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Mervyn King ne regrette rien

Stephanie Flanders | 07:20 UK time, Wednesday, 26 January 2011

I don't know whether Mervyn King is a fan of Edith Piaf. But where monetary policy is concerned, we can say he is not a man burdened by regrets. Last night in Newcastle, the governor of Britain's central bank had the following to say about Britain's above target inflation, and the Bank's response to it.

First, nearly all the inflation that Britain had seen in the past few years was due to factors beyond the Bank's control - like changes in VAT, and sharp rises in the world price of fuel and food. He said these would push inflation up again in 2011 - to "between 4 and 5 per cent". Partly as a result, we could expect real wages to fall for the 6th year in a row, the first time that has happened since the 1920s.

Mervyn King

But, raising interest rates to prevent that leap in inflation would have squeezed living standards even more, by hurting growth. To think otherwise was a delusion:

"There is a misapprehension in some quarters that the MPC could have prevented the squeeze in living standards by raising interest rates over the past year to bring inflation below its present level. That view is a misunderstanding of how monetary policy works... if the MPC had raised the Bank Rate significantly, inflation might well have started to fall back this year, but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now. The erosion of living standards would have been even greater. The idea that the MPC could have preserved living standards, by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking."

Some, such as the Financial Times' Economics Editor Chris Giles, have asked whether the Bank would really have followed the same approach, if they had been able to predict all the forces that would push inflation up. But the governor's answer last night was yes - he would do it all again:

"Even if we had known a year ago that 2010 would bring further increases in food, energy and other import prices, as well as a rise in VAT, it would not have been sensible to pretend that a tightening of monetary policy to offset those upwards pressures on CPI inflation was consistent with aiming to keep inflation at the target in the medium term."
Many in the Bank will see yesterday's poor growth figures as a vindication of their decision to keep the official interest rate at a record low. But they surely admit that the bad news from the economy has not made their job any easier.

Looking ahead, the Bank's governor admitted there were upside risks to inflation, which it would carefully consider. But - to return to his theme - the MPC was not going to be spooked into the wrong policy by misplaced chatter about its credibility:

"The headlines will inevitably focus on the immediate effect of shocks on CPI inflation rather than the outlook further ahead. Central banks, though, do not set policy or react according to headlines. They simply do their work. We shall try even harder to explain the basis for policy decisions. Credibility was not earned in a year, and it will not be lost in a year."

Mr King's speech will not silence Andrew Sentance. This week he repeated his call for higher interest rates, on the grounds that not tightening could force the Bank to impose much harsher medicine down the road.

Nor will it silence the critics in the City, who wonder whether the Bank has the nerve - or even the wherewithal - to bring down inflation in the unfavourable global environment I described on Friday, where prices are turning against the UK and against British workers. But after last night they cannot say the governor has failed to make his case.

Comments

Page 1 of 3

  • Comment number 1.

    After the banking collapse in 2007 and 2008 the following occurred:

    In January 2009 The Bank of England reduced interest rates to 1.5%, and finally to 0.5% in March 2009 (the lowest rate since the BOE was founded in 1694). In addition to the above the B.O.E. started Quantitative Easing in early 2009.

    Since these actions were taken the following has happened:

    Retail price index (all items) RP02:
    Jan 2009 210.1
    Dec 2010 228.4
    Price inflation = + 8.7% (v.a.t. increase yet to be added)

    Average weekly earnings private sector (not seasonally adjusted):
    Jan 2009 Average weekly earnings = £445
    Nov 2010 Average weekly earnings = £433 (provisional)
    Increase = – 2.7%

    Average weekly earnings public sector (not seasonally adjusted):
    Jan 2009 Average weekly earnings = £441
    Nov 2010 Average weekly earnings = £467 (provisional)
    Increase = + 5.9%

    Average weekly earnings whole economy (not seasonally adjusted):
    Jan 2009 Average weekly earnings = £444
    Nov 2010 Average weekly earnings = £441 (provisional)
    Increase = – 0.007%

    (All figures noted below are sourced from the Office for National Statistics website):

    There are a lot of people paying a very high price to keep the financial system afloat Mr King.

