QUANTATIVE EASING - IS IT A CAR CRASH IN THE MAKING?

QUANTATIVE EASING - IS IT A CAR CRASH IN THE MAKING?

Observing this recession is rather like watching slow-motion footage of a car crash. The front bumper of the vehicle is share prices and money growth. Shares started really sliding in the autumn, around the same time that Lehman Brothers declared itself bankrupt. This coincided with a sudden and unprecedented collapse in world trade. The impact of the collision is still travelling through the frame of the car however, shattering both corporate and individual fortunes with inexorable inevitability as it passes on. Investors have abandoned the markets because of their fright about the slide in profits and the rise in redundancies that lie ahead in the coming months. It will only be at the end of this year, when unemployment is closer to three million than two million, that we will truly know how it feels to be in the thick of a recession. Sir Fred Goodwin may be viewing himself both a scapegoat and a victim, but how would the revelation of his £700,000 pension have gone down eight months ago with 10% out of work for the first time since the 1980s. Considering the amount of expendable cash in an economy is directly related to growth and inflation, If BoE policy makers had looked at money growth in 2006, as it soared by a massive 14.5%, they would have been able to heed a warning about the un-sustainability and scale of the boom. Looking at it now policy makers would see that it is growing by a mere 3.8%, which is still severe recession territory.

At midday today emergency measures to prevent the depression-scenario will culminate here in Britain when the BoE will confirm that it is about to start printing money for the first time in its history. Quantative Easing is a terrifying prospect for those aware of how easily governments can trigger hyperinflation by employing the printing presses, but it may also provide the catalyst necessary to turn the economy around. The BoE’s aim is very simple: to increase the amount of cash flowing around in the UK, which should, in turn, enable companies and people to spend a little more, and to avoid the prospect of deflation.

The ECB is also looking increasingly likely to follow suit. It has argued, quite reasonably, that quantative easing will potentially generate high inflation in the coming years. But the more pressing prospect of impending European economic collapse, and indeed the threatened disintegration of the euro itself, are compelling enough arguments for it to change its mind. Preventing high inflation is a worthy aim, but useless if, after all your efforts, there's no functioning economy left. Add to this that retail sales in Germany, Europe’s largest economy, unexpectedly fell in January as consumers fretted about job security and reined in spending.The Germans are battling their worst recession since World War II. The IMF expects their economy to contract 2.5%. Unemployment was up for a fourth month in February as a collapse in foreign demand prompted companies to shed jobs. This prompted the German government to spend €80billion on measures to stimulate growth, including tax cuts and subsidies to get consumers to buy new cars. With the ECB looking at a probable lowering of its main lending rate by 50 basis points (down to 1.5 %) when policy makers meet in Frankfurt today major currencies should be looking to make some ground against the Euro. The euro fell against the dollar on speculation that Trichet will lower interest rates today and signal further cuts are needed to curb the deepening recession.

The markets are obviously dominated by the Bank of England rate announcement at midday. This will be closely followed by the ECB rate decision at 12:45. Other data out today includes US initial jobless claims at 1:30 this afternoon

Raphaels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

This newsletter is the personal view of Raphaels Bank and nothing herein should be construed as a recommendation or advice. The Bank accepts no responsibility for the correctness or otherwise of any matters contained herein.

Authorised and Regulated by the Financial Services Authority.