base rate from an existing 1 per cent that was already the lowest in the Bank's 315-year history to a new all-time low of 0.5 per cent. Trichet followed suite just a half hour later and lowered the European Central Bank rate to 1.5% (its lowest rate ever). But Mervyn King is taking it a step further by injecting 75 billion pounds (with another 75 billion pounds in the near future) directly into the economy with its open market operations by purchasing government & commercial bonds. We will now see if Milton and Anna were correct. We will see if the economy is a simple machine where the mandarins can spin a few dials and pull a few levers and everything will be just rosy in a quarter or two. After all it worked in Japan - didn't it? During my travels this past few weeks meeting with business associates as well as talking with different people from around the world I have come to an opinion that is a bit different. I sense that there is something in the air that has not been felt since the mid to late 1970's when people actually wondered if inflation was going to get out of hand. I SMELL FINANCIAL FEAR. While touring the Bank of England's museum one of the exhibits was a hot air balloon where you could try your hand at flying the inflation balloon at an altitude of 2%. When the economy cooled down you simply lowered the interest rate and juiced it a bit. When the economy heated up you raised the interest rates and released a bit of hot air. Just that simple - dials and levers to adjust at the central bank and it is smooth sailing. The economy is a bit of an organic living thing. The invisible hand of Adam Smith is an example of the decisions of millions of individuals all acting on their own to fill needs in society. The economy works IN SPITE of the actions of governments and central banks and NOT BECAUSE of them. But now I have to wonder if the arrogance of government intervention will not overcome the markets. Misallocation of capital on such a grand scale has only been tried in the old USSR and we all know how that ended up. Excessive consumerism through borrowed money has never been sound policy but that is exactly what the mandarins now want. In spite of the fact that no country has ever spent itself into prosperity with borrowed money that is exactly the heart of the government's plan. The people that I have talked to are having none of it. Everyone I spoke with is talking about paying down debt, driving their cars longer, wearing last year's fashions and making do. I would not even be surprised for austerity to become in vogue. It really doesn't matter how low the interest rate is this week - people are not in the mood to take on more debt in this economic climate. People are all running for the safety of a financial harbor. Cars are piling up in manufacturer's lots and the government wants to subsidize the manufacturers to make more of them. If there are no buyers that sort of plan is doomed for failure. To make matters worse this new lower interest rate has arrived at the very time that governments around the world are suffering from decreased tax revenues and are foolishly increasing spending. This is causing deficits to soar. The lower interest rates are making government bonds look as attractive as Cinderella's step sisters. With no Prince Charming (or sovereign wealth funds) to gallop in and buy them up is monetizing the debt far behind? Do you really trust the same people who manage the post office to run the economy? The big plan is to inflate our way out of this mess but not to worry they won't let things get out of hand. I would imagine they said the same thing a few years ago in Zimbabwe. In the meantime rig for storm, head for a financial harbor and get some of your assets to the safety of precious metals. ### Larry LaBorde 321gold Ltd |
