The pound could take a hammering in 2012

By Tim Price Dec 23, 2011

Tim Price

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Here is a shocking prediction for you: Britons will be worse off in 2015 than they were in 2002.

According to the Institute for Fiscal Studies, we are facing the worst stagnation in real incomes (that is, adjusted for inflation) since records began in 1961.

It's a grim prediction to digest right now. After all, our whole economy depends on growth to get us out of this mess. The banks desperately need growth to repair their balance sheets. The government needs growth to fill a chasm in the public finances. And the people need growth to maintain the grand bargain they've lived their lives by.

But they won't get it. Not for a few more years. And that could have serious implications for your finances…

Any growth we had this year was borrowed from the future

Most investors are still desperately clinging to the view that long-term growth rates in the UK have not been affected by the financial crisis. They still consider the pre-crash boom times as 'normal'.

But you can't afford to be so naïve. The reality is that even the pathetic, artificial stimulus-inspired growth we have had over the last couple of years has been borrowed from the future.

Once the markets realise this and understand that politicians are more or less powerless to turn things around, we are likely to see a serious de-rating of earnings, incomes and asset values. We may only be months away from that meltdown.

That's the bad news. The good news is that if you take urgent action, you could avoid serious damage to your wealth in 2012.

The global economy is poisoned by debt and won't grow

Japan, Europe, the US and the UK are stuck in a low-growth rut. Japan's bubble popped in 1991, and it has barely grown ever since. That's a problem. Because our whole modern economy requires continuous growth to keep working. Without growth, our banks, government and society will only get sicker.

Desperate politicians who find themselves in this situation normally try to spend their way out of recession. It's a neat trick because it justifies cynical electoral spending on perks for lobbyists and interest groups who support the party in power, all in the name of prosperity.

But there are two problems with this approach. Firstly, it doesn't work. Secondly,  Britain already owes so much money that extra 'stimulus' spending is not on the table. So given that our credit card is already maxed-out, the government will have to synthesise some growth through 'quantitative easing' (QE).

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Using newly-created electronic money, the Bank of England has bought vast quantities of bonds. The hope was that capital would be recycled through the markets. In turn, this would boost investors' 'animal spirits' and as a result, some form of magical 'trickle-down' wealth effect would mysteriously makes us all feel richer, and therefore more susceptible to going onto the High Street and spending.

Now you may have spotted some of the flaws in this logic. The newly created pounds effectively cause all existing pounds to be worth a little bit less. So QE immediately made all holders of cash worse off. And this is at a time when savers are already being short-changed by the banking system, since interest rates have been driven down to near-zero in order to try to force them back into the financial markets – where their capital, of course, is at greater risk.

It's a different story for the banks. They got free money courtesy of the Bank of England, plonked it in long-dated government bonds, and kept the interest rate spread (the gap between the cost of the money and the income earned on it).

In short, I think QE is a Ponzi scheme designed to please one powerful constituency – the City of London. David Stockman was director of the Office of Management and Budget in the Reagan administration. He was a key member of Ronald Reagan's financial team. Here is what he said recently about quantitative easing, as practised in the US and the UK:

"These [QE] programmes… are simply designed to… keep the stock indexes going up, [in the hope that] somehow that will fool the people into thinking they are wealthier and they will spend money. The people aren't buying that. Main Street is not stupid enough to believe that engineered rallies as a result of QE stimulus are making them wealthier and so they should go out and buy another Coach bag. This is really crazy stuff... I think the Fed is injecting high grade monetary heroin into the financial system of the world, and one of these days it is going to kill the patient."

I agree with him. And I believe that QE is dangerous for a number of other reasons:

• QE badly distorts capital markets, particularly those for government bonds, giving a false sense of market strength.

• It is inflating yet another asset bubble – what would be the third in just over a decade.

• It insidiously devalues the pound. So it destroys - not creates - wealth.

Your wealth depends on a strong pound

The bad news is that the government doesn't care about all that. So I think it is very likely to repeat its mistakes. Since the government doesn't have the money to pay back its debts or bail out the banks, and the economy isn't growing fast enough to raise money, there's only one thing to do – keep printing.

The Bank of England has already embarked on QE2. This time around, I believe it will hurt sterling again. Then I think we'll see QE3, QE4 and even QE5, each round sending the pound lower and lower. And I'm not alone in thinking that. Citigroup anticipates two to three years of pound-pummelling QE!

That's a frightening thought, because a broken pound would crucify ordinary British savers and consumers. Inflation would drain the value out of savings and investments.

That's why I've been advising everyone I know to stock up on precious metals, and gold in particular. You can find out more about how to buy gold in our useful directory of gold bullion dealers and exchange-traded funds.

QE isn’t the only thing I’m worried about – it’s just one of three ticking timebombs that you need to be aware of as 2012 approaches. You can read about the rest of them in this: Protect THEN Prosper - and find out more about my newsletter, The Price Report, too.

Also, listen to my most recent comments on gold – made on my most recent conference call with readers of The Price Report.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

Comments (12)

Published in UK economy | More articles by Tim Price

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  • 1. Cliff Hanger

    (24 December 2011, 01:34PM)  Complain about this comment

    Sage words from Tim Price. The government's hopes are that the subterfuge will work because other currencies will also be devaluing through their own QEs and so the true erosion of wealth will be disguised.

    Most ordinary folk will see straight through this artifice and of course all currencies will devalue against gold, which is the truth pill governments and bankers hate.

