US central bank accused of unleashing an inflation shock that will rock financial markets, reports Ambrose Evans-Pritchard
Barclays Capital has advised clients to batten down the hatches for a worldwide financial storm, warning that the US Federal Reserve has allowed the inflation genie out of the bottle and let its credibility fall "below zero".
"We're in a nasty environment," said Tim Bond, the bank's chief equity strategist. "There is an inflation shock underway. This is going to be very negative for financial assets. We are going into tortoise mood and are retreating into our shell. Investors will do well if they can preserve their wealth."
Barclays Capital said in its closely-watched Global Outlook that US headline inflation would hit 5.5pc by August and the Fed will have to raise interest rates six times by the end of next year to prevent a wage-spiral. If it hesitates, the bond markets will take matters into their own hands. "This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that's possible. It has lost all credibility," said Mr Bond.
The grim verdict on Ben Bernanke's Fed was underscored by the markets yesterday as the dollar fell against the euro following the bank's dovish policy statement on Wednesday.
Traders said the Fed seemed to be rowing back from rate rises. The effect was to propel oil to $138 a barrel, confirming its role as a sort of "anti-dollar" and as a market reproach to Washington's easy-money policies.
The Fed's stimulus is being transmitted to the 45-odd countries linked to the dollar around world. The result is surging commodity prices. Global inflation has jumped from 3.2pc to 5pc over the last year.
Mr Bond said the emerging world is now on the cusp of a serious crisis. "Inflation is out of control in Asia. Vietnam has already blown up. The policy response is to shoot the messenger, like the developed central banks in the late 1960s and 1970s," he said.
"They will have to slam on the brakes. There is going to be a deep global recession over the next three years as policy-makers try to get inflation back in the box."
Barclays Capital recommends outright "short" positions on Asian bonds, warning that yields could jump 200 to 300 basis points. The currencies of trade-deficit states like India should be sold. The US yield curve is likely to "steepen" with a vengeance, causing a bloodbath for bond holders.
David Woo, the bank's currency chief, said the Fed's policy of benign neglect towards the dollar had been stymied by oil, which is now eating deep into the country's standard of living. "The world has changed all of a sudden. The market is going to push the Fed into a tightening stance," he said.
The bank said the full damage from the global banking crisis would take another year to unfold.
Rob McAdie, Barclays' credit strategist, said: "The core issues have not been addressed. We're still in a very large deleveraging cycle and we're seeing losses continue to mount. We think smaller banks will struggle to raise capital. We're very bearish - in the long-term - on high-yield debt. The default rate will reach 8pc to 9pc next year."
He said investors had taken their eye off the slow-motion disaster engulfing the US bond insurers or "monolines". Together these firms guarantee $170bn of structured credit and $1,000bn of US municipal bonds.
The two leaders - MBIA and Ambac - have already been downgraded as the rating agencies belatedly turn stringent. The risk is further downgrades could set off a fresh wave of bank troubles. "The creditworthiness of many US financial institutions will decline in coming months," he said.
The bank warned that engineering and auto firms we're likely to face a crunch as steel and oil costs surge. "Their business models will have to be substantially altered if they are going to survive," said Mr McAdie.
A small chorus of City bankers dissent from the view that inflation is the chief danger in the US and other rich OECD countries. The teams at Société Générale, Dresdner Kleinwort, and Banque AIG all warn that deflation may loom as housing markets crumble under record levels of household debt.
Bernard Connolly, global startegist at Banque AIG, said inflation targeting by central banks had become a "totemism that threatens to crush the world economy".
He said it would be madness to throw millions out of work by deflating part of the economy to offset a rise in imported fuel and food prices. Real wages are being squeezed by oil, come what may. It may be healthier for society to let it happen gently.
No, none of 'the Central Banks' as such pay taxes. Taxes are for the rest of us idiot 'Joe Public' to pay, for this to be *lent* back at interest to 'our governments' for our infrastructures, and to repay interest on previous such lendings. But didn´t we work for it, and therefore wasn't it 'ours'? Well, there are many deceptions involved about the unreality of 'mine and thine', but technically yes, it is 'ours' and therefore not 'theirs' to lend. So what kind of thieves does that make them? Wholesale thieves. So don't pay taxes. They don't. Just get rid of the whole fiction. Let's recover the planet.
Recent moves down by global stock markets confirm this warning, but the bottom may still be a long way away. However, gold and silver have gained in this period. The logic of an investment switch is clear, see: http://arabianmoney.net/2008/07/05/equities-falling-gold-rises-to-950-silver-past-18/
Those who control the issue of money have the most clout.Trusts have pyramids of companies and have brilliant accountants.
Yeah Mark, Don't mean to bust your bubble buddie(no pun intended) The Federal Reserve here in this country DONT pay no taxes.
