Bank of England and Quantitative Easing

Posted 12 Jan 2009

It appears that the Bank of England is embarking on a path similar to the Federal Reserve regarding quantitative easing.  As reported by the Telegraph, the English government is intent on removing a key part of the 1844 Banking Bill that 'obliges the Bank to publish a weekly account of its balance sheet'.  

For transparency of the currency this is worse than the Federal Reserve's discontinuance of publishing M3 in March 2006.

Quantitative easing is a tool of monetary policy.  The effect is an increase in the quantity of currency without regard to maintaining its quality.  Quantitative is relating to, measuring, or measured by the quantity of something rather than its quality.

 Not all ‘dollars’ are defined equally.  Even traditional economists and government reports index in terms of ‘1986 dollars’ or ‘1977 dollars’ to account for the differences in quality of the currency or its purchasing power.  Neither the FRN$ nor the Pound have a definition and are instead complete illusions which are subject to payment risk.

A commodity currency such as gold is not subject to this risk.  For example, 1 ounce of gold in 1986 is equal to 1 ounce of gold in 1977 or 577.  The quality of the money is consistent and comparable.  The names of the national currencies arose to define a particular type and weight of metal of a given purity.

For example, when coins called sterlings were minted from silver; 240 of these sterlings weighed one pound, and large payments came to be made in 'pounds of sterlings'.

 The definition has been tinkered with from the times of the King Offa of Mercia, Charlemagne, King Henry II, the Tudors, Sir Isaac Newton's gold standard which while it cured the deflationary credit contraction resulted in shortages of silver coins and most recently Bretton Woods.  Truly, the definition of a Pound Sterling has been thoroughly used, abused confounded, deflected, misdirected and distracted from its purchasing power.  The latest change to the Banking Bill will be no different. 

The current ‘£’ has no definition and is a fading monetary illusion like the other major currencies; FRN$, Euro and Yen.  The quality of the currency is called into question in direct proportion to its quantity.  The inconsistent quality of currency undermines the confidence in it.

 Less transparency will undermine confidence in the Pound's quality and fuel distrust of the currency while a slowing of velocity can mask or delay the inevitable consequences.

Throughout 2008 distrust of the £ accelerated.  Of the ten major currencies only in the FRN$, Yen and Yuan (FRN$ pegged) has gold not shone brilliantly with all-time highs during the 2008 prelude to the coming financial crisis.  This is because of the FRN$'s status as the world reserve currency and the Yen carry-trade.

 As the deflationary credit contraction, of Kondratieff Winter, intensifies more pressure will be put on the FRN$ and Yen by their lethal competitor the Ancient Metal of Kings.

Notice how the £gold has smashed its earlier all-time highs in March 2008 around £500 ending the year around £600 or 20% increase.  A similar change for the dollar would have been about $1,000 to $1,200 instead of the current $820.

 Seeing the financial world through rose-colored FRN$ lenses greatly distorts one's view.  A mere three years ago gold's £ price was only £250.  This rapid devaluation should alarm anyone holding Pounds or English assets and be a shrill warning to everyone else; particularly FRN$ holders who can do something about it.

Despite gold's velocity being near stasis, it is rarely used in ordinary daily transactions, it has held up remarkably during the credit contraction.  As gold's velocity increases, particularly in ordinary daily transactions, it will greatly increase in value.  One reason the negative effects of quantitative easing have not been manifest is because the velocity of both the FRN$ and the £ has been slowly tremendously.   

These are good reasons, particularly for the British, to have a portion of your wealth in the precious monetary metals of gold and silver.  For large amounts I recommend reputable and trusted allocated digital gold currency vaulting services, like GoldMoney, which can also function as a currency in ordinary daily transactions.

If interest rates for major currencies are going to 0%, the FRN$ is under 1% and the £ is below 2.5%, then why hold illusory paper or electronic digits that are subject to both payment and counter-party risk when you can hold gold?

At all times and in all circumstances gold remains money and has a constant and comparable definition.  Gold is the ultimate insurance, is no-one’s liability, the ultimate store of value and is always accepted.  Gold is the penultimate of safe and liquid assets.  Without mercy and with tremendous force the Ancient Metal of Kings is both raining and reigning down with blow after blow on the illusory £ and we already know how the fight will eventually end; with the £ in the fiat currency graveyard.

Disclosures:  No position in the GBP and both short and long FRN$.