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Inflation: Mervyn and me

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Paul Mason | 11:45 UK time, Wednesday, 16 February 2011

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This morning I inadvertantly volunteered to serve on the UK's Monetary Policy Committee. For some reason, almost at the same time, the pound slumped against the dollar. But I am glad to say the two facts are not linked.

Mervyn King, the governor of the Bank, had been explaining how "there was no obvious answer to the question" of what to do about 4% inflation; and that what mattered was not the inflation rate now but in 3 years time.

I pointed out - see the clip above - that the inflation rate does matter to people seeing their wages disappear into their local Costcutter at an alarming rate. And that it was 4% as a result of a series of decisions taken by him - namely to revel in the fall of sterling, to print £200bn and to cut interest rates to their lowest level since Samuel Pepys.

At this point the governor invited me to explain what I would have done and I made a possibly unguarded suggestion that they might like to stick me onto their committee and find out.

Mervyn King then pointed out that I have not exactly been an inflation hawk over the past 36 months, and that I would have possibly been the first to raise questions had they raised rates sooner and tanked the economic recovery.

I replied that this was a fair point, and that maybe there really is nothing the Bank can do, but that therefore the man in Costcutter should probably conclude that the 2% target is a fiction. The governor rejected this.

The substance of today's press conference however, was still grim, despite these moments of levity. What Mervyn King was at pains to explain is that "we are only now seeing the impact of the 2008 events" on people's real incomes. Either your wages are eroded by inflation or by rising mortgage interest rates and credit card bills. That's the Hobson's Choice you are faced with once the banking sector collapses and has to be bailed out, and then the bailer-out - ie the government - gets forced into the biggest peacetime austerity programme in living memory.

And he is right. But what I was doing with that question is trying to let some of the frustration that is out there among our readers and viewers into the perennially genteel world of the Bank, Treasury et al. What Mervyn King is really saying is: direct your anger somewhere else - and in numerous speeches he has made clear where that should be - at the bankers and those who mis-regulated them.

(I should add that I am not seriously volunteering to be on the MPC: I would expect wholesale capital flight, let alone a collapse in sterling were this to happen)

However it might not be a bad idea to put a few ordinary people on the MPC. Because, in the end, all it has to do is tweak a dial, 0.25% this way or that. Anybody who has used a faulty shower mixer could do it.

Ultimately, the reason sterling fell during Meryn's press conference was more prosaic. Having got themselves into a froth about imminent interest rate rises, following Mervyn King's letter to the Chancellor yesterday, the writer of that letter then effectively blew away the froth.

I read the subtext of Mervyn's rationale for that, with repeated references to "unforseen shocks", as as follows: until we know the European banking system is safe, and that the Eurozone authorities are not going to run around like Fred Karno's Army when the markets finally flatten Portugese sovereign debt, we can't really project anything safely, and therefore monetary strategy cannot become decisively tighter.

Comments

  • Comment number 1.

    To be fair to Merv he is right when he observes that the impact on household finances of the crash is only now being felt, and there probably is little the BOE could have responsibly done any different monetary policy wise that would have made any difference.

    The problem is not so much the policy itself but the way it is communicated to the people they serve.

    In times such as these and with public trust so eroded in public institutions there is a desperate need to 'tell it how it is' .

    i.e.

    The inflation target is aspirational NOT realistic in the short or medium term. People should prepare for relatively high inflation for the next year or two at least, people should prepare for low wage inflation over the same period and as a consequence people should prepare for lower house prices too over the same period especially with a hike in interest rates likely.

    It has been pretty obvious for some time to anyone who takes an unleveraged interest in economics that the above dynamic I describe will need to be played out sometime due to the excesses of the financial elite.

    Mervs job is simply to try to manage that transition as gradually as possible to maintain social cohesion. I think people would understand that, prepare for it and get behind him if it were explained to them in those terms and done in conjunction with some form of visible justice being seen to be done for those whom have profited from the misery of others.

    But it is NEVER explained to the public in those terms outside the blogosphere. It seems they are too afraid to tell us how it is in plain English, all we get is endless rhetoric which plays on the oft misplaced hope by struggling families that 'recovery is around the corner'...'signs that house prices are going up again'.. ' UK PLC cant survive if we get tough with the banks etc etc ( you have got to laugh).

    It is not so mcuh your policies Merv or you, it is the communication strategy dictated by politicians which is the problem.

    I suspect from Merv's past remarks that he does understand all of that and he is right in that scrutiny should be on politicians and the financial elite not the BOE whom are simply trying to prevent the wheels falling off entirely by the rather clumbsy tools they have at thier disposal.

    Merv is alright I reckon.

    Merv is probably doing the best that he can






  • Comment number 2.

    Your first question was kind of dumb, but the second question was good.

    Is it not simpler to answer your first question by looking at the difference between CPI and CPI-CT? It is nearly 2%. I am pleased Mr King is not more forthright about this; it shows great humility and he deserves great respect for it, since a lesser man would simply say "Don't blame me, blame the government".

    So if you position yourself right now as anti-inflation you cannot also argue against the need to cut the fiscal deficit. Cutting the deficit through a reduction in spending seems like the simplest and least harmful way to bring inflation back down to target.

    Mr King fuzzed the answer to your second question, and you do well to bring this debate out; it seems clear they are really using inflation expecations as a proxy for nominal GDP growth rather than an end goal in itself.

  • Comment number 3.

    Oh dear, unemployment up again, even before the cuts have really started. Gideon ought to start getting worried. An interest rate hike is going to bring everything down around his ears.

