Here is the foundation of our economy and investments
The above charts were created using data available from the Bank of England’s three centuries of financial data research.
Does this seem stable to you?
Does this lay the foundation for stable and predictable investment outcomes?
A view of where the Bank of England base rate is today compared to it’s history shows just how far we’re in unchartered, manipulated territory.
You should be concerned about this as the valuation of everything you own is a combination of fundamental valuations and subjective views.
With long term government bond yields and the UK base rate at record setting lows, people have chased returns in bond issues and stocks of lower quality and thus have accepted ever lower yields for these assets, pushing up their respective market prices to distorted levels.
When the anchor of prices, which is the investments’ yield reduces, the risk of loss increases.
Not until rates rise and ‘the tide goes out’ will we find out which asset classes, bond issues and stocks have been manipulated to a larger extent than others and are ‘swimming naked’.
Going back to this chart, here’s a very brief financial history lesson.
Gold used to play a very important role in monetary affairs and governments didn’t play such a large part in the economy or our lives.
We temporarily came off the gold standard due to World War 1. After an attempt to push the inflation genie back in the lamp by trying to re-price our economy back at a lower pre-inflated rate, we came entirely off the gold standard in 1931.
Now that the Bank of England and government were free from any real external control on their manipulation and spending, take a look back at the chart and see what has happened to interest rates since 1931.
The range of the base interest rate from 1694 all the way to 1931, a period of 237 years, was between a low of 2% and a high of 8%.
From 1931 to 2015, a period of just 84 years, the range has been a low of 0.5%, which we currently still have, to a high of 17% as recently as 1979, just 36 years ago at the time of writing.
The base rate plays such a pivotal role in the valuation of assets, the level of consumer demand and the cost of long-term business investment, that navigating the correct course for your business or your finances has become extremely challenging.
These huge swings in interest rates also shift the country’s mindset between over-optimistic speculation and depressive despair.
The supposed ‘intellectuals’ make grandiose doublespeak statements like ‘modern monetary policy promotes growth and stability’ yet this chart doesn’t exactly support the rhetoric.
The last 50 years have been extremely unstable from a financial perspective. The UK had to seek help from the IMF in 1976, placing us amongst such distinguished financial company as the likes of Argentina, Mexico and Greece. We now carry huge personal, home, business and government debts and have recently experienced a rather large financial crisis, which is putting it mildly. A financial crisis that I feel we haven’t yet escaped from.
So I think their claim about stability is a lie.
We should consider the possibility that these central planners and bureaucratic elitists have spent so much time in their ivory towers that they are simply wrong when it comes to monetary policy.
It’s hard to know what the ‘right’ interest rate is, which is partly why I feel uncomfortable leaving it in the hands of an influential and arrogant minority.
What I do know is this.
Huge amounts of financial pain will be felt when we return to ‘normal’ rates of say the 4% range. Could you imagine the effects if rates went even higher?
They will have to go up sooner or later. I fear we will look back and challenge the wisdom of lowering them to such a level in the first place.