Tim Price

These are dark days for investors. Interest rates squat at historic all-time lows in order that the Bank of England can continue to bail out our errant banks and government. Western economies toil under a monumental burden of public and private-sector debt, to which austerity is merely the latest desperate political response. Securities and currency markets are all being manipulated by extraordinary and highly inflationary monetary stimulus. Safe havens, anyone? The situation is doubly challenging for anyone in or approaching retirement. By artificially suppressing the yields available on UK government bonds or gilts, and therefore annuities, through its absurd policy of quantitative easing (a.k.a.

The Bank of England’s latest announcement of quantitative easing, widely referred to as QE2, prompts as many questions as it does answers — particularly for investors and pension-holders. Under a QE regime, money printed out of thin air is used to purchase government bonds from banks and other private sector investors. The theory then has it that long-term interest rates will fall, and banks will have more money to lend to eager borrowers. There’s just one problem with this cunning plan: it doesn’t work. It did not work in Japan, the first country to flirt with QE. Richard Koo, chief economist of the Nomura Research Institute, calls QE ‘the 21st century’s greatest monetary non-event’.

Not for nothing is economics known as the dismal science. Having failed to foresee the global bubbles in credit, banking and housing, mainstream economists have compounded the problem by advocating entirely the wrong solutions. Like generals fighting the last war, most economists (and leftists who think they understand economics) continue to bang the drum of Keynesian stimulus, evidently un-able or unwilling to understand that countries, like their citizens, cannot borrow their way out of debt. Cue the world’s largest ever sovereign-debt crisis. But not every economist got it lament-ably wrong. A number of financial thinkers anticipated both the bubble and the crash. Though few of them actually hail from Austria these days, they are known in financial circles as the Austrian school.

In the 1983 comedy Trading Places, two unscrupulous commodity brokers wagered that they could take a vagrant off the street and turn him into a successful trader. The film was a hit, symbolic of a more innocent age when interference in ordinary people’s livelihoods by gambling financiers was the exception rather than the rule. What is less well known is that its plot was essentially true. Also in 1983, the commodities trader Richard Dennis set out to show that anybody could trade provided they were taught properly. His partner, William Eckhardt, disagreed, and a wager was born. Dennis placed classified ads in the back of the financial magazine Barron’s. Experience in trading was not necessary.

For a solvent mortgage lender to require emergency government support on a huge scale suggests that all is not well in our financial markets. This understatement matches the gorgeously hubristic claim from ‘Chuck’ Prince of Citigroup, America’s largest bank, in July, that ‘as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’ But by November Prince was gone, victim of a multi-billion-dollar write-down relating to losses in the mortgage market. Perhaps he now dances with Stan O’Neal of Merrill Lynch, America’s biggest stockbroker, who also resigned in November after giant mortgage-related losses.