  • Comment number 4.


    Mr Mason you write :

    I read the subtext of Mervyn's rationale for that, with repeated references to "unforseen shocks", as as follows: until we know the European banking system is safe, and that the Eurozone authorities are not going to run around like Fred Karno's Army when the markets finally flatten Portugese sovereign debt, we can't really project anything safely, and therefore monetary strategy cannot become decisively tighter. [End quote]

    I would very much like to read your rationale for interpreting the subtext thus.

    'Newsnight last night' : Mr Paxman seemed at times out of his depth. Would it not have been better for you to have 'chair' the discussion on interest targets and policy instead ? (and no, I don't expect an answer to that.) But the assertion of DeAnne Julius that Bond markets would punish the UK if the inflation target were redrafted was simply that: an assertion left as an assertion.

  • Comment number 5.

    If Mervyn King contract and pension were for a fixed number of pounds then he might take inflation seriously. But as it is, he has a high expectation of a comfortable standard of living, whatever the inflation rate, with an index liked pension to follow.

    You're right, Paul, that he and the MPC need to get out more, to meed people who are struggling with rising prices.

  • Comment number 6.

    But the assertion of DeAnne Julius that Bond markets would punish the UK if the inflation target were redrafted was simply that: an assertion left as an assertion.

    Why should we care. The "bond markets" rated Japan's bonds less worthy than Botswana's a few years ago. Japan didn't give a hoot.

  • Comment number 7.

    AM I IGNORANT OR IS THERE NOTHING THAT CAN BE KNOWN?

    I do not engage with these money discussions, as I understand nothing of its manipulation. However, when my bank (in the 90s I think) tried to get me to gamble with half my meagre 'wealth', I said I would, if the bank indemnified any loss, at 0%, while it was recouped (as theory predicted). They would not - so I would not play - two weeks later their ball got a bad puncture. Was that MY 'expertise'?

    I suggest you guys are arguing over '42' but don't really understand the question that yields that answer. But it's only intuition on my part. . .

  • Comment number 8.

    Was it worth bailing out the banks and bankers to the man in the street? The man in the street is losing jobs, facing cuts in services and rising costs. The bankers still get massive bonuses. Whilst the shareholders return on profits drops dramatically. To the man on the street the pain of saving the banking system has resulted in tangible costs to his way of life but no effect to the banker. Therefore what would have happen if some of the big banks did fail? Would it have really been so bad for the man in the street or that different to the coming year? Iceland will face a far shorter period of adjestment to Ireland. Iceland let its banks fail, Ireland tried to hold the tide back by supporting the banks. I bet the average Irish man would prefer to be in Iceland's position now.

  • Comment number 9.

    Paul I saw the press conference - good questions.

    However, in my opinion there is a whole bunch of contradictions here -

    the 2% target is a joke, they can't get anywhere near it, nor even accurately predict inflation 1,2 3 or even 4 quarters in advance.But yet he's says it's "iron clad" and everything they do is geared towards reaching that target.....except that they are more likely "on balance" to get near to it "sometime" in the future!

    imported inflation/"shocks"/factors outside his control - so when deciding on the 2% target it never occured to the BOE that there might be external shocks and non UK factors influencing UK economy? which if true also means they had no strategy to deal with this eventuality/probability. What kind of central bankers are they?

    Of course, it's nothing to do with the fact that super low interest rates and QE are feeding a stock market and commodities bubble which are leading to imported inflation e.g. oil prices

    I keep hearing that we have the lowest interest rates since 1696 but I'd like to see some figures on what in reality market interests rates are - I mean what rates companies,large, medium and small, consumers, borrowers etc pay on average for all types of lending - short-term, long-term, ovedraft, credit card, venture capital etc.

    I suspect these rates are not at historic lows at all and the 0.5% base rate and QE was all about saving the banks, and not the economy.

  • Comment number 10.

    "Either your wages are eroded by inflation or by rising mortgage interest rates and credit card bills."

    Or, to put it another way, we're currently suffering the consequences of a massive and utterly irresponsible credit boom, and instead of loading those consequences onto the participants, they're being loaded onto everyone.

    If this man was a judge, he'd be sentencing mugging victims to prison for inflicting damage on their assailants fists with their faces!

    Cheers Merv. Cheers for rewarding years of doing the right thing, living within my means, and behaving in a prudent manner with yet another golden opportunity to subsidise those whose borrowing was as much of a cause of the crisis as the lending (can't have one without the other).

    Oh, I feel so motivated to work this afternoon now.

  • Comment number 11.


    Inflation is just another manifestation of Collective Punishment, along with Austerity.

    It punishes those on lower incomes, whereas those on City pay scales will barely feel the pinch.

    As #8 clearly states, the answer to Meryvn's question "what would you have done?" is merely to say "restore symmetry of privatised profits and privatised losses", i.e. let creditors take a haircut.

    Mervyn is just perpetuating the policy of "privatised profits and socialised losses". He isn't even hiding it that well.

    Time to dust off John Dos Passos. We truly are a nation of two halves:

    http://www.amazon.co.uk/product-reviews/0618056831/ref=dp_top_cm_cr_acr_txt?ie=UTF8&showViewpoints=1

  • Comment number 12.

    Good questions Paul. Mervyn King is not a politican, but operates in a political environment. In that context, he is as honest anyone could be. In fact, I suspect his statements annoy government spokesmen, as he blames our problems on the financial crisis, and not on the level of government spending in general.

