World View: Bank of England Uses ‘Sledgehammer’ Stimulus to Fight Brexit Slowdown

This morning’s key headlines from GenerationalDynamics.com

  • Bank of England uses ‘sledgehammer’ stimulus to fight Brexit slowdown
  • China overtaking both Russia and US in influence in Central Asia

Bank of England uses ‘sledgehammer’ stimulus to fight Brexit slowdown

Mark Carney on Thursday
Mark Carney on Thursday

It was expected that on Thursday, the Bank of England’s governor Mark Carney would announce that the BoE would reduce interest rates from the already low 0.5%, set in 2009 during the financial crisis, to an even lower 0.25%.

Mark Carney, who is a Canadian is currently the Governor of the Bank of England (BoE) did make that exact announcement, but he shocked investors by announcing a lot more. He announced a massive program to “print money” and use it for a quantitative easing program that would purchase about 70 billion pounds ($100 billion) of bonds — not only government bonds but also corporate bonds.

As we described two days ago, global interest rates have been rapidly plummeting since November of last year, and the average is now at 0.5%, causing a great deal of alarm among many financial experts. Carney said on Thursday that the BoE has no plans to implement negative interest rates, which have been increasingly common in countries around the world, but his announcement nonetheless will push the average down even farther.

The announcements by Mark Carney, who is not a Honeymooner, have received several forms of criticism. Some analysts point out that quantitative easing and low or negative interest rates have been tried around the world and haven’t worked so far, although others claim that these policies have allowed the world the recover from the financial crisis. Another criticism is that by purchasing corporate bonds, the BoE will be picking and choosing among companies, giving big advantages to the companies whose bonds are purchased over the companies whose bonds are not purchased. Others say that even if the interest rate change was necessary at this time, the UK economy is in good shape and does not need such a massive quantitative easing purchase.

Carney admitted that he was using “a sledgehammer to crack a nut,” and he said that the successful Brexit referendum, which called for Britain to leave the European Union, would cause the economy to slow later this year, and so he was acting pre-emptively:

We took these steps because the economic outlook has changed markedly. Indicators have all fallen sharply, in most cases to levels last seen in the financial crisis, and in some cases to all-time lows. […]

By acting early and comprehensively, the (Bank) can reduce uncertainty, bolster confidence, blunt the slowdown and support the necessary adjustments in the UK economy.

Whether that’s true remains to be seen. By announcing such a massive easing program, investors may decide that the UK economy is in more trouble than they realized, and they may actually lose confidence and make things worse than they currently are.

In fact, Generational Dynamics predicts that exactly that will happen, because the velocity of money keeps plummeting. As I explained in “11-Mar-16 World View — In desperation move, European Central Bank further lowers negative interest rates”, the velocity of money is a generational variable, and a falling velocity of money means that people are afraid to spend money or to go into debt.

Carney’s desperation announcement on Thursday also contained provision to attempt to tackle the velocity of money problem, saying that the 0.25% interest rates should make it easy for banks to lend money to people and businesses. He said that banks have “no excuse” not to pass on the lower borrowing costs to customers and will be charged a penalty if they fail to do so. That hasn’t worked in Japan and Europe, so don’t be surprised if it doesn’t work in Britain. BBC and Reuters and Bloomberg

China overtaking both Russia and US in influence in Central Asia

On Thursday, US Secretary of State John Kerry announced at a meeting that the US will providing $15 million in aid five Central Asian countries: Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. The purpose of the meeting was to discuss projects in the fields of trade, transport, business climate, renewable energy sources, the fight against terrorism, as well as the trafficking of weapons, illicit drugs and people. This follows a similar meeting in Uzbekistan in November 2015.

Russian officials fear that the US is trying with this announcement of $15 million in aid to gain greater influence in Central Asia at Russia’s expense. The Central Asian countries were all part of the Soviet Union before it disintegrated in 1991, so Russia considers itself to be the prior influencer of these five nations, and considers the US moves to be suspicious.

But in fact, Russia has much more to fear from China than from the US.

Kazakhstan may already be choosing China over Russia. Most of the routes from China to Europe in China’s “New Silk Road” or “One Belt One Road” (OBOR) initiative pass through Kazakhstan, giving China numerous opportunities for investments and influence. In fact, Kazakhstan has already announced the “100 concrete steps” program that incorporate Chinese investments and goals. This includes a railway that crosses the entire territory of Kazakhstan and reaches Iran.

However, one result of China’s increasing investments is generation of Sinophobia among the general public. As we reported in May, authorities in Kazakhstan have had to react harshly to widespread demonstrations in cities across the country protesting against “land reforms” that would permit large Chinese agribusinesses to take control of vast swaths of farmland.

However, nowhere has the spread of Chinese influence been greater than in Tajikistan. According to one local commentator,

[China has] begun to extend its financial influence in various spheres of the [Tajikistani] economy, to buy up industries and to take control of agricultural land, [with the result that] we have become completely dependent on China [and] filled up by Chinese entrepreneurs.

It’s thought that there are now 150,000 Chinese working in Tajikistan, even though the government says that the total quotas for foreign workers is only 8,000 a year.

As in Kazakhstan, the Chinese are taking control of huge amounts of farmland in the countryside, where officials are renting an increasing amount of land to Chinese farmers for 49-year terms. Furthermore, when the Chinese hire Tajik laborers, they treat them as “second class” people, and pay them less than they pay Chinese workers. Sputnik News (Moscow) and Diplomat (6-Jul) and Jamestown

KEYS: Generational Dynamics, Bank of England, Mark Carney, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Uzbekistan. Russia, China
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