    And the tone of many posting on this and other sites, suggests most don’t think it’s worth it. And for the avoidance of doubt, I’m one of them.

    ‘Austerity’ is a reasonable consequence of ‘profligacy’.
    Unless it’s their ‘profligacy’ that results in your ‘austerity’.

    There is a group that wants to change the current system, supported by two MP’s see link: http://www.positivemoney.org.uk/


  • Comment number 2.

    "But, raising interest rates to prevent that leap in inflation would have squeezed living standards even more, by hurting growth. To think otherwise was a delusion:"

    Interest rates are not low Stephanie! Mortgages aside everything is higher! This is what it is all about though. The bankrupt banks can borrow at 0.50% and lend at 29.9%.

    So it has nothing to do with hurting growth directly, its about keeping up the charade that the banks are actually solvent. Of course the next issue is when are the BoE going to hit the streets with suitcases of money and start buying every house they see so that the housing indexes stay up nice and high. We wouldn't want any asset to go down in value in our theft by inflation model of economics.

  • Comment number 3.

    Whether Merv is right or not, I'll leave the debate to the usual suspects.

    However it is refreshing to see a establishment official at least say, that what we all know - our relative wages have been decreasing for 6 years, to the tune of about 12% ( I think this was the figure mentioned).

    Contrast this with the politicians, who are in complete denial about the actual cost, and are happy to see minority sections (investment bankers) keep up with, and exceed the pay erosion that 99.999% of the country has to endure.

    At least somebody with power is explaining to the populace why they are feeling poor, and why it's going to continue.

  • Comment number 4.

    Bank of England web site says:

    The Bank's Financial Stability Role
    A stable financial system is a key ingredient for a healthy and successful economy. People need to have confidence that the system is safe and stable, and that it functions properly. The Bank's role is to contribute to maintaining the stability of the UK financial system.


    To The Governor of the Bank of England
    Threadneedle Street,
    London, EC2R 8AH.

    I John Dempster (hereinafter referred to as the claimant) believe that the Bank of England (hereinafter referred to as the defendant) owes me a duty of care in maintaining financial stability in this country, and that it has failed in that duty, in that the financial system was and is not stable, and this instability has caused me loss, the extent of which I detail on the attached pages.

    Love John XXX

  • Comment number 5.

    This is precisely what I said the last time this blog speculated on a rise in rates.

    When inflation is mainly down to sales tax, exchange rate and commodity speculation, what use is raising base rates other than to stomp on the little man a little bit harder?

    We have to face up to the facts: the endgame for any Western social model is already with us in the form of Japan. The only way out is for the public to buy state bonds, to save with the state, and for private debt to be converted to public debt.

    This is just the way it is going to be for the next 20 years until debt creation is tightly regulated and private debt levels are down. No more credit booms.

    The only optimism to be had from the future is from real progress: technological progress and improvements in living standards through innovation. But this is the right type of optimism.

    The idea that everyone can be a winner if they play the trader's lotto is the dream of a dying finance sector. Debt-funded gambling is no kind of social order, and should never have been deregulated.

  • Comment number 6.

    1. "Many in the Bank will see yesterday's poor growth figures as a vindication of their decision to keep the official interest rate at a record low."

    As I suggested at comment 261 under SF's previous article ('Lessons from the latest growth figures') ... convenient?

    2. "Financial Times' Economics Editor Chris Giles, have asked whether the Bank would really have followed the same approach, if they had been able to predict all the forces that would push inflation up. But the governor's answer last night was yes - he would do it all again"

    Is this for real? BoE/MPC role is to control inflation and only subject to that aid implementation of economic policy. Could one read this as - I/we have failed to do our job, but since we are independent & unelected we would happily fail to do it again - ?

  • Comment number 7.

    Low base rates are in place for the banks not for the people.

    His remit was inflation and financial stability and he failed on boith counts. Few sensible people take him seriously anymore.

  • Comment number 8.

    The medicine is higher interest rates, otherwise high inflation will drive higher pay rises. This will lead to prolonged high inflation, as well as higher unemployment than there would otherwise be (as labour costs more per "unit" oops I meant per person). The only way for it to cool off is to let interest rates rise to their natural level, and let nature take its course in the housing market.

  • Comment number 9.