    My general conclusion is this: large differences in wealth are justified to be "rewards for success". It is clear now that "success" has been illusory, and that, as Merv said, people who didn't cause the crisis are paying for it. One answer is to have a genuinely redistributive tax system, and also a tax regime which penalises speculation as opposed to real investment. We could also genuinely crack down on tax-avoidance rather than extending it. Of course, Merv is "non-policical" and couldn't say any of this - but I wonder what he's really thinking?

    Lest we forget:

    http://www.guardian.co.uk/commentisfree/2011/feb/07/tax-city-heist-of-century

    http://www.onegoodcut.org/rising-youth-unemployment-not-a-problem/



  • Comment number 13.


    Jericoa #1 is pretty much 'on the money' from where I'm sitting. Mervyn King knows that we are damned if we do and damned if we don't - either we take a risk on inflation or we take a risk on a collapse of consumer confidence as interest rates push up mortgage repayments etc.

    Put in that way it looks like a no-brainer. The consequences of inflation running around 5% are understood: who knows where a collapse in consumer spending would take us?

    Two questions though. First, the man in the street may not fully graps this: but it must be blindingly obvious to all the clever people in the City (including the bond markets). So who do they think they're fooling?
    My guess is that they are simply maintaining the illusion that they are in control of events.

    Secondly, whichever way the thing goes it is still the ordinary punter who is picking up the tab. Inflated prices and falling wages: versus higher mortgage repayments and fewer jobs. So the message is that we're going to have to pay and the choice is, how?

    THe unanswered question is whether these are the only two alternatives?

  • Comment number 14.

    "Either your wages are eroded by inflation or by rising mortgage interest rates and credit card bills."

    Well if that is all it is about and it is not about loaning to the commercial banks at very pleasant terms then there is no excuse for the MPC behaviour;

    1) The target is inflation.
    2a) Rewarding debt for "fun", and not for productivity increases, is THE problem.
    2b) To invest we should need savers not debt, debt, debt. (OK that is a bit Schiff like in the extreme, but sometimes one does feel like shouting at the MPC complexification of the simple. It is investment for supply that seems to go ignored whilst the debt for consumption demand is worshipped. Demand is at best a necessary not a sufficient condition for growth.)

    and

    3) If you've basically guessed at one route and it doesn't work, try the other. It is hard to believe that a monthly toss of the coin always comes down on one side.

  • Comment number 15.

    Hi Paul
    The consistent reference by Mervyn King in the webcast to the reduced effective exchange rate aiding the re-balancing of the economy is at the centre of his case, isnt it? Reading Mr Osborne's seemingly unconcerned reply to the latest BoE inflation letter, you get the impression that a fiscal contraction is being counter-balanced by a low exchange rate/zero bound interest rate and imported inflation. The argument seems to accept that the erosion of real wages by inflation is a necessary by-product. Deflationary outcomes would have eroded wages in a different way.

    The inflation target and the BoE mandate are being stretched to accomodate.QE has been thrown at the debt-vortex and created a few bubbles and eased FTSE big boy financing as well as government debt financing.

    This is all fine, accept one question : was this supposed to be the job of the BoE? Who consulted who?

    I am with you, Paul - what's going on?

  • Comment number 16.

    Excuse me but when did CPI become de rigeur measure of inflation for the BBC? One would have thought that independent journalists would choose the measure of inflation that most accurately reflects the rise in the cost of living for most of the population which is RPI. The current level of inflation is 5.1% - all agreed? It is understandable for a government short changing those on benefits and pensions to push the universal application of CPI but why should we all fall in with their deceptions.
    If Merve really believes our inflation is attributable to external factors that will unwind in the short term why is he even hinting at a rate rise while the economy is still tanking?
    The point is that soon their will be compensating pay claims with the inevitable rise of strikes which will give Cleggmeron an annus horribilis.

  • Comment number 17.

    I'm no economist (and it will show shortly) but pumping money in (QE) = more cash chasing less product. Less product because capital availability is reduced because of (perceived) increased lending risk.

    Yet more cash/wealth (in terms of stock/options) is then pumped in by traders' bonuses. I say 'traders' not bankers with good reason as the hedge and fringe markets are the source of most of this intangible 'growth' in wealth.

    This is 'artificial' cash but serves to increase spending power and fuel the circle again.

    But like the sub-prime mortgage market all this is predicated on speculative future 'real' values - which may never appear.

    For example - when there is lack of confidence in currencies the market gets into gold and similarly perceived 'safe havens'. The US dollar is no longer one of those either, nor is oil as too much supply is now politically managed.

    But there are vast reserves of gold held by numerous states. Some of those are states who have had financing problems with majot state institutions (e.g. Dubai). If they start to sell their gold to bail out their state institutions, or, more importantly in the current Mid-East political climate, to meet the protesters' aspirations, gold ceases to be 'safe' in terms of capital preservation.

    So.......

    Good luck Mervyn.

  • Comment number 18.

    There are a lot of us who are retired with no mortgage and no credit card debts so would love to see interest rates rise. Having ridiculously low rates of 0.5 percent is effectively giving money to those who took out large mortgages and ran up large credit card debts and is grossly unfair. Why should prudent people have to suffer because they saved.

    They said in the past that they would act quickly if inflation started to take off because there would be a delay in the effect of increasing rates. So just how far does inflation have to rise before they will do anything?

    Also why are other countries not suffering such large rates of inflation. Perhaps because they don't have idiots like King doing large amounts of QE and setting low interest rates and devaluing the currency.

    Our export industry is now too weak to pull the country round.

