The £Pound in Your Pocket!

When Harold Wilson commenced his first stint as the British Labour Party Prime Minister in 1964, he inherited an unusually large external deficit on the balance of trade from the Conservative administration and despite fighting the markets for a couple of years, the inevitable devaluation of the £GBP came in 1967, when Wilson famously assured the public that the “pound in your pocket had not lost its value,” stating within his next sentence that “prices will rise!”

Fast forward to today and, aside of awaiting the monthly “Dog and Pony Show” called the Bank of England Monetary Policy Meeting, an interesting report from Lloyds Bank PLC hit the cyber-waves. Entitled “Value of the fiver declines by 96% in the past sixty years,” the report states that “£5 in 1957 would provide same spending power as £113 today.

So who’s to blame?

Politicians’ of course and in particular the intervening governments of the day, as ultimately they are responsible for economic policy, albeit as evident from Wilson’s remark above, most of them are clueless about the true workings of the economy and the markets in general, deluding themselves that ever increasing levels of debt and stifling regulation are the way to prosperity.

Of equal and perhaps more responsibility for the devaluation is the Bank of England, who for 20-years now have been “independent” of political influence over monetary policy, including the setting of interest rates, inflation targets and financial stability, three areas over which the 4500+ team of “highly qualified” individuals employed at the bank have consistently failed in their objectives

Exhibit 1 above shows the UK base-rate, the rate that the MPC decide on and the one that no-one outside of the banking industry under certain conditions can borrow at, Yet everyone eagerly await to identify change.

The purple-line is the UK year-on-year inflation rate, aka CPI, where its obvious that the 2% annualised inflation rate has hardly ever been achieved, whilst the red blue and black lines show the “market- lending rate” for a term of 3-months, 2-years and 10-years, the latter being the anchor for UK mortgage rates if taken on a typical variable rate contract.

The main take-away from this chart, aside of the failures alluded to, is the fact that the MPC base-rate “follows” the market rate, both up and down. In other words the Bank of England has never made a pro-active decision in decades, they “re-act” to market rates, and market-rates, dear reader, are set by us, the human herd made up of borrowers and lenders who decide what an acceptable risk/return number is.

Exhibit 2 below zooms in on the base-rate versus the 2 and 10-year market rate where you will note that the market-rates are changing trend. In fact they have risen by a respective 70% and 80% since August 2016

That tells you that the return on lending was too low versus the risk of lending and one look at the massive increase of UK government, corporate and personal debt over the past decade in particular, should surprise nobody.

With the UK in the middle of an election campaign it’s likely to be no policy change from the Bank of England today, which actually poses a question on its so called independence when the market-rate is calling for change. Either way, the UK interest-cycle has changed and the pace of the change will likely accelerate and have implications for inflation, house and stock-market values and of course that “£pound in your pocket.”