Gold News

Collateral Damage

Savers, retirees & wage-earners are just collateral damage in the war between debt & depression...

SLASHING the Bank of England's base interest rate to an historic low of 0.5% was supposed to "rebalance" the economy.

But all that the resulting 20% slump in the Pound has done so far since rates began sinking – two years ago this month – is gift a no-brainer gain to Gold owners.

"While we were hit with a great recession, we now know that the world has indeed avoided a great depression," said UK prime minister Gordon Brown at a Reuters press conference in London bright and early on Wednesday.

Just as with the war in Iraq, however – another "shock and awe" campaign planned with little thought for the collateral damage – we'll never know how things would have panned out if brave men like Brown hadn't done "whatever it takes". And just like in Iraq, victory has been declared way too early.

New data today showed industrial production in the UK sinking to 1991 levels. The employment rate has sunk back to 1996 levels, meaning a net loss of private-sector work when you allow for Brown's intervening civil-service jobs jamboree. And despite the collapse in Sterling, the UK's trade deficit has been widening for more than a year, verging at last count on the record 3% of GDP hit at the very top of the credit bubble, 2005-2008.

"Let us be clear," says Brown, "the economy is growing, but remains fragile."

And the cost of this modest success...?

  • The interest paid on the average cash ISA account now lags retail-price inflation by 3.3 percentage points per year – the worst real returns to cash in over three decades (source: Bank of England and ONS data);
  • Annuity rates have fallen by 6p in the pound, offering new retirees barely £6,000 per year on pension savings of £100,000 (source: www.WilliamBurrows.com);
  • Real wage growth – on average, and after inflation – has gone negative for the first time since 1974, falling well over 1.5% since March 2008 (source: ONS data).

Not quite depleted uranium, then. But followed up with cluster-bombs of £200bn in quantitative easing – money wished into existence by the Bank of England, and entirely spent on government bonds, thus flirting with that "debt monetization" which typically precedes hyperinflation – the campaign for hearts and minds is at least being won at home, if not amongst the victims.

"In the medium to long term, inflation has to come through," says Nouriel Roubini's latest fixed-income hire at RGE Monitor, former Citi managing director and wealth-management strategist, Arun Motianey.

"Just allow it...just admit it. It doesn't matter where the inflation comes from. It doesn't have to be through monetization of public-sector deficits, although at a pinch we may need to do that. What I am saying is that if we do get cyclical [demand-driven] inflation, then let that inflation stay...allow it help to write down the real value of debt."

Naturally, Motianey was talking to CNBC this week because he's got a book to promote. (Hey, we're all shills, remember.) And naturally, looking to sell a few copies, his policy prescriptions conclude with handy tips for investors on "How do you preserve purchasing power, how do you preserve savings?" amid the inflation which Motianey says we should – and shall – get.

The finance industry can have it both ways, in short. Government debt can be inflated away, while creditors are somehow protected. I can't say whether Gold Bullion is part of his saver's solution. But when fixed-income economists beg for inflation...and pretend that savers won't get screwed in the process...you've got to wonder where else you can hide.

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Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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