This morning the Bank of England’s Monetary Policy Committee will meet and in all likelihood order another £50 billion of Quantitative Easing, or money printing. This will again be used to buy government bonds, artifically holding down long term interest rates. This deliberate policy is approved by George Osborne and allows the Treasury to finance government over-spending via sales of government gilts to the Bank of England. It robs the old of the value of their savings and the young who will have to finance the future taxation which the government has effectively deferred.

This monetary experiment will have totalled some £375 billion, it is unprecedented in scale and there is no clear exit strategy to unwind QE. The Bank of England’s balance sheet is now loaded up with gilts that were not sold in the open market, holding down interest rates and allowing George Osborne to point to the bond market and claim the UK is a safe haven. In reality we have an artificial bubble in the bond markets that could pop disastrously if confidence was lost. If it goes wrong, we will look back on QE as the biggest rate-fixing scandal of all time.

Downing Street are drawing attention to this email in Barclay’s evidence to tomorrow’s Treasury Select Committee:

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“Mr Tucker stated the levels of calls he was receiving from Whitehall were ‘senior’ and that while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently.”

As Guido said this morning, you have to distinguish between the nickle and dime LIBOR fixing scandal of traders trying to massage their end of day mark-to-market and the Treasury / FSA / Bank of England policy of fixing LIBOR. Tomorrow Bob Diamond is likely to point out that manipulation of LIBOR rates was in the national interest and sanctioned by Downing Street and the regulators.

Gordon Brown’s Downing Street economic adviser Shriti Vadera was driving the policy…

After resigning as CEO of Barclays this morning, Bob Diamond may yet exact some revenge on the government when he testifies tomorrow in front of the Treasury Select Committee.

There are two LIBOR fixing scandals – the first involves traders massaging the settling of LIBOR rates a few basis points, mere hundreths of a percent, off market reality to flatter their trading books. It appears to have been going on for years and not just at Barclays. This was not so petty corruption.

The second LIBOR fixing scandal is of a different order altogether – it involves the wholesale systematic substantial misrepresentation of true LIBOR, with the encouragement of the Treasury, the FSA and in particular the Bank of England. The policy was to under-report LIBOR rates at much lower levels than were actually trading in the market. This deliberate policy was to cover-up the increased risks to the UK banking system revealed by higher LIBOR rates.

It is emerging that Gordon Brown’s economic adviser in Downing Street, Shriti Vadera, an ex-UBS investment banker, circulated a paper on ”Reducing Libor” at the height of the banking crisis, which she argued would be “a major contribution to the stability of the banking system and to the health of the economy”.

That message will have gone out to the Treasury in Whitehall, the regulators and the Bank of England. They in turn will have given a nod and a wink to the investment banks. Bob Diamond is reportedly furious that the “lowballing” of LIBOR rates by Barclays – which was explicitly encouraged by the authorities  to stabilise already panicked markets – is being used against Barclays. Bob Diamond is expected to testify tomorrow that the Bank of England’s deputy governor Paul Tucker encouraged the “lowballing”.

The politicisation and manipulation of interest rates is ongoing even after Gordon Brown and Shriti Vadera are long gone. The £275 billion Quantitative Easing (QE) programme implemented by Mervyn King with George Osborne’s blessing is designed to artificially lower interest rates. We currently have a false market in Gilts, it is arguably the biggest bubble since the South Sea Bubble. It is cheating pensioners and savers of income on an unprecedented scale. This is a robbery organised from within the Bank of England …

Don’t buy a newspaper this morning – it’s already out of date with the musical chairs:

“Barclays today announces the resignation of Bob Diamond as Chief Executive and a Director of Barclays with immediate effect. Marcus Agius will become full-time Chairman and will lead the search for a new Chief Executive. Marcus will chair the Barclays Executive Committee pending the appointment of a new Chief Executive and he will be supported in discharging these responsibilities by Sir Michael Rake, Deputy Chairman.

The search for a new Chief Executive will commence immediately and will consider both internal and external candidates. The businesses will continue to be managed by the existing leadership teams.

Bob Diamond said “I joined Barclays 16 years ago because I saw an opportunity to build a world class investment banking business. Since then, I have had the privilege of working with some of the most talented, client-focused and diligent people that I have ever come across. We built world class businesses together and added our own distinctive chapter to the long and proud history of Barclays. My motivation has always been to do what I believed to be in the best interests of Barclays. No decision over that period was as hard as the one that I make now to stand down as Chief Executive. The external pressure placed on Barclays has reached a level that risks damaging the franchise – I cannot let that happen.”

