It’s STILL a matter of trust: Better to be prepared than misled


LONDON - JANUARY 08:  A Bank of England sign i...

Image by Getty Images via Daylife

Would the Bank of England lie to you?

Perish the thought!

The Bank of England is tremendously powerful and exerts immense influence over our lives. But don’t let their authority fool you into believing everything they say. They may be trying to trick you.

Because of the Bank’s influential position, its Governor can’t come across as a dour pessimist, moaning about how bad the economy is. But crikey, the forecasts coming from this august institution look like something out of a Disney production.

Just look at their latest cartoon from the ‘Quarterly inflation report’. See if you accept The Bank’s forecasts… then, when you agree that you don’t, we can make some more plausible projections.

The solid black line depicts where the economy’s been so far; you’ll see the trough mapped out by the recession we’ve just been through. The economy started sliding in late 2007 and finally hit the bottom in March last year.

That’s when the authorities threw everything, including the kitchen sink, at the economy to drag it out of recession.

What an exciting place we’re at now then (the first dotted line). Just out of recession, with a new Government and the Bank of England telling us that the future’s bright…

The green shading is the Bank’s best guess as to where the economy’s headed. Their economists tell us there’s a 90% chance that the black line will fall inside this green fan. But that only leaves a 10% chance of falling back into recession!

 

Basically, the Bank’s saying it’s almost certain that we’re in a V-shaped recovery. The only uncertainty is how good this V-shaped recovery’s going to be.

Does this look like a fair projection to you?
To put this in perspective, 2006 and 2007 (far left of the chart) were the go-go years. Rising house prices meant people could re-mortgage to buy a new kitchen, car, holiday, or whatever. Rising stock markets gave people confidence in the future, so they were happy to spend, spend, spend.

All the while, government spent like there was no tomorrow (which, in the end, there wasn’t for them). With all of these plusses, the economy mustered up growth of around 2%, or 3%.

And guess what, the Bank’s pencilling in a bounce straight back to the go-go days. But wait, it gets more absurd… they even say there’s more chance of the economy hitting growth of 5%,or 6% (top of the green fan) than there is us heading back into recession! I can’t remember the economy growing by 6% per year at the best of times. I’d love to take a bet from anyone that reckons we’ll be seeing it in the next couple of years.

This is pie in the sky economics from the Bank of England. If I had a green pen, I’d be shading in most of the bottom right hand side of that chart. A double-dip recession is more than a remote possibility and they’re not even considering it!

Why’s the Bank feeding us a lie?
It’s a confidence trick. The bank needs to get the confidence of its audience. Imagine a WWI army officer in the trenches saying ‘hey soldier, I wouldn’t want to pop my head up above there, but you go ahead… somebody’s got to.

Of course he wouldn’t say that. The Bank is the army officer, he wants you to poke your head up above the parapet. He wants companies to invest, he wants individuals to spend… he’s telling you that everything’s okay.

For the Bank it’s the right thing to do. But I’m treating this delusionary guidance as a negative signal. It’s a sign of desperation.
I mean, this chart must have been produced before we’d even got the new government into office. How can any economist make these pseudo-scientific projections before they’ve even got a clue about who’s running the country?
What does this mean for investors…and who can you trust?

Keep your wits about you
I suspect that this year and next will be tough. The whole of Europe will be facing ‘austere budgets’ (as they’re ubiquitously known now) at the same time. The Bank of England is going to have to refresh some ideas by next quarter’s inflation report. I predict that every quarter, we’ll be seeing a little more green shading appear on their pretty chart.

 
 
Related articles by Zemanta
Reblog this post [with Zemanta]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s