"The currencies of trade-deficit states like India should be sold." Still they gain, theoretically. As the value of their currency goes down their exports become cheaper and their imports become costlier. And much of their industrial production is being consumed by their own people. While the 'socialist' leanings of their early leaders are usually decried by us in the west, it was that judicious use of "protection" that prodded and propelled "motivated" groups among the "poor" to the launching pad to be ready to become the middle-class when liberalization set in! Only that we in the west find it difficult to accept that we were wrong. And their earlier leaders didn't learn socialism in Delhi. They learned it right here in London, in the London School of Economics. Americans called Indians "communists" all along because they refused to allow the US brand of philandering CEOs to go in to mess up their fledgling economy! "Socialism" and "Communism" should not be used as scarecrows to enrich a few as has happened here in the west.
Posted by Mark on July 2, 2008 11:33 AM "Is nominal ownership different to actual ownership?" Yes, I own a house, I have access to the economic benefits of owning a house. If I owned a house, but wasnt allowed to live in it, or charge the person who does rent, it wouldnt be very good. Thats the way the Fed works, the Tier 1 one banks paid for it, and technicaly own it, but dont get to appoint its managers and dont get dividends from it. "Who owns the tier 1 banks?" Not secret cabals of Jews, European Royalty and the Free Masons. Go and ask them, they have to list anyone who owns more than 5% of them. Certainly not the stupid figures thrown about by the thinly veiled anti semetic nationalists. "The Fed does pay tax because it is privately owned enterprise." Not tax, although it does pay tax, each year, it produces a profit and loss statement, and each year, it transfers ALL its profits to the US treasury. "but interested in who has a controlling interest in our banks" The Government controls them.
It is no secret, nor should it be one, that the finance of the world is controlled by startegic use of the ninety percent of the world's 'money', which is in 'the Trusts', and that this is under the control of the Rothschild family. The food production of the planet is intended to be under the control of the Rockefeller family via the use of their 'Round-Up' herbicide and their patented plants genetically-modified to be solely resistant to this lethal herbicide. The present use of food as fuel, plus the deliberate raising of all prices by using the Trust-finance to continually on-sell oil and food-commodities will put such things beyond the reach of half the world's population. This is in keeping with the declared intention to reduce the world population by two-thirds as being unnecessary to 'The Economy'. Let's not beat about the bush. In any of us, this would be called criminal intent. So in the present circumstance, what do we call it? Well, despite the best efforts of our mealy-mouthed political masters, I still call it premeditated genocide, and those who know of it and excuse it are accessories before the fact. Race doesn't particularly come into it. Criminality does.
Dominic July 1 1:26 Is nominal ownership different to actual ownership? Who owns the tier 1 banks? The Fed does pay tax because it is privately owned enterprise. Take another look at my comment June 1st 10:16, I do none of what you accuse me of. I am not racist but interested in who has a controlling interest in our banks Sir.No wish to give offense?
If you want to educate your understanding of how money works, then go and watch http://video.google.co.uk/videoplay?docid=-9050474362583451279&q=money+as+debt&total=1239&start=0&num=10&so=0&type=search&plindex=0 It is very enlightening. Then you will understand why this situation exists. Economics as taught in schools and colleges is theoretically correct but ultimately, wrong.
It being so obvious for so long that just now people are asking questions? Same thing thing happend in the 29' crash...The weak were gobbled up by the strong. The big 3 banks were out of the market before the crash and thus were able to buy for pennies. Why would BofA buy Countrywide knowing there was nothing but bad debt? Is it any mystery they now will have those debts paid by the new Congress bailout. The syetem was gamed years ago..the spoils now go to the victor. Unfortunately if you don't know who the sucker in the game is...it is you. Socialize the expenses,privitize the profit. Happens every time. 1929,LTCM,BearStearns etc etc etc..
Regarding this post>>>>Posted by John Connolly on July 1, 2008 12:16 AM John, "Stay in the US." Same stuff is happening in Ireland, Europe, Spain, China etc. and Central & South America. Some countries down there have absolutely crazy inflation, stock markets and legal systems. Besides, you risk death traveling around Mexico, Central and South America by yourself. Very easy for an America to be robbed, get in trouble and end up in some lousy rat infested hell hole of a jail with a hundred thousand "dollar" bond. You could lie in that cell for years until someone pays the price, or worst, disappear off the face of the earth… permanently. I understand getting proper health care is another problem. Don’t go. America's still the land of opportunity and always will be. Anyways...chances are you would be the only American leaving while a couple of million foreigners sneak over the US border to gain access to everything you left behind. America's been through it all before… many times… strikes, protests, wars, recessions and depressions yet life goes on. Opportunities will always be available to people that hustle, have a plan and work hard to accomplish those goals. Focus on the positive what you want to become then finish school GED or trade school or college for a business degree. Recessions are always a nice time to return to school. However, "thank you" for paying attention to what's going in your country through newspapers and these web sites. I wish more Americans, both young and old, were like you. That would help keep things on the right track in the US. Americans should spend more time researching the major issues and vote for politicians that support Democracy, Constitution, Bill of Rights and the rule of law. Personally, I have always considered politics and the many economic cycles an ongoing course in real life experiences and utilize the information to plan my investments and purchases around these bumps in the road. If we go into a recession/depression opportunities will exist for individuals thinking positive, with cash and hustle waiting for the right moment to invest and/or buy. Stay in America and dodge the occasional bullet life shoots at you. Don’t let this stuff keep you awake at night or worry about your future as it’s bright. Focus on fun stuff, enjoy your family, live life to its fullest, save while looking for occasional opportunities that come up and then "invest." You don’t live to work… you work to "live." Have a great life!
