UK Toxic Bank Plan: More Gains For Gold

January 18, 2009

The normally reliable Daily Telegraph reports that the UK is planning to launch a $390 billion toxic-loan bank early next week, using the excitement of the Obama inauguration as a smoke-screen for a very big reshuffling of the British banking system.

The separation of good from bad loans, and shoving the unwanted assets into a new ‘toxic’ bank is controversial with the banks as it will probably be compulsory and involve fixing a value on loans that have gone wrong. Bank stock prices and executive bonuses are in danger.

Bad loans

Underwriting the scheme will be the hapless British taxpayer to the tune of $50,000 each, although as time passes many of the loans will be repaid. The idea is that once banks are freed of their bad loans then the banking system will start to function again.

However, bailing out the banks is a costly business for the UK government. It will have to borrow the money, creating a surge in the money supply. This will add to the downward pressure on Sterling and will likely mean a run on the pound by foreign holders.

UK owners of gold and silver have already benefited from the protection afforded by precious metals during the storm of 2008 and can be expected to seek further protection in this safe haven in coming weeks.

Devaluation

The currency impact is the immediate worry of the massive bank bailout plan but further out this is bound to be inflationary. Indeed, inflation is the one sure fire way to deal with debt, toxic or safe.

On the other hand, inflation is bad for consumers whose salaries tend not to keep up, and for many firms which cannot adjust prices fast enough to match cost input rises. For investors, inflation is particularly nasty for bonds and bank deposits whose capital value drops while interest rates slip behind inflation.

British savers are surely bound to turn to gold and silver in 2009 to protect them as they did in 2008, only in even greater numbers.



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