    They should increase interest rates NOW. If that means double dip, then we have to accept that there is no alternative to double dip. Inflation will hurt just as hard and just as bad.

  • Comment number 19.

    If Mervyn thinks the Banks caused this mess, aided by lax regulation then why did the MPC cut rates to 3.5% the first time he chaired the meeting? - a post WW2 low!

    For how long has he thought the Banking system was a potential country-wrecker?

    The MPC had rates to low in the good times and too high when the sub-prime crisis hit.

    They only know where they've been - not where they are or where they are going.
    These guys tell you that driving a car while looking only in the rear-view mirror is a skill!

    I'd think better of Mervyn if he said - we're in uncharted waters; we've never had to deal with this set of problems before. It's probably safer to do nothing for the moment.

    But to continually tells us he knows best when his track record is truly awful is not acceptable.

  • Comment number 20.

    There are fewer people paying mortgages than there are wage earners so if its a choice then go for the one that affects the least. At least share the burden a bit more equally because by doing it this way the lion's share of the load is being carried by the poor and the young who don't own assets. Its nothing more than an ongoing bank bailout as it is banks that own most of the assets.

    The worst thing about Mervyn King's argument is it allows him to constantly claim inflation will return to 2% in the medium term, and when it doesn't he can just blame it on 'unforeseen circumstances'. If you think about it he can go on saying that forever if he needs to.
    Domestic fuel bills are set to rise by at least 50% in the next few years in order to pay for all the new power stations that are to be built, is that unforeseen? I bet when our bills go up and inflation rises, the only person 'surprised' by it will Mr King.

  • Comment number 21.

    Interesting comment posted on Stephanie's blog today:

    http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2011/02/the_unrepentant_governor.html

    Says it all really.

  • Comment number 22.

    @ 9 said -I suspect these rates are not at historic lows at all and the 0.5% base rate and QE was all about saving the banks, and not the economy.
    ............

    Absolutely. When the economy has never needed a Base rate lower than 2% before there has to be another reason for it to be 0.5%. It can only be the Banks.
    Saving the Banks has cost savers through lower returns and all of us through higher inflation - in addition to the taxpayer bailout cost.

    The QE money should have been added to the National Lottery prize pool - that would have helped somebody's local economy. :-)

  • Comment number 23.

    When are we going to sue the USA over the 2008 crash?

    I`ve been doing a bit of homework into the secrecy around how the Glass Steagal Acts got repealed and have now discovered that the massive sums of money needed to bankroll Clintons and Obama`s presidential campaigns were raised by a chap who also seems to have been a very influential White House staff member until very recently.

    Clearly the repeal benefitted the sort of sub-prime financial instrument writers who stood to make a lot of money from selling what turn out to be toxic assets.Could they have been the same folk who "invested" in Clinton`s election campaign?

    It may be a complete coincidence but I do wonder why there`s a complete silence about catching and convicting the people behind what may have been the biggest scam ever.

    But hey! Let`s not fight for our kid`s financial future... let`s roll over and let them be taken to the cleaners?

  • Comment number 24.

    #13

    I believe there is an alternative but the window of opportunity to take it is fast vanishing under the social unrest being generated by the incumbent elites determination to maintain the current system.


    I could go on and apologies if I am preaching to the converted but NEF has done a lot of thorough well researched work on what that alternative may look like so I want expand on it here, they ahve loads of info on their web site.

    The answers are out there, but sadly it appears they will only become part of the mainstream conciousness after there is another crisis which forces the issue rather than as part of a reasoned and reasonable debate by politicians and the media.

    #21

    Makes sense to me, I was the only one who predicted the 4th qtr dip remember :).

    For what it is worth I am not expecting it to be a blip at all. The number of unsold red roses in marks and spencers yesterday told its own story i felt withou waiting for any 1st qtr figures.


  • Comment number 25.

    Paul Mason.

    "However it might not be a bad idea to put a few ordinary people on the MPC."

    yes, and perhaps they ought to be selected from one of the households which, in spite of having at least one income, remain below the poverty line; or perhaps from one of the households which in spite of having at least one income have to rely on food banks to feed themselves. Channel4 News today was most depressing.

  • Comment number 26.


    23. At 7:40pm on 16 Feb 2011, worcesterjim wrote:

    Clearly the repeal benefitted the sort of sub-prime financial instrument writers who stood to make a lot of money from selling what turn out to be toxic assets.Could they have been the same folk who "invested" in Clinton`s election campaign? [End quote]

    I put this question to RBS Investor Relation Dept four months before the Lehman debacle. Answer was there none.

    I also asked about the potential legal liability of RBS of having 'written' and sold CDOs. Answer came there none.

    Draw your own conclusions ?

  • Comment number 27.

    If the subtext of what Merv is saying is really 'direct your anger somewhere else', then isn't he the very guy that should have and could have made sure those that were responsible are also accountable. He's following a path of spreading the pain out both over time and across the population, including those that have yet to be born yet given how long these debts will take to pay off, if they ever are. He is gutless, taking the path best for him, and I do direct my anger at him for the theft that is QE and consequential collapse in the value of Sterling. If the Euro is good for one thing it is that it has protected the wealth of savers and made those in debt, including Governments, are accountable for their screw ups.

    Those that have taken on too much debt are now happily seeing that inflated away, including Government, while those that have lived prudently within their means see their hard earned savings evaporate similarly. It's not right and Merv cannot tell me to direct my anger elsewhere all the while he is not prepared to use his real powers to ensure the pain is felt where it is due.

