Northern Wreck

Regular visitors here might be a little puzzled as to why I’ve been a bit quiet on this over the last week or two. Partly because I’ve been kept busy at work as a result of what’s been happening but also because its something that didn’t exactly come as a surprise and its not where the real action is coming from.

There’s a good summary of events here if you’d like a re-cap :

Ten lessons we can learn from the Rock that rolled downhill

The most important point is that the BOE has effectively nationalised Northern Rock and with it the entire credit industry which pours a large bucket of cold water on Gordon Brown’s tenure as Chancellor of the Exchequer but also undermines any notion that the BOE was ever independent. This is a little taste of Marxist economics, its being underwritten by the taxpayer and it will lead to turbulence and rampant inflation. I’ve been calling the man a fool for ten years hopefully the public will now see him with the mask off.

On the other hand, what choice did they have with the US so aggressively cutting rates? The problem with the intense competition between New York and London is that it ends-up a race to the bottom and its a bottom carved-out by political expediency rather than economic mismanagement.

There are some serious problems for the American response though. Principally that as rates are lowered their Bond markets and currency value is seriously undermined at a time when they desperately need to keep their yield-rates attractive to their foreign investors.

Fears of dollar collapse as Saudis take fright

There is now a growing danger that global investors will start to shun the US bond markets. The latest US government data on foreign holdings released this week show a collapse in purchases of US bonds from $97bn to just $19bn in July, with outright net sales of US Treasuries.
 
The danger is that this could now accelerate as the yield gap between the United States and the rest of the world narrows rapidly, leaving America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850bn this year, or 6.5pc of GDP.

With all this political medicine its looking to me that it will simply kill our financial patient all the quicker.