    Why is this guy still in a job?

  • Comment number 10.

    GET RID OF KING NOW!!!

    And here is why...

    During the noughties he knew that imported Chinese deflation was perverting the UK inflation indices yet took advantage of this to set far too low interest rates. (That caused the bubble economy that created the economic mess we are now in.)

    Then today he argues that imported inflation is not a reason to raise rates now.

    He has also presided over the dramatic and unprecedented loss of monetary control by the Bank - this if anything is even more damming.

    There is absolutely no intellectual honesty or economic skill in this man. This is why he MUST go. He is an ongoing menace to the country. He has done so much damage to the Nation - more than any politician or any other part of the system, yet we can't get rid of him. Why?

  • Comment number 11.

    Mervyn King, who somehow manages to get by on his meagre £300,000 salary, is telling us "the pay squeeze is necessary". Is he having a larf? He has no idea what "pay squeeze" means. Once he and all his banker/parasite cronies are living off the kind of wages the rest of us have to manage with we might be prepared to listen to their opinions.

  • Comment number 12.

    "... we could expect real wages to fall for the 6th year in a row ..."

    That wouldn't be the second half of the Brown/Balls economic miracle, would it? Surely not ... no, of course not ... all together "It's the fault of the Coalition".

  • Comment number 13.

    Great to see some honesty at last. I suspect secret documents would have been sent to the government and still are about this and it's possible social impacts.

    The implication though is that the inflation target is a long term concept and the BoE is more focused on economic stability as far as this is possible.

    Fixed wages and rising prices encourage a seige mentality. People get to a point where they can afford to or want to spend a fixed about so they buy less.

    On the plus side there do appear to be advances in computing, wireless devices and electronics at the moment which could lead to a new productive technologies. I think there are some signs we are at the beginnings of a new technology circle

  • Comment number 14.

    A slack day yesterday, in which I randomly came across this little gem.

    http://news.bbc.co.uk/onthisday/hi/dates/stories/november/19/newsid_3208000/3208396.stm

    plus ca change, hein?

  • Comment number 15.

    Crookwood and EconomicsStudent

    All the banks would do would pass any costs on to the customer. I think Mr King is clever enough to know that the banks wouldn't voluntary absorb any further political damage on his behalf.

  • Comment number 16.

    The Bank of England moved a huge proportion of its Pension Fund into index-linked Gilts just before the start of QE1 in early 2009. These index-linked Gilts were then denied to the rest of us.

    The naked theft of the UK's savings has been some time in the planning.

  • Comment number 17.

    5. At 08:30am on 26 Jan 2011, Oblivion wrote:
    When inflation is mainly down to sales tax, exchange rate and commodity speculation, what use is raising base rates other than to stomp on the little man a little bit harder?

    Well, inflation is caused by low interest rates. If the interest rate was higher our currency would be stronger and the commodities we import would become cheaper.

    So this is exactly what the BoE is meant to prevent.

  • Comment number 18.

    And here is my attack on Mervyn King and the lot of thicko economists re: keeping interest rates low:

    Go back to TEN years ago, when commodity prices were cheap, cheap, cheap, and OECD currencies were riding high against the rest of the world. Remember?

    Did any economist argue back then that these factors, namely the import of low inflation, should be taken out of the inflation rate back then?

    Now we are in 2011. Commodity prices are dear, dear, dear. OECD currencies, except for the Yen, CAD and AUD, are down, down, down. See?

    Does any economist argue that these factors should be taken out of the inflation rate now?

    IS THIS ECONOMICS? No self-respecting science academic would observe this inconsistency and tolerate the falsehood that their peers were trying to perpetuate.

  • Comment number 19.

    Some of us have been ranting about the dangers of inflationery pressures as the global economy increases demand, for the last 2-3 years - and King is saying that the BOE and MPC could not see it coming last year?

    Also, the BOE have been aware of nearly all of the excess lending by British banks in GBP currency ... and they could not see the Financial crash, Northern Rock etc coming ... and the BOE print the money?

    Too slow to lower interest rates in 2008 ... exacerbated the UK financial conditions?

    The BOE has some of the top economists and innovative financial minds in the world and yet their thinking and policy is not showing through in a way that is making a real difference... other than printing money.

