June 28, 2012By steve jacobs
ROME- The UK economy needs another big dose of quantitative easing to kick-start the stalled recovery, a Bank of England policymaker has asserted. David Miles reiterated his support for a further cash injection of at least £50billion in an interview with the Financial Times at the weekend.
Miles is a leading cheerleader on the monetary policy committee for the asset-purchasing scheme and was one of four members who voted to turn the money-printing presses back on earlier this month. Minutes of the MPC meeting showed five voted against but that means only one more committee member needs to switch camps next month in order to launch another burst of QE.
That was a dramatic shift of opinion on the committee compared with May, when Miles was the only member to call for more QE In a clear indication that Threadneedle Street has one hand on the printing presses, the minutes said: 'On balance, most members judged that some further economic stimulus was either warranted immediately or would probably become warranted.'
Miles' counterpart Martin Weale, who voted with the 5-4 majority, said last week that further monetary stimulus could be applied to the economy without putting the inflation target at risk. This of course leads to the devaluing of Sterling and with the Euro in freefall, this all adds up to the greenback being the currency of favour at the moment.
Should people be concerned about the inflated value of government bonds?
There has been a big inflation of government bond prices, which may not be over, and it may be some considerable time until they deflate, but at some point they will have to come back down to earth. Gilts are seen as a very safe asset, but actually at their current prices there is a potential for capital losses.
There are three related reasons for this current trend.
Firstly, governments have cut interest rates to try to stave off recession. This has had a knock-on effect on UK government bonds, known as gilts. As the Bank of England base rate has fallen to 0.5%, the fixed rate of interest paid by the gilts has become correspondingly more valuable and their prices have risen. Gilts have also been seen as a "safe haven" by foreign investors who have been buying them during the turmoil in the finances of the euro zone.
And the price of gilts has been further boosted by the Bank of England's policy of QE.
Designed to drive down interest rates in the wholesale financial markets, and stimulate some economic growth, this extreme policy has seen the Bank buy up huge quantities of government bonds since March 2009.
It has spent £325bn on this project and, astonishingly, now owns about a third of all gilts in issue.
The inevitable speculative effect of this artificial demand has been to drive up the market price of these bonds. Conversely, if the Bank of England started selling its massive holding of gilts, the bond-bubble could burst suddenly.
Such sales probably won't start to happen in the next year or so, though.
The Jimmy Carr witch hunt?
The news that Jimmy Carr had £3.3m tucked away in a legal but morally questionable Jersey tax structure has gradually gathered momentum this week, building from Tuesday when he was splashed across the front page and culminating in the PM David Cameron’s damning of him.
The structure that Carr has used utilises an offshore Loan Trust. The way that it works means that the Trust is funded by untaxed income and then ‘loaned’ to the beneficiary. Because the ‘loan’ can be called in at any time, it is not taxable as an income. However, it is likely that the ‘loan’ will never be called in.
The financial planning that companies such as Imperius carry out can help mitigate tax liabilities using effective, legal and morally acceptable structures.
I do feel people have a right to make sensible tax planning arrangements, but I also feel that to live in a society and call yourself part of it, let alone make a living satirising it and the people within it, you have to contribute.
On July 5th, we are holding an early evening drinks and networking evening on the Savoy terrace with a complimentary bar from 18.30pm. The event is designed to allow Imperius to introduce ourselves and for participants to be able to meet new contacts and have the opportunity of winning a bottle of vintage Champagne. Contact me at firstname.lastname@example.org you would like to join us.