Notes From Underground

The head of the Bank of England was making speeches today and he too had dreams. First and foremost, he put forth his dream that the G20 would metamorphose to become the governing body of the IMF. Mervyn King noted that the G20 represents 90% of global output, thus giving greater credibility to its voice in global affairs. We have called for abolishing the G7, as it represents an antiquated colonial mindset. King believes that the global imbalances are giving rise to a protectionist backlash that needs to be addressed in a much broader forum than the G7. The European community is not keen on the idea as it feels it is under represented in the G20, but others have pointed out that France, Germany, Italy and the U.K. are permanent members. Many non-Europeans believe that the EU has too many seats at the table. These issues have to be worked out, but we deeply believe that King is on the right track and is no dreamer. Dissolve the G7 and let the world get some serious work done. Give the rising global powers a greater say representing their new status.

King also gave a speech on monetary policy today. It related to the fact that the British CPI data was higher than anticipated but King was not perturbed by this, stressing that it was early in the recovery to be too concerned. He seemed to pay homage to “a balance sheet recession” and believes that the ongoing balance sheet reductions would continue to be a drag on the economy. King added:

“A key factor influencing future monetary policy would be how and when Britain’s budget deficit–set to top 12% of GDP this year–would be cut. Cutting the deficit would also help rebalance the economy.”

We found this to be rather cryptic because he didn’t specify what the Bank of England would do if the budget was not brought under control. Would they raise rates to offset the stimulus? And if the budget was quickly cut, would the BOE then keep rates low to offset the drag caused by severe budget reduction The outcome of this dilemma is important because it is the same puzzle that has the FED in a box. This doesn’t take into account removing the Quantitative Easing that both banks have utilized.

The Bank of Canada kept their overnight lending rates at 25 basis points today. This was expected and, again, the official statement reiterated the “persistent strength” of the Canadian Dollar and low U.S. demand have been drags on the Canadian economy. These factors have pushed growth away from exports and left the heavy lifting to domestic demand. The BoC statement points out that it expects domestic demand to be the “sole driver” of demand growth through 2011. This is a somewhat tepid outlook on the global growth story and, again, shows the concerns that a fundamentally sound economy has for the over-appreciation of its currency. As a developed economy, it will not enact exchange controls that we have seen from Brazil and Indonesia, but it is a reminder about the perils that exist in the emerging market currencies. The fear of any exchange controls or tariffs will be enough to undermine the dreams of many. The more noise we hear about financial restrictions without robust growth emerging, the more Mervyn King’s fears will be realized. Oh well, no concern mate, let the realm of cheap money reign.

Tags: BOE, Fed

This entry was posted on January 19, 2010 at 10:17 pm and is filed under Currency. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.