    The functioning of the BOE is now a major strategic problem for every UK citizen, taxpayer, borrower, saver, UK plc ... as the BOE is not functioning properly and is not giving the banking sector proper direction ... may be it does not have the powers to do this ... may it has too much power and is unaccountable ... as King's mumbled snippets don't normally tell us anything really.

    Either the govt controls behind the scenes are too strong and it is a simply a political puppet extension of HM treasury and/or its management team need clearing out and it the BOE itself needs a new 'raison d'etre', structure, undertaking, rationale, processes, business plan and strategy to allow it to comeprehensively and competently apply the strategic management that is required for our proper financial management.

    The role and purpose of the BOE should be assessed as a matter of urgency in a major independent review and the necessary constitutional and other control changes be put in place asap so that the BOE is effective and meets the demands of the nation and it's accountability, operations and our expectations of it are fully understood by Joe Public.

    Confirming that the real net disposable incomes of British people has been in the red for the last six years (after previously failing to disclose such information)... and repeatedly failing to meet meet inflation management targets would be reason for instant dismissal in the private sector.

    What is this 'Bank' (is it really still a bank ... I'm not quite sure?) . now supposed to be doing... on behalf of the Head of State/people of Britain?

  • Comment number 20.

    Mr King like all other bankers has self interest at heart - his salary ensures minimal affect for him as the "squeeze" takes effect. Never has the reality of how financial institutions (rather than governments) which run this country, become clearer. Or perhaps I have just become cynical with age.

  • Comment number 21.

    Steph,

    Considering last year, the average wage rise for FTSE 100 executives was ~55%, and for FTSE 350 was ~45%, (and bank bonuses are back), who exactly was Merv talking about?

    The little people of course.

    The poor must get poorer, whilst the rich can get richer, and its all for the good of the economy?

    What a banker!

  • Comment number 22.

    Thoughts:

    1) Who on earth gave him the right to make these kind of multi year policy decisions? It's obvious and has been for some time how the BoE has become ever more entrenched in making the big calls on the economy over government. I don't remember voting Merv in or have any clue how to complain to his party... The banks are really making all the calls these days!

    2) The 2% inflation remit fallicy! Ye right, whatever... it's starkly clear that regardless of how many letters Merv might have to write he believes that ongoing devaluation of the currency is his perogative.

    3) The self fullfilling prophecy.... Well if you constantly reduce the spending power of everyone's take home pay, whilst at the same time restricting how much that pay or those savings can/will grow by then the cost of living gets more expensive! You don't get out of a recession by making everything more expensive in real terms to everyone... nobody has any discretionary spending left. What Merv has failed to say is that his own policies will help bring about the double dip recession and thus vaildate the BoE that growth would be slow.

    4) The external inflation shock factor... Merv is in trouble... he might think he can steer a course through these choppy waters but frankly he is going to get hammered once all the costs of food, cotton, oil, commodities etc. keep rising... and so will the rest of us. The problem comes that stealth inflation doesn't go away becaus you ignore it... it compounds. When rates finally do raise... it will be quick, the jumps will have to be substantial and there will be blood in the streets.

    5) Capital fight from Sterling. Who knows where the pound will end up but the answer is worth an awful lot less... (£5 a loaf anyone?) the entire policy and approach makes capital exit from UK related markets the ONLY choice for savers and investors except where shorting the major companies and instituations.

  • Comment number 23.

    What is clear is that the BoE/MPC is the only show in town for management of the economy. This is true now and to its eternal shame was also true of the Labour Government. It is living standards that the Bank is supposed to be concerned about and that would seem to be progress in relation to the exclusive focus on inflation or by talking about the lesser of two evils (living standards v inflation) is the BoE is trying to explain its way out of obvious failure! The Government through the Governor is trying to roll back wages to fund higher profits and lower public spending. I would be astonished if on the one hand the TU's allowed their tummy to be tickled by the Government and on the other the large reduction in disposable income ensures any recovery is strangled before its walking. Inflation built in with no growth.
    Export led? The chickens of poor economic management are coming home to roost as the manufacturing industry is already talking of skills shortages.

  • Comment number 24.

