THE U. K. DID WHAT WAS NEEDED, BEFORE LEAVING THE EUROPEAN UNION

On Thursday, the Bank of England, the British central bank, announced that it was confronting the economic weakness that leaving the E. U. would probably cause.  It projects that its economy will not grow at all in the second half of this year, and that it will probably not grow in 2017 or 2018 either.  Accordingly, it is initiating a multi-pronged Stimulus Package, along with the Exchequer, the British treasury, to confront any potential recession before it arises.

Besides being the first rate cut since 2009, this one is particularly noteworthy for its wide-ranging approach:  lower base-lending rates, increasing the money circulating throughout the economy and government spending by the Exchequer.  The government spending is vital to partially offset the fall-off in purchases by consumers and businesses.  This package might not prevent a recession; however, by confronting it early on, with a full-scale approach, this action should help reduce the impact—both in its depth and its duration.

If this is successful, the E. U. should take note.  Apparently, due to jawboning by Germany—Europe’s economic locomotive—Austerity, is the primary financial strategy used, while government spending is discouraged.  Germany’s Finance Minister, Wolfgang Schnauble, appears to believe in a more conservative policy; but, avoiding government spending in all cases, merely contracts the economy, when the goal should be to expand it.

After the BOE announcement on Thursday, stock prices soared on the London Stock Exchange, and that carried over somewhat to global exchanges.  Prior to the Brexit referendum last June, there were a number of economists who had also project6ed significant economic weakness in the U. K. if it were to leave the    E. U.  Investors today, who are wallowing in the post-Brexit vote rally should pay some attention to the U. K.’s moves this week.  There is a reason that the Government is taking these extraordinary measures. Also, consider the abnormally low global interest rate environment.

NOTE:  Keep in mind that there is a reason why the U. K. is taking such fiscal and monetary measures, and why global bond yields are so very low.  It’s called a weak global economy!

 

 

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  1. #1 by cheekos on August 6, 2016 - 4:53 AM

    So, why have I been stressing caution in investing? Try assuming that there is a reason: why the BOE and Exchequer made such extraordinary moves on Thursday: why a number of British economists were also predicting significant declines in the U. K. GDP if it leaves the E. U. and why many other central banks have lowered their base-lending rates to near or even below zero. This situation is global now: not just in England.

    Many investors try to establish a balance in their portfolios, between: stocks; bonds and cash. Weak global economies have kept bond yields quite low, and depressed bank lending is the reason for cash accounts paying next to nothing. So, what’s an investor to do?

    With little else to choose from, stocks seem to be the investment venue of choice. So, maybe that’s the reason why many stock indices have been trading at or near record highs!

    Tulip bulbs, anyone?

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