    And perhaps the students would be more prepared to pay for their tuition fees if they were also be exempt from paying the debts run up by the last Labour government to buy three terms in office while they were children at school and unable to express their displeasure at the ensuing economic train wreck.

    They're all getting away with it while my children and I have to pay and Merv is complicit in that and just as culpable in my view.

  • Comment number 28.

    # 11 - Hawkeye_Pierce:
    "As #8 clearly states, the answer to Meryvn's question "what would you have done?" is merely to say "restore symmetry of privatised profits and privatised losses", i.e. let creditors take a haircut."
    How right. Unfortunately, self-appointed financial genius G. Brown had a better idea.

  • Comment number 29.


    27. At 8:55pm on 16 Feb 2011, Dicko 1966 wrote:

    Those that have taken on too much debt are now happily seeing that inflated away, including Government, while those that have lived prudently within their means see their hard earned savings evaporate similarly. It's not right and Merv cannot tell me to direct my anger elsewhere all the while he is not prepared to use his real powers to ensure the pain is felt where it is due. [End quote]

    Some time ago Mr Paul Mason Esq revealed that the three architects of the brilliant Tripartite System were :

    Mr Gordon Brown
    Mr Edward Balls
    Sir Augustine O'Donnell

    If you read today's FT you will see speculation about the third named person's retirement from his current position.

    Directing anger at them all ? Focusing attention may be better. And also elsewhere in the broad sweep of government and business and journalism, if you're feeling generous.

  • Comment number 30.

    Frankly, leaving alone is always best! Deep and fast correction is better than (an expensively) contrived slow correction. The interest rate needs to be (around) inflation +2% then markets will stay "normal" our currency will be a real store of value, and we would soon be out this mess (but not without pain to those who invested badly). Mervyn and Gordon only delayed the inevitable and increased the magnitude of the inescapable reckoning. Look after the value of money and everything else will fall into place.
    Do we really need things to get so bad that another Reagan/thatcher era gets inflicted on us?
    Micky

  • Comment number 31.

    This is worth 5 minutes of anyone's time.

    'Why Isn't Wall Street in Jail?

    Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world's wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.'
    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 32.

    Paul,

    1. Mr King said '...what mattered was not the inflation rate now but in 3 years time.' which by implication means that the inflation rate we have now was put in train by the policies adopted by the BoE and MPC 3 years ago. The follow on question should have been, 'what do you hope to achieve by pushing inflation above the target of 2% ?'

    2. Mr King also pointed out that you have not exactly been an inflation hawk in the past.
    Mervyn reads your blog !!, as it impossible to read your blog without an overwhelming urge to comment, which poster is Mervyn King ?

    (I'm not Mervyn but I would say that wouldn't I, Jericoa, surely it's not you :)


    #24 turnover appears to be stable despite prices (and in some cases profits) rising, this is a real terms reduction.
    Double dip ? We only rose out of recession on a technicality (QE and devaluation) now that is working through we are moving back to the real economy which is (and was) in depression.


  • Comment number 33.

    inflation without employment rising means it is an oligarch tax. take energy prices. we were told they must go up because stirling is weak and the futures are rising. Now both are falling. do the prices come back down? who benefits? where is the regulator?

    there is a shortage of soft commodities. yet the govt pay millionaire landowners to do nothing but role game as country squires while land is left idle. who benefits in this wealth transfer from poor to rich?

    merv can only deal with inflation related to employment. not the market rigging by the oligarchs and their front men [the political class].

  • Comment number 34.

    What else would you expect ... from an 'inflation denier' ... I think 'he' might just change his mind about his 'low inflation' if his only current source of income and wealth was a UK state old age pension... which a couple of million British OAP's are trying to manage on right now ... a bit different to his own pension arrangements.

  • Comment number 35.

    Oh gosh, did I go and cut and paste a porn link instead of a link to a valid financial article again?

  • Comment number 36.

    #23

    I guess the usual suspects from repeal of Glass-Steagal also presided over the commodities modernisation act too:

    http://www.pbs.org/wgbh/pages/frontline/warning/

    After all, it was an inside job. Out this weekend folks:

    http://golemxiv-credo.blogspot.com/2011/02/final-dates-and-times-for-london-inside.html

    At least Film 2011 wasn't afraid to use the "crime" word tonight when reviewing Ferguson's film about the crisis!

  • Comment number 37.

    @35 tawse57 A bit of perverted punishment porn for you? ;-D

    http://www.bbc.co.uk/news/business-12476847

    Why isn't this happening to the financial failures?

    @36 Hawkeye - Thanks - keep 'em coming!

    This gives a bit of background too.

    http://en.wikipedia.org/wiki/Brooksley_Born

  • Comment number 38.

    Paul, I know this isn't really relevant, but your title reminded me of the "Jealousy Duet" from the 'Threepenny Opera' :-D

    http://www.youtube.com/watch?v=eW2ZSTQfedA

  • Comment number 39.

    Paul you are most definitely wrong to suggest that the only choice is a decline in living standards brought on either by inflation of higher mortgage rates.

    We don't have to have capitalism.
    We don't have to have a corrupt few controlling the world's wealth.

    Egypt has shown us a glimpse of people power.
    All of a sudden the French, Russian & Spanish revolutions have more meaning.

    The people have a choice, they can fight back.
    They can take over the banks & right-off everyone's mortgage.

    The whole world is changing!

  • Comment number 40.

    #37

    Lawrence (Larry) Summers is nothing less than the "de-regulators’ de-regulator"!

