In today’s Issue:

  • Conspiracy theorists can’t take sides
  • Bond yields are dangerously high, yet QT continues
  • A Liz Truss moment in the gold market

If you believe the Bank of England sabotaged Liz Truss, things are about to get awkward. Because there’s been plenty of quantitative tightening (QT) since.

Yet the same conservative commentators that accused the Bank of sabotage are now blaming Labour for rising bond yields.

When Labour is in power, the bond market’s rising yields are their own fault.

But when Conservatives are in power… rising yields are the Bank of England’s fault?

You can’t have it both ways.

Can you?

So what’s really going on?

Managed incline

Central bankers influence bond markets today as much as ever.

Since Andy Burnham became Prime Minister, the Bank has sold about £2.65 billion of bonds. It sold £39 billion under Sir Keir Starmer. And sales didn’t even start under Truss because that had to be postponed.

These sales move markets. They push bond prices down and yields up. For which Labour gets the blame.

If a Conservative or Reform UK government were in power, we’d be pointing the finger at the Bank of England for the same data.

But the data gets worse than that.

Because bond prices have crashed since QE became QT, the Bank of England books a loss when it sells the bonds.

Since QT was announced the day before the mini-budget, the Bank has realised £36 billion in losses on those bonds. The Office for Budget Responsibility is expecting another £22 billion in losses over the next few years.

Why does this matter?

Under the terms of the original bond purchases, the Treasury has to reimburse the Bank for those losses.

That makes QT a major drain on the public finances. Not just by making government borrowing more expensive in the market, but as a direct fiscal transfer too.

Can you imagine what Liz Truss would have to say about all this if she were still PM?

Next month, members of the Monetary Policy Committee will decide whether to continue QT. And at what pace, if they do.

I wonder if Andy Burnham’s spending plans might influence their decision-making at all…

The point I’m trying to make is that the market price of government bonds isn’t really a pure market price. It’s still heavily influenced by the Bank’s shenanigans in the bond market.

Yet political commentators in the UK are blaming the government for rising yields. No doubt they’ll soon claim the Bank of England suspended QT early to prop up Labour.


Are central banks really playing politics?

This is a familiar problem for those in Southern Europe.

For years, governments there accused the European Central Bank (ECB) of manipulating bond markets to influence national politics.

Under the “capital key,” the ECB is supposed to buy and sell Eurozone government debt in certain proportions. But in practice, the ECB could choose to buy or sell debt disproportionately.

If it didn’t like the latest Italian prime minister, but the Greek one had surrendered to the Troika, the ECB bought a bit more Greek debt and a bit less Italian. The result was a divergence in yields, known as the “spread.”

Italian politician Claudio Borghi explained just how powerful bond yields can be during Italy’s 2018 crisis:

In a way I am very happy because we have finally wiped the bull**** off the table. We now know that it is a choice between democracy or comfortable bond spreads.

You have to swear allegiance to the god of the euro in order to be allowed to have a political life in Italy. It’s worse than a religion.

What we are seeing is the fundamental problem with the eurozone construction; You can’t have a government that displeases the markets or the spread club. The ECB and the Eurogroup will use this to crush your economy.

You are very lucky in the United Kingdom that you still live in a free country.

Not anymore.

We now have a central bank that actively buys and sells our government debt too. It has the power to move a major indicator of political stability and credibility. Yet few are even aware of it.

The point of the Liz Truss moment wasn’t that the bond market unseated a prime minister. It’s that the Bank of England has enough clout in the bond market to unseat a prime minister… and get away with it.

Gold bugs beware

The same story, even more awkwardly, applies to gold. This is another narrative buster for many amongst us.

We like to claim that the gold price is rising because central banks are a bunch of nincompoops. Their mismanagement of currencies causes people to flee to the precious metals to escape.

The rising gold price is proof that central bankers are making a mess of things.

Yet, the rising gold price is largely being driven by central-bank gold buying!

Central bankers can’t be both stupid and smart for buying gold. Unless buying gold is stupid…

What’s really going on?

That’s fairly straightforward.

The Nuremberg excuse

Central bankers tend to suffer from split-personality disorder. They turn into completely different people while holding office.

Alan Greenspan was a devoted acolyte of gold and the free market… until he became a central banker. Afterwards, he was his old self again.

Mark Carney was a climate alarmist while at the Bank of England. Since then, he’s been promoting fossil fuel projects in Canada!

Germany’s toughest hard-money hawks turn into turtle doves while at the ECB.

The European Central Bank President, Christine Lagarde, was criminally convicted of financial negligence for her time as French Finance Minister. But she suddenly became financially responsible once appointed to lead the ECB…

The point is that central bankers behave like committed employees. They get given a job to do. And they do it, even if it goes completely against their own beliefs and values.

Otherwise, they would never be appointed in the first place.

While it’s their job to trash their own currency by 2% a year, central bankers can guard the national interest by protecting themselves against their colleagues’ equally heinous behaviour overseas.

How?

By holding gold instead of foreign currencies or government bonds. Then the central bank is protected against the same counterfeiting overseas that it is doing domestically.

Find out what your friends and family think as well. Share this email with them so they can answer today’s poll and subscribe as well.

Until next time,

Nick Hubble
Editor, The Fleet Street Letter

PS Central banks are buying gold because they know exactly what happens when confidence in currencies starts to crack. But gold isn’t the only place I’m looking. My colleague Sam Volkering believes Britain could be approaching an energy moment remarkably similar to the North Sea boom of the 1970s – only this time, the potential prize could be much bigger. He’s put together a full briefing on the discovery, where it is, and how investors could position themselves early. Click here to see Sam’s full story.