Not surprisingly, Mark Carney, head of the Bank of England, recently said that the central bank would take “whatever action is needed to support growth” in the aftermath of the Brexit vote. Carney’s statements seemed to have been crafted from Mario Draghi’s repeated promises that the European Central Bank would do “whatever it takes” to support the euro.
To his credit, Carney added, “One uncomfortable truth is that there are limits to what the Bank of England can do. In particular, monetary policy cannot immediately or fully offset the economic implications a large, negative shock.” However, that will not keep him from trying.
The accepted central bankers position is that the Brexit vote is causing businesses and households to delay spending and investment, thereby slowing the economy. Maybe so, but there is no proof that increasing the money supply and lowering interest rates stimulates economic activity in the long run.
Following Carney’s speech, British government bond yields fell into negative territory for the first time ever, joining German and Japanese government bonds. In the US, 10-year treasuries are yielding a record low 1.47%.
In the UK, investors are flocking to “gilts,” as UK government bonds are called, on the theory that to keep the economy from “freezing up,” the BoE will buy gilts, thereby driving up their prices. As prices of bonds go up, their yields go down.
In the US, bond prices are up (and yields down) because the US is perceived as the safest place to invest. That perception also resulted in US stocks regaining all the ground lost the two days following the Brexit vote.
Gold and silver also benefited in the “flight to safety.” When gold and silver rise in price along with the dollar, you know there’s heavy buying, and rightfully so. Gold and silver have been monies for millenniums while the dollar, once redeemable in gold and silver but now only a piece of paper, has been around 240 years.