    "In a recent paper Steven Gjerstad and Nobel laureate Vernon L. Smith describe more fully (1) the contribution of derivatives to the flow of mortgage funds that supported the housing bubble, (2) the concerns that Brooksley Born had raised about the dangers inherent in these contracts, (3) Summers' contribution to their deregulation, and (4) how these contracts precipitated the collapse of the financial system in 2007 and 2008"

    http://en.wikipedia.org/wiki/Lawrence_Summers

    Reinhart & Rogoff (2009) put forward a causal model showing how regulatory conditions (of private credit creation) relate to the occurrence of banking crises and potential knock-on effects. Adapting their model we get a succession of crisis phases:

    1) Financial liberalisation
    2) Asset speculation
    3) Banking crisis
    4) Currency crash
    5) Rising inflation
    6) Default
    7) High inflation / currency collapse

    For argument's sake, let's call this the Reinoff scale. Where do you think we are on the Reinoff scale?

    I'd say about 5.1 - 5.2. Inflation is picking up momentum, and the Gvt is certainly making inroads to covertly "default" on various obligations (c.f. public sector pensions).

  • Comment number 41.

    Merv & co are part of the problem helping fueling the uncontrolable boom with a low base rate,now thinks that and even lower base rate will get us out of trouble.He should of raised rates in 2003 never mind now.
    we eitheir go the way of ireland or iceland (through these morons out of office and start sending poeple to jail)merv picks ireland i pick iceland maybe thats because I wasn't invited to the party but merv & co are going to make me pay the bill.
    RISE UP !

  • Comment number 42.

    I have to agree with most contributors to this piece. Yes inflation is a problem but what can the MPC actually do about it ? There only weapon seems to be interest rates. There must be other solutions than always looking at raising or lowering interest rates. We only need to look back at 2007. Raising interest rates around the world to quell inflation and commodity prices failed disasterously. The property market in the US burst followed less so by our own. Linked property investments failed and the rest is history as they say. Raising interest rates would destroy the British economy for a second time. The MPC surely must see this. I only thought the MPC should raise rates if inflation was being driven up by demand in this country. There is NO demand driven inflation in this country. Again the MPC surely must see this as well. House prices are flat, Retail sales are flat, Wage growth is flat, Unemployment is going up. Looking at the data myself i would say the British economy is flatlining at best. Lastly I would just ask the MPC members to look back at 2007 to learn the lessons of what followed.

  • Comment number 43.

    I seem to remember that only a few years ago the idea that interest rates and only interest rates could be used to control the economy was regarded as almost laughable. Yet now it seems that everybody has joined the neo-liberal consensus that this is the "only golf club in the bag".

    I kind of despair that 99% of discussion in the media is all based around the consensus position. It becomes the financial equivalent of reading Heat magazine.

  • Comment number 44.

    You've been wrong so very many times in the past that I wonder how you have the gall to imagine that you know more about how to manage the economy than Mervyn King. The economy might well be better off in the hands of the dull, stolid unemotional Mervyn King. Your jumpy, nervy pessimism and bent for seeing disaster round every corner wouldn't help much in the the tricky business of navigating a path through today's treacherous economic landscape.

  • Comment number 45.

    The Bahraini riots are worrying me. Not for the geo-political reasons nor the economic ones.

    The first F1 race of the season is just 4 weeks away.

    Last season's race was incredibly boring. I recall a grid talk behind Martin Brundle and one of the Royal Family.

    The Prince stated that there was only one bumpy bit left on the seemingly perfect race track, (Brundle pointed out that some people actually like the bumps in F1 as they make for better races), but that he aimed to get rid of it by next year.

    I wonder if that bumpy bit has now gone? Will we ever know? Does the Prince have more things to be worried about at the moment?

    I am told that most of the oil in Bahrain is in the Shia populated areas.

    Hey, BBC News is reporting that 'Hope' is coming here in May. How many US Presidents has the Queen now made dinner for?

  • Comment number 46.