    "17. At 09:00am on 26 Jan 2011, dj_gandy wrote:

    5. At 08:30am on 26 Jan 2011, Oblivion wrote:
    When inflation is mainly down to sales tax, exchange rate and commodity speculation, what use is raising base rates other than to stomp on the little man a little bit harder?

    Well, inflation is caused by low interest rates. If the interest rate was higher our currency would be stronger and the commodities we import would become cheaper.

    So this is exactly what the BoE is meant to prevent."


    AND we need look no further than the BoE's educational pages (www.bankofengland.co.uk/education/targettwopointzero/inflation/ratesAffectInflation.htm) to find

    "A particular influence on prices comes through the exchange rate. A rise in interest rates relative to those in other countries will tend to result in an increase in the amount of funds flowing into the UK, as investors are attracted to the higher sterling rates of interest. This will tend to result in an appreciation of the exchange rate against other currencies...... Other things being equal, an increase in the value of the pound will reduce the price of imports and, because many imported goods are included in the CPI, this will have a direct influence on inflation."

  • Comment number 25.

    "The role and purpose of the BOE should be assessed as a matter of urgency in a major independent review and the necessary constitutional and other control changes be put in place asap"

    Thank you, nautonier. As with yesterday, I agree with you completely on your post.

    The role of a Central Bank is primarily to create a stable monetary system. Secondarily to ensure a stable financial system. Thirdly to support a stable economic system.

    1. Create Stable Monetary System
    2. Ensure Stable Financial System
    3. Support Stable Economic System

    THIS is what was INTENDED.

    It seems to me that because the Central Banks have been taken over by economists, that they think the role of Central Banks is now in the following priority:

    1. Create Stable Economic System
    2. Ensure Stable Financial System
    3. Support Stable Monetary System.

    THIS is what it has BECOME.

    The Bank of England is supposed to create and manage Sterling currency so that it is regarded with more stability as an investment than gold, or a commodity index, or an ETF.

    The Bank of England acts as though its job is to manage the economy, instead of managing the currency of this island economy that is floating in a global economic system.

  • Comment number 26.

    The Governor is King ! Perhaps.

    He has articulated clearly how things stand in the UK today. More clearly than Messrs Osborne and Balls.

    A. It is more important to place financial stability over price stability - although both are important and interlinked.

    B. Living standards have been falling for some years, and by reading between the lines of yesterday's speech, will continue to fall, at least in relative terms, for a few more years yet.

    A hard overall message for the hoi poloi, the cognoscenti, political elites, business elites, and Marxist-Lemonists to swallow. Pish ! I say...a plague on all their houses.



  • Comment number 27.

    First, we need to see the bankers being squeezed 'til the pips squeak. We are all in this together, supposedly. Once his own industry shows restraint, he might be entitled to preach to the rest of us.


  • Comment number 28.

    But he won't put up rates because the precise effect described will dampen the demand for our exports and cause a collapse in houseprices.
    Now thats not supposed to be his concern but (its starting to become a pattern) Dave and George are happy for him to take responsibility for management of the whole economy and he, like the lib dems, seems flattered. Fool.

  • Comment number 29.


    > I don't know whether Mervyn King is a fan of Edith Piaf.

    "it is paid, swept away, forgotten, I don't care about the past"

    Yeah, in your dreams, King. It isn't paid yet, you can't sweep it away, and nobody's forgotten what bankers did. You WILL care about the past, until you've put things right.

  • Comment number 30.

    A sentence involving the words "cart" and "horse" come to mind. I always thought that the justification for the gross inequalities in the our capitalist based economic system was that, at least, it delivered growth which raised everybodys' standard of living. Now Merv is saying that in order to achieve growth we have to sacrifice our standard of living.

    I don't get it.

  • Comment number 31.

    27. At 09:34am on 26 Jan 2011, Jacques Cartier wrote:
    Once his own industry shows restraint, he might be entitled to preach to the rest of us.
    ==============
    surely the government is showing restraint


  • Comment number 32.

    25. At 09:27am on 26 Jan 2011, verano wrote:

    "The role and purpose of the BOE should be assessed as a matter of urgency in a major independent review and the necessary constitutional and other control changes be put in place asap"

    Thank you, nautonier. As with yesterday, I agree with you completely on your post.
    ..............