  • 2. PM

    (24 December 2011, 01:47PM)  Complain about this comment

    Unfortunately the author is wrong and the central banks are right on the point that people are still buying Coach bags; the profits of Hermes, LVMH and Burberry rose during this gloomy period. Some of the sales was in the China but the core is still strong in NY, London and Paris. Not one person in this age of austerity has cut down shopping at Waitrose even when Waitrose has cut the quantity of its products while keeping the price the same. The soups still cost the same at lunch time, but the size of the container has gone down and now you are charged 20 to 30p for Butter! The age of austerity is not upon us yet and may never be as well. The talk of the town now, is to forgive the debt - a festival cheer - forgive them for they did not know what they did - sounds prophetic?.

  • 3. NoGrowth

    (26 December 2011, 11:06AM)  Complain about this comment

    Long term growth is an illusion and not sustainable- just look at population growth and resource limits. We need a new economy that is built on real 'wealth', not a whole load of illusions. Growth is needed by the feral financiers, and speculators who don't know how to do an honest day's work producing something real; it is not needed by normal people. The reality is that the UK is now very soft with a lot of lazy people who expect too much for too little work (and I'm not referring to the hard workers at the bottom of the 'heap'!) - and there is too little home production of real things.

  • 4. Mrs C

    (26 December 2011, 11:45AM)  Complain about this comment

    It's much worse than that!
    The City of London is the only financial centre in the world that allows unlimited rehypothecation, or reusing the same collateral over and over again. That is why so much business (dodgy business) goes through London. There have been hints from the EU that they will regulate the City with or without David Cameron's agreement. That means we either leave the EU and become isolated or the City of London suddenly sees a huge drop in business, as the rats desert the ship. According to Professor Steve Keen on the Keiser Report (22 Dec) when this happens the UK economy will collapse in about 3 minutes. There will be a credit crunch that will dwarf anything we have seen anywhere in the world ever.

  • 5. NeutronWarp9

    (26 December 2011, 01:13PM)  Complain about this comment

    Not all of the City's activities operate on the dark side and if its business shrinks to remove the bogus, self-gratifying, casino operations, very few of us should cry wolf.
    It is time all the arrogant, self-interested professions with their morally empty codes of ethics were brought to book. Money is the root of all evil and many so-called professionals appear to never have enough of it.
    Increased competition is one answer - in all sectors - with a robust regulatory system to punish the inevitable chancers who race to the bottom to cut standards at the cost of the customer, client or patient.

  • 6. Ian H.

    (26 December 2011, 02:07PM)  Complain about this comment

    Yes, but is gold the only answer? If the pound crashes, surely shares in companies trading world-wide like Shell, Astra,Glaxo, BAT, Rolls, VOD will see their shares rise proportionally on LSE. Income-yielding property, too, as long as the renters remain solvent. In these circumstances, it seems to me that cash and bonds will be the great losers

  • 7. jrj90620

    (26 December 2011, 04:02PM)  Complain about this comment

    All these comments also apply to the U.S. The problem is that,in both countries,big,powerful,economy interfering, govt democracies are run by voters,who aren't qualified to be voting.It's difficult to find qualified people,even in their of expertise,let alone,who know anything about economics or how a country should be run. They end up voting their short term greed,with little care about the long run.In America,Obama became President by being the most convincing salesman.The author is definitely correct about the long term.Fiat currencies always decline against real goods and services,over the long run.Who can predict the short term?

  • 8. IJ

    (27 December 2011, 05:30PM)  Complain about this comment

    @ PM. You're not wrong about LVMH, Hermes et al profits. It does seem anomalous. But luxury goods looks to me like a classic bubble. It's a very crowded trade, and even makes it into weekend papers (always a bad sign). It "can't go wrong" because of insatiable demand from the Chinese and other emerging consumers. This reminds me of sentiment around certain commodities (particularly steel-related and potash) in early 2008. We know what happened next. These companies trade at 7x book value last time i looked. I'd say there's a decent chance they will crash next year. When austerity becomes cool and bling goes out of fashion, as may well happen, they will get crushed.

  • 9. Realist

    (28 December 2011, 10:58PM)  Complain about this comment

    With the '3 ticking time bombs' article, could Tim Price tell me why the 'house price crash' has suddenly been left out of his article. For years this has been one of the '4 ticking time bombs' and now without any explaination, it has been dropped.
    This error really doesn't do his credibility any favours.

  • 10. Sam Cow

    (29 December 2011, 01:35PM)  Complain about this comment

    My broker friend tells me that there is no gold ETF that is 100% backed by the metal, and in fact some are way, way below 100%. He therefore avoids them. Have you any information on this assertion?

  • 11. MarkB

    (02 January 2012, 01:09PM)  Complain about this comment

    Sam Cow, read the small print of the ETFs. When you see the word custodian and JP Morgan together, ask youself if the gold will be yours or theirs when THEY need it. That applies if the ETF has 100% gold. Then they will just take all of it.

    Unfortunately I still have some silver ETF, not wanting to pay 20% VAT for taking delivery. This is a mistake that I am in process of sorting. I own far more physical than ETF.

    DO NOT TRUST ANY OF THE CRIMINAL BANKERS

  • 12. Tim Price

    (16 January 2012, 10:33AM)  Complain about this comment

    @Realist - you may be confusing two different reports from different sources. The 'ticking timebombs' feature has only just been written, and never featured property prices - although I can' t say I'm bullish.

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