    Inflation: Mervyn and the United States.
    Mervyn King, the Governor of the Bank, had been explaining how "there was no obvious answer to the question re what to do about 4% inflation. What he likely means is that he does not understand the higher inflation i.e. cause and effect.
    There is indeed something the Bank of England can do. Let's follow the history of what's happening:
    In November, 2010, The United States Treasury started buying $600B of longer-term Treasury Securities which is to continue till the end of the second quarter of 2011 - on top of the some $1.75 TRILLION of various types of securities, many of which were mortgage backed securities (added in 2009), currently standing at a total of $2.3 TRILLION.
    (This figure could rise higher; as the Fed says it will carry out "regular reviews and adjust the program as needed to best foster maximum employment and price stability.")
    The United States has literally NOTHING LEFT, NO OTHER ANSWERS, except to keep the printing presses rolling in the hope of stimulating the American economy...and this plan has not got a hope in H...
    In other words, the United States of America is debasing its own currency to stimulate an economy, which is something that one could expect a Third-World Country to do. It spells C A T A S T R O P H E.
    Now consider that the American economic problems are structural; they are primarily due to
    - bad mortgage policy,
    - bad industrial policy,
    - bad fiscal policy,
    Forget it! Let's just say BAD, BAD and more B A D!
    In here I am also considering such things as demographic problems (e.g. aging baby-boomers, and those expensive, ongoing, imperialistic wars).
    The United States decision to "fix" its monetary problems by printing more money, was (and is) a serious mistake - exacerbating rather than solving the problems.
    Why?
    Because economic structural problems cannot be corrected by printing press. They require REAL solutions. To be perfectly clear this means
    things like fixing the housing mortgage mess, establishing an industrial strategy, getting out of at least some military engagement.
    Whatever it thought it was doing, The Federal Reserve Board (Fed) is the only branch of the US government that is still somewhat functional; as a result, bankers are in charge of the US economy...and let us all remember who created the current mess in the first place.
    Also, let us all remember that the Fed is a semi-private organization that has a long history of creating financial bubbles - not just in the US but around the world.
    Why?
    Because the US dollar is an international key-currency - an important part of other central banks' official reserves. Therefore, Fed errors in the United States create serious (maybe unmanageable) financial and monetary problems wherever this international key-currency takes hold.
    The Fed is at it again. Only this time, it's creating
    - a huge bond bubble and
    - a massive gold and commodity price bubble.
    Let's not forget that the United States is running on (practically) a zero interest rate. All of these bubbles are interrelated but the one sure fact is they will POP, POP, POP and POP. The most likely American plan is: keep printing, keep printing till the 2012 election, and then try to push down really hard on the monetary brakes...But by then, alas, what will be left of the key currency?
    The Fed's monetary policy is flooding the financial markets with liquidity, i.e. newly created dollars; in the process, the American dollar is circling the drain, but it was supposed to spur American exports and prevent deflation from taking hold.
    The Fed has been engaged since 2009 in round after round of some kind of stimulation (printing presses running), interest rate reductions and keeping short-term real rates negative. The American economy is in a liquidity vice. A central bank can print all the money it wants, but this will NOT stimulate the real economy. It will make matters worse.
    The Fed can manipulate short term interest rates by artificially increasing demand for short term securities, but INFLATION IS A HUGE COMPONENT of longterm interest rate policy. Therefore, if the Fed's intention of printing large amounts of new money causes INFLATION, long term interest rates may jump rather than fall.
    MAKE NO MISTAKE (one of Obama's favorite expressions) with globalized financial markets, a large inflow of these newly minted dollars is flowing out of the United States; it is being invested in higher interest rate countries,
    - pushing the dollar further down and
    - the currencies of these countries further up.
    Another consequence is this: The current outflow of US dollars helps keep the dollar exchange rate low, but when the Fed is forced to raise interest rates (which will happen inevitably), the reverse will happen: and the US dollar will become overvalued.
    What counts for most people, however, is that the Fed’s zero-interest rate policy has not cured the structural housing mortgage crisis, since home foreclosures are very high. The Fed now places most of its hopes on a currency devaluation, which is a very old game called “beggar thy neighbor”, which means trying to export one country's unemployment to its "good friends" and trading partners by devaluating the currency.
    This was a form of PROTECTIONISM the Great Depression. This may work for a while, at least as long as other countries can (or are willing to) absorb American exports WITHOUT running to their own printing presses.
    Indeed, is it likely that countries which see their currencies being badly effected by the Fed will remain passive?
    The Fed is implicitly making the bet that these countries will not retaliate; in fact, may not recognize what is going on.
    My recommendations:
    1. impose capital controls in order to slow down the inflow of unwanted money and therefore the onslaught of imported INFLATION, and accordingly prevent exchange rates from rising too high & too fast.
    2. Meanwhile, accelerate the dumping of the US dollar, accumulate gold and other more stable currencies such as the Euro, the British pound, the Canadian dollar...
    (China has already begun to do just this.)
    The share of dollar official reserves must decline to as little as possible.

  • Comment number 47.

    What would happen if China and Saudi Arabia and the Rothschilds decided to cancel first world debt?

  • Comment number 48.

    I suppose Mervyn is right: he said that without GBP 200 billion of QE and a base rate of half a percent we would suffer deflation.

    So we got 4% inflation instead. Is that a good trade? I think it is a bit pricey.

    It all depends on how indebted you are. Those of us who are not and who have saved for a nest-egg are getting well screwed.

    My only worry is that Mervyn is saying the inflation is temporary. I hope he is right but will he resign if he is wrong?

  • Comment number 49.

    Isn't it about now in the thread that someone mentions the lizard people who are supposedly running the planet from their mountain lair in NZ?

  • Comment number 50.

    49 We were waiting for you to do it tawse57...since we developed a conspiracy theory about you!

  • Comment number 51.

    #46 BB

    A perceptive analysis.

    I agree with your policy points, but it seems that we're doing the exact opposite:

    1) Accelerate the dumping of the US dollar: The UK has gone from holding $180bn of T-Bills at beginning of 2009 to $541bn at end of 2010. At this rate of growth we could overtake China & Japan within a year:

    http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

    2) Accumulate gold: It seems the UK has applied the same strategy as many other Central Banks (including Tunisia?) - Seen it, knicked it, sold it off

  • Comment number 52.

    #47

    "What would happen if China and Saudi Arabia and the Rothschilds decided to cancel first world debt?"

    Err... pigs might fly?

    Those guys need first world debt in order to engineer the "leveraged buy of the West"!

    "In the likely circumstances of limited real growth prospects, debt could be little more than the perfect method for annexing what remains of a finite supply of essential economic resources.

    If the world were really on the cusp of future miracles in growth, then why wouldn’t the power elite take an equity stake in our future, such that they could share in the rewards?

    No, instead we are seeing the omnipresent spectre of debt, a modern Feudalism enacted through state sponsored loan sharking."

    It's called: Sell freedom, buy control

    They are actively pushing us towards a 6.5 to 7.0 on the Reinoff scale (see #40) such that we'll sell what little resources & genuine productive capability remains at firesale prices:

    "You see banks have a love hate relationship with fire sales. They hate having to sell their assets at fire sale prices but love it when anyone else does." Golem XIV

  • Comment number 53.