    Thanks Verano - I think that I was nearly there but you have put the icing on the cake!

  • Comment number 33.

    Perhaps Mr King needs a reality check on 'necessity' of squeezed incomes?

    The Bank of England website shows his lucrative income/benefits, and of those who work closely with him. btw - good to see that transparency.

  • Comment number 34.

    Apparently Merv is calling for a squeeze on wages - I don't know if he means mine, yours, his or the hopeless Governments.

    Didn't mention bankers bonuses though.

    The Government no longer does what we expect of it. It's too busy crooning over itself and worrying about it's image.
    In the last few months we have seen rising panic about swine flu, fear about jobs, recovery, cuts and European sovereign defaults. We've seen disappointment as the manifesto pledges fall by the wayside and an announcment of an NHS 'revolution' - which even if you agree with the changes - making such radical alterations without any backup funds if it all goes wrong - is complete madness.

    ...and in all that time what has our Prime Minister said?

    He invited the English cricket team for a 'champagne lunch' at Downing street for winning the ashes.

    Nice work if you can get it.

    ...and now we're told we must take the pain of the economic collapse. I notice that Merv referred to it as the 'world financial collapse' - but conveniently this is converted by politics into 'Gordon Browns mis-management of the economy'

    Funny that - how they want is both ways......and we must be satisfied with less on all sides.

    There's only one thing Governments truly fear - losing ccontrol. This is evident in Egypt right now - and it's what we must do to bring our rogue Government back into line.

  • Comment number 35.

    So we have Mr Diamond (Barclay's Chief) saying we should leave bankers alone and let them have their bonuses and now Mr King saying us mere mortals should take pay cuts and show restraint.

    Am I the only one who finds this rather distasteful?

  • Comment number 36.

    ...and still that clown Osbourne talks of recovery.....

    http://www.bbc.co.uk/news/business-12285628

    The whole nation's wealth is based on our valuation of property. If the valuation cannot be sustained through lack of credit then the bubble will truly burst for the UK.
    Of course such a reliance is undesireable and unsustainable....but then I didn't make this bed we're now lying in, successive Governments and greedy lenders have.

    ...but you want to see what the alternative is....

  • Comment number 37.

    23. At 09:24am on 26 Jan 2011, watriler wrote:
    The chickens of poor economic management are coming home to roost as the manufacturing industry is already talking of skills shortages.
    --------------------------------------------------------

    To an extent manufacturing industry must take the blame for any skills shortage.

    For many decades (even centuries) manufacturers were proud of their own training schemes based around apprenticeships, City & Guilds etc.

    In the interests of increasing profits (and to be fair in some cases cost cutting for survival) the responsibility for providing a skilled workforce was passed onto the state education system. As technical colleges and polytechnics became universities there was a strengthening of an already visible trend towards both more academic learning and new "softer" subjects that did not fulfil the needs of manufacturing.

    So then we have another skills shortage. These have happened before but I believe the root cause goes back to the lack of in house training in many of the largest manufacturers and lack of sponsored college places by the middle sized companies. They should not have passed responsibility to the state to train their staff.

  • Comment number 38.

    5. At 08:30am on 26 Jan 2011, Oblivion wrote:

    I agree with your sentiments...but there is one little problem.

    "We have to face up to the facts: the endgame for any Western social model is already with us in the form of Japan. The only way out is for the public to buy state bonds, to save with the state, and for private debt to be converted to public debt. "

    The Japanese had savings, we only have debt - they could keep their Government afloat - we cannot unless we borrow privately to lend publicly.

    This is why the situation is far, far worse than Japan - and at last we're seeing the cracks in the Tory economic policy which have been well papered over by the lenient media lackies.

  • Comment number 39.

    If we want to see some help from the banks in return for the bailout money I think all banks that took the money should be restricted on the credit card interest rates. 0.5% for a bank to borrow the money to lend to yiu the consumer at rates, in some cases of 29.9%. This is theft and the raising of those credit card rates during this economic second dip, yes dip not contraction, is absolutely and definately theft.

    The rise in repayments costs on credit cards and the extension of the banks income due to these costs puts even more pressure on the populace.