Central bank stringency can be effective against inflation caused by a wage/price spiral as Volcker demonstrated in the '70s. It is useless against price increases caused exogenously like scarcity of oil and minerals.
"On balance, I think the greater risk in the US and Europe is ultimately deflation if the authorities overeact. " Recognizing the contemporary redefinition of the terms 'money' and 'goods'. As I understand it, excesses in the creation of money are traditionally thought to create inflation, assuming the stock of items to be purchased would be 1) tangible goods with some liquidation value and 2) that the stock of goods would remain stable. Inflation = an increase in money supply chasing the same goods. However, in times past, 'money' was what we today would call M-zero, physical money that did not easily disappear. Increase in the money supply traditionally meant the coining or printing of more physical items. The great German inflation required the actual printing of huge amounts of paper money. Today, the M-zero is relatively stable [increasing at 1%] as the M-3 escalates at a rapid rate. Today, what is recognized as money consists largely of computer impulses capable of creation in enormous amounts in an instant and vulnerable to disappearing in a trice. Similarly, what we recognize as 'goods' today, includes electronic impulses such as cable services, internet services, cellular phones, telephone ring tones, computer games, etc and the many other commodities without tangible existence, which are ultimately unneeded for survival and whose liquidation value is zero. A quick look at the proportion of one's own expenses devoted to vulnerable 'notional goods' should provide the evidence. What would be the consequence if both these intangible items, notional money and notional goods, experienced a mass meltdown? Money would simply disappear, an M3 bust due to the crisis in finance, and the goods once thought desirable would be recognized as unnecessary to existence, could not be afforded due to unemployment, or overspending, or would simply lose their appeal. I suspect that deflation will be the result. Nonetheless, a 'differential meltdown' might mean inflation if central banks continued the creation of 'notional money' in spite of the reduction in the market for intangible goods. The focus of inflation would then shift to the necessities, food, housing, transportation, fuel etc., i.e., bottom line inflation.
Is it really anti semitic to say certain families indeed do control the banks?
Belief in deflation over inflation is a very arrogant first world attitude. It is as though they in the developed countries are the only people populating our planet and are the only ones with a right to consumption, to the extent that a drop in that consumption will lead to global deflation. The developed world is a fraction of the global population, and the rest are rapidly catching up and want a piece of that consumption which the developed world takes for granted. So forget deflation. Global commodities are not going to fall in value because a few hundred million people in the West have stopped spending. There are several billion people out there who want to catch up with the West and are working very hard to do so, and are demanding the material and resources to make it happen. We can comfortably say that commodity inflation will continue well into the forseeable future. The problem with those western countries which have overborrowed, of course, is that their currencies are under intense pressure, and persistently high commodity prices will lead to even higher inflation in their economies. Quite the opposite of deflation. Some, but not all, Western countries - since many protected by the euro - could face a run on their currencies and hyper-inflation. Britain is the prime candidate.
Kevin P, 9.25 I agree entirely. Make greed a crime. Quality of everything would rise in a locally sustained environment. Charlie Chang you are quite correct the history of the Cheka and those responsible has been conveniently swept under the carpet. Same as the mass murder of Germans returning from the East.
“Scot” comes unglued once his bolshevist ideal state has been criticized. Yes, Scot, your man Stalin murdered thirty million people, and it all happened during peace time, and before WWII. Your blood relatives, like Yagoda and Kaganovich, were the killer functionaries, and provided the ill-gained financing to get the machine started. Yes, Scot, we see clearly now that you’re a cringing, cowardly crypto-Yeedel, incapable of logical discussion. One was at first deceived into thinking you were a Scot, instead you are of those who find it necessary to change their names every generation, lest certain name associations be made. Someone said to “never argue with Yeedels, it’s purely a waste of time. They are not about truth, but are falsifiers.”
"The UK could do worse that ask to become the 51st state of the USA ;) Cheer up everyone, it's only a recession!" Posted by Ted M (USA Citizen) on June 27, 2008 1:08 PM Don"t you mean 52nd state? The State of Israel being possibly the 51st.
I've been living outside of the house of cards that is the world financial system for quite some time now. My life is small. Everything I need I can find in the second economy. The bottom line is this house of cards is hopefully about to fall. You cannot save it. It is not worth saving.
I am a young, working-class man living in a North American city. I am not stupid. I understand some basic fundamentals regarding the manipulation and control of monetary resources by certain groups. I was wondering if Latin America will be a better place for a working-class loser such as myself after certain realities become more accesible to the rest of the ignorant populace? I have very limited financial resources and understand that my quality of life is at stake. I was merely wondering if the outlook for a person of my means is more favourable in say...Venezuela? Argentina? Chile? Peru?