Diamond has nothing to lose now at tomorrow’s Treasury Select Committee appearance. He’s unlikely to go out quietly…

This is from page 36 of the FSA Notice on the Barclays LIBOR fixing scam:

Robert Peston has identified the senior individual at Barclays to be Bob Diamond and his interlocutor to be Paul Tucker, deputy governor of the Bank of England. If it turns out that, as Guido suspects, the Old Lady was encouraging Barclays to downplay its LIBOR funding costs to help maintain calm, we have a right old regulatory pickle. The Bank was in all likelihood encouraging Barclays to break the rules for the greater good of the City of London…

Hat-tip: Jim Pickard

On the Today programme yesterday morning Ed Balls claimed Osborne has made a giant mistake and cuts in public spending are the same mistake made by Snowden in the 1930s. Balls is wrong, as a recent pamphlet from the Centre for Policy Studies by George Trefgarne shows. After the 1929-31 Wall Street Crash the British economy recovered rapidly in the 1930s:

If only we currently had a growth rate like they averaged in the thirties…

For a couple of years Guido used to report his financial market trading in a box in the blog’s right hand column. It was popular with a few readers, nowadays Guido trades occasionally and just tweets about it. Readers still ask how the market trading is going, the above chart shows how it has been going this year so far, each data point is a closed trade. For the first couple of months Guido was long and wrong on gold, which hurts when you are over-leveraged. Since March Guido has been trying to sell a break in the Euro, as the chart shows it wasn’t really going anywhere until a couple of weeks ago when it dipped below 1.30 to the US dollar before hitting new lows for the year yesterday. Making back all losses for the year and some…

The CityAm Active Trader conference saw 650 traders gathered in the City. Guido spoke to them about the pros and cons of trading on the back of your political analysis. If you are interested in that kind of thing (and why the tooth fairy made 7 year-old Miss Fawkes cry) the speaking notes are here. Just don’t tell Mrs Fawkes…

Alexis Tsipras, leftist leader of Greece’s Syriza party, threatens…

“If they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors.”

The Eurozone political class are desperate to keep the show on the road and admittedly they have managed to do so for longer than many, including Guido, expected. Nothing has so far stopped them in their determination; not economic logic, democratic votes nor civil unrest.

Today Eurozone governments are sending €4.2 billion to Greece to enable it to repay the European Central Bank €3.3 billion for bonds maturing a week on Friday. They are repaying themselves with their own coin.

The Greeks will never repay all the loans, they mostly voted for parties who explicitly reject the bailout deal because the voters realise it is not Greece that is being bailed out. The European banking system and the banks that lent money to Greece is being bailed out. The sooner Greece exits the euro the sooner the money-go-round ends and reality hits the Eurozone.

Guido shorted €uros last night as soon as the Kiwis got to their desks and the currency markets opened. French Socialist Francois Hollande looks set to become President of France and the Dutch government has fallen apart. International investors are not going to look at that kindly, Guido also has a sense that the election of a left-wing president in France who actually implements a left-wing agenda would frighten the bond markets. Hollande will probably tack to the centre once in office, he is after all only a politician making election promises. If however he sticks to the left-wing agenda that his rhetoric promises, the big macro-hedge funds will take the view that French bonds can join the PIIGS (Portugese, Irish, Italian and Spanish bonds) on the sell list. In government Hollande has to choose between his rhetoric and the reality of the bond markets.

The ECB has already dangerously leveraged up support for the PIIGs via Long Term Refinancing Operations (LTRO). Leveraging up the ECB’s capital base has allowed it to put nearly €1 trillion of PIIG sovereign debt on its books, at a massive leverage ratio of nearly 40 to 1. If the ECB were a marked-to-market hedge fund instead of a Central Bank we would say it was investing recklessly, a mere 2.5% market move against it would wipe out all of its capital. The market doesn’t move it against it because it massively intervenes to support its own position.

If however the German Bundesbank decides that the ECB can’t go on literally doubling the chips on the table – up 106% since last year – the €uro as is could be too big to save. That is why all Osborne’s Treasury’s protestations about the IMF always getting its money back count for little. The US and China want to see Germany bet everything on the €uro before they join the rescue party. German politicians – including those of the left-of-centre SPD – expect Hollande to govern from the centre whatever he says on the hustings. British left-wingers hoping for a left-wing surge on the continent sparked by Hollande should be careful what they wish for, it would trigger the end of the €uro. If Hollande abandoned Sarkozy’s deficit reduction programme Germany would probably seek alternative arrangements – a hard-€uro Fiscal Union made up of Northern Europeans who run their affairs like the Germans and a looser soft-€uro of Southern Europeans who overspend. The dream of a united continent of Europe with one currency would be over…