Has the pound just had its Ratner moment?
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MoneyWeek Editor
John Stepek Sep 28, 2010
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You probably remember the cautionary tale of Gerald Ratner.
He's the former jewellery tycoon who, back in 1991, stood up in front of a group of his peers and the world's press and described one of his own company's products as "total crap."
Within a very short period of time, his customers had reached the same conclusion. If the guy who made and sold the stuff thought it was rubbish, then why should anyone else buy it?
Why am I bringing this up now?
Because the pound may have just had its very own Ratner moment, courtesy of Bank of England deputy governor Charles Bean...
The Bank of England wants to force people to spend
Charles Bean didn't describe the pound as being less likely to hold its value than a prawn sandwich (as Ratner once described a pair of his firm's earrings). But that's what he was getting at.
In an interview with Channel 4 last night, he said: "What we're trying to do with our policy [of keeping the bank rate low] is encourage more spending. Ideally, we'd like to see that in the form of more business spending but part of the mechanism that might encourage that is to have more household spending. So in the short-term, we want to see households not saving more, but spending more."
To paraphrase, Mr Bean told savers: 'You might as well get out there and spend, because the Bank's policy is to make sure that your savings aren't worth holding on to.'
We sort of knew this already. The Bank of England has made no real effort to hit its 2% Consumer Price Index (CPI) inflation target. Indeed, it's been more than one percentage point above that target for the whole of 2010 so far.
But there's a vast gap between suspecting something is true, and being told that it's official policy. BoE governor Mervyn King has been able to offset much of the criticism about missing the inflation target by playing up the threat of deflation.
Many of his points seem reasonable – credible even. Despite the 'stickiness' of inflation in Britain, you can still make the argument that there are lots of deflationary pressures out there, if you try hard enough.
As my colleague Merryn Somerset Webb noted on our blog yesterday, you can point to unemployment keeping wage pressures down. You can talk about previous bouts of sterling weakness still having an impact. You can dismiss 'short-term' spikes in food prices. You can put it all down to tax increases, both past and future.
In other words, you can pretend that you're keeping interest rates low because you are genuinely worried about deflation, and people will believe you.
But Mr Bean's message is quite different. Mr Bean is saying: "We don't care what the inflation rate is. We want to force people to spend more money." He's saying that the rules have changed. The Bank isn't targeting inflation any more – it's targeting some non-specific combination of economic growth and asset price inflation.
That's a potentially lethal distinction to make.
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Mr Bean has admitted that the system is rigged
Why? Let's go back to the Ratner point for a moment. No one ever mistook a Ratner's ring for a Tiffany's sparkler. But equally, no one wants to feel they're buying rubbish. They want to feel they're getting good value – an affordable luxury, maybe.
A salesman selling an 'affordable' product has the customer's best interests at heart – he's on her side. A salesman trying to flog his customer what he believes to be a piece of cheap tat is trying to rip her off. Worse still, he's calling her an idiot.
This is what the Bank has just done. When Mr King dismisses high CPI inflation because he's trying to protect us from deflation, it's because he's got our best interests at heart.
But Mr Bean is saying we're idiots. He's admitting that the system is rigged to favour spenders, not savers, and that the inflation target is of secondary importance.
Now, this may not be exactly what he wanted to say. He did throw in some comments about long-term saving for retirement being important. But "spend don't save" is the message that's being taken from his speech.
Why is this a problem? Because when policymakers are as deeply entrenched in the markets as they are now, then their credibility – always an important issue – becomes even more important. If consumers and investors stop believing that the Bank cares about controlling inflation, then you run the risk that their inflation expectations start to rise.
Ironically enough, that makes it harder for the Bank to loosen monetary policy any further – even if it thinks it needs to – because the rest of the world realises that it has no intention of keeping inflation anywhere near 2%. And if that's the case, then who'll want to hold on to sterling?
Of course, Britain's central bankers aren't the only ones who are trying to undermine their currencies. In fact, Brazil's finance minister Guido Mantega has said that there is an "international currency war" going on. "This threatens us because it takes away our competitiveness." In other words, Brazil doesn't want to have a strong currency either. And nor does anyone else. No wonder gold is rising.
What if you want to save rather than spend?
But that's the big picture. What if you're one of these naughty savers who would really rather hold on to your money than splurge it at the command of the Bank of England?
As we've pointed out before, if it's money you can't afford to lose (like for a deposit on a house) or need access to in the short-term, then while it's tempting, you shouldn't stick it into shares – not even the big blue-chips we like – because that's taking a risk with your capital. And the same goes for another of our favourites, gold.
The truth is, you just have to find the best account you can to put your money in, even if it does pay a bit less than inflation (you can get an individual savings account from Santander that pays 3.2% right now, as long as you're an existing customer). Either that, or use 'spare' money to pay down your home loan – you'll almost certainly make a better return that way than via almost any savings account, but bear in mind that you may not be able to 're-borrow' the money easily at a later date.
Our recommended article for today
New rules on self-certified mortgages could wipe out a big chunk of demand in the housing market. That could send house prices crashing further, says Merryn Somerset Webb.
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