    Some seem to have missed the real point on inflation and QE.

    All advanced economies are kept afloat by money created by banks as part of the FR banking system. Money creation of itself is not evil, so long as it is an entitlement to consume based on the productive capacity of the economy. In general, what is wrong with the system is that (i) banks' creation of money has not been meaningfully regulated and (ii) they charge a percentage on all the money created, ie most of the money in existence, thus levying a private tax on the economy. Most money in my savings account has originated in someone elses debt, upon which they pay interest.

    The financial crisis and bad debt has significantly reduced the amount of money in existence. Therefore there is a need to replace this, or the economy will continue to plummet. QE is meant to replace one entiltlement to consume with another. The problem? much of it has ended up rebuilding the hole in banks' balance sheets, rather than helping the economy.

    Inflation in the UK now has several causes. The first is that during the asset boom, foreign money entering the country made the pound artificially high. Now this is not happening, and some of these loans are being repaid, the pound has fallen towards a level reflecting the true productive capacity of the UK vis a vis other countries. This is not very pleasant, as the previous high value of the pound discouraged the manufacturing side. Also, the "success" of the City in extracting revenue from overseas, has also always distorted the UK economy, bith geographically, and away from manufacturing by supporting the value of the pound.

    One thing should be clear from the genesis of the current crisis: a high exchange rate often does not correlate to a strong economy. The global economic situation, including but not confined to serious crop failures, has led to increased commodity prices. Unless we can boost exports significantly, we will not be able to afford our imports. Inflation is not caused by QE, but by high global commodity prices and the weakness of the UK economy.

    This is what I believe Merv means by the need to rebalance. However, I think that the government, with the possible exception of St Vince, if they see the problem at all, would prefer to rely on a reinvigourated City's financial piracy earn/steal our living.

  • Comment number 54.

    Sasha

    I take the point about FRB. I have often been confused / bewildered about the nature of money, but also in relation to credit. Is credit a special form of money? Does money cancel credit? My head hurt for years.

    But the penny dropped one day. As Steve Keen points out, credit issuance preceeds Central Bank (M1?) money creation. This Bezemer article is also worth reading:

    http://mpra.ub.uni-muenchen.de/15766/

    Money is a special form of credit, one that is universally accepted and transferable.

    Therefore the private arrangement of credit issuance (between you and the bank) comes first, then comes the social legitimacy with Central Bank backing (i.e. Treasury reserves). If a bank is irresponsible in issuing credit it should fail and therefore destroy the created credit and insulate the sovereign money supply.

    The actions of lowering interest rate, bailing out the banks as well as QE is just converting (irresponsible) private credit creation into public debt. It is monetising the private debt.

    Peter Warburton explains that excessive credit creation is what has kept Inflation at bay since the 1980s - it's just been hidden in the non-money credit supply, enabling us to artificially maintain our international buying power. Central Banks have done nothing to contain this private credit creation (esp. derivatives), indeed they have actively encouraged it. This build up has been going on for 10-15 years.

    Now we are monetising it, all hell could break loose.

  • Comment number 55.

    @55 Hawkeye - Food for thought, and I haven't digested it all yet. :-)

    Re this:"If a bank is irresponsible in issuing credit it should fail and therefore destroy the created credit and insulate the sovereign money supply." The first part is easy enough, bankrupt the lender. But how do you then nullify the trail of created money after it has fragmented and passed through many hands? It's probably neither possible nor desirable. I think that the only way round it is to stop banks creating money altogether. I would also stop lending at interest, and make creditors into part-owners, ie proper investors, with legal protection for debtors against unreasonable forclosure. Thus instead of a mortgage, one would have a modified kind of hire purchase agreement. The idea that money should grow just because one is not spending it is, I think, at the root of many of our economic and political problems.

    Thanks for your previous reply by the way. The Larry Summers link was particularly interesting.

  • Comment number 56.

    53 Sounds like a very plausible explanation for our predicament Sasha...... but the Wall Street Mafia run our global capitalist world as they wish it to run... and not at all in accordance with our best interests.

    Remember Diamond geezer`s smirk of self confidence as he oiled and condescened his way through his "fearless forensic interrogation" by our pitiful Dad`s Army politicians?.. Don`t panic Sasha!!

    How are you going to wipe the smile off his face?

  • Comment number 57.

    @56 "How are you going to wipe the smile off his face?"

    I wish I knew Jim. What's clear to me is that the impunity of the top players in finance will gradually undermine respect for the rule of law. At best, there may be a community using the Wikileaks model which starts to target institutions believed to commit "financial crimes against humanity". At worst there will be violence and counterviolence.

    I remember seeing a gated community on top of a hill in the US once. I thought it needed a slogan above its gate. "Work Makes One Free" would obviously have been completely wrong, but "You Too Can Live In Fear" might have been very apt.

  • Comment number 58.

    So if it is true that real term living standards have to fall for all the millions of people who were in no way responsible for the mess we are in then why doesn't it apply across the board?
    Why then can't house prices fall to an affordable level again?
    What about private rents, why can't they come down?
    Why does everything have to go up in price, protecting the margins and profits of those who are already doing very nicely thank you?
    Why does the cost fall disproportionately on the young and poor who don't own any assets?
    The future 'haves and have nots' won't just be a case of the traditionally rich and poor, but more between the young and the old, those who are lucky enough to have an affordable home to bring up their families, run a car, afford to retire before they die, work in full-time jobs with paid holidays and sick pay...and those who don't.

 

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