    Banks who took the money should have credit cards reduced to 10%, this is still a healthy profit, no unseen charges are to be applied and a fixed annual fee for the card of 12 pounds would be enough to provide the services.

    This would release some money for those who have debt problems, this would help the squeeze on salaries, this would make other banks outside reduce interest rates or they would lose business overnight.

    Come on banks give something back for those bailout funds and high bonuses.

  • Comment number 40.

    MK/SF: 'But, raising interest rates to prevent that leap in inflation would have squeezed living standards even more, by hurting growth. To think otherwise was a delusion: '
    ----------------------------------------------------------------------
    I just love to say 'I told you so'.

    The solution is fiscal.

  • Comment number 41.

    We have had a growing public sector debt since Charles II. At the same time, living standards have risen. You may think there is a correlation between the two. I think there is, but it is not debt gives rise to higher living standards, but, IMHO, the other way around. The Monach/Governments have borrowed because there was always money available in the next decade to pay off and re-borrow more. This has come about via the banking system, and our rising living standards have come about because of the free market's need to invent better and cheaper products for us to consume. I think it is time for Governments to pay off the whole National debt and then never be allowed to borrow again. If a Government wants to increase spending on say health and education, then that is fine, but let them raise the money in taxes to do so, but no more public borrowing.

  • Comment number 42.

    I thought I would open up some more of the intellectual space on this issue, given that Ed Balls yesterday on Sky said that he still agreed with his comments he made to Bloomberg on 26th August 2010, in which he said: "Yes, there are some important warning voices – Anatole Kaletsky, Paul Krugman, Lord Skidelsky, David Blanchflower to name a few – who have written powerful critiques on the comment pages of the broadsheets. But for the most part, the political and media consensus has dictated that the deficit is the only issue that matters in economic policy, that the measures set out in the Budget to reduce it are unavoidable, and that there is no alternative to the timetable the Budget set out...."

    Here is Paul Krugman blog 6 July 2010, 'Lincoln, McClellan, And Stimulus': "There’s now a lot of talk about the fact that U.S. corporations are sitting on a lot of cash, but not spending it. I don’t find that particularly puzzling: with huge excess capacity, why invest in building even more capacity. But almost everyone seems to agree that if we could somehow get businesses to spend some of that cash, it would create jobs. Which then raises the question: how can you believe that, and not also believe that if the U.S. government were to borrow some of the cash corporations aren’t spending, and spend it on, say, public works, this would also create jobs? (Brad DeLong has tried to make this argument repeatedly)...So shouldn’t that be our response to all that idle corporate cash? We don’t literally have to borrow from the corporations; they’re parking their funds in the money market, and the feds would borrow from that market. But the end result would be to put some of that idle cash to work — and, ultimately, to give the corporations a reason to start investing, too, so that the deficit spending would crowd investment in, not out. I have never seen a coherent objection to this line of argument."

    It is a simple rule: never put up taxes in a liquidity trap, especially when there has been a generation of journalists reared on the ubiquity of stagflation. The UK's CPI rate would not be at level it is without the fear of the bond vigilantes who will push up the borrowing rate to unsustainable levels, which has led the governor of the B of E to support an untenable deficit reduction plan with its inflation-inducing VAT rise, whilst critics attack the central bank for not controlling what they cannot control.

  • Comment number 43.

    Low interest rates stimulate activity in a number of ways. Savers, for instance, seeing no returns and their money losing value feel pressured to spend. In turn this supports the housing market, a prime electoral consideration.

    However, this is cynical, manipulative and above all wrong, I would say.

  • Comment number 44.

    31. At 09:52am on 26 Jan 2011, AnotherEngineer wrote:
    27. At 09:34am on 26 Jan 2011, Jacques Cartier wrote:
    Once his own industry shows restraint, he might be entitled to preach to the rest of us.
    ==============
    surely the government is showing restraint
    ------------------------------------------------------------------------
    In some areas - yes.
    In all areas? Perhaps, probably - no.
    Are they the right areas? Possibly, probably - no.
    Could it work out tolerably well in three to four years time? Maybe.
    On the other hand ...

    Well, what do you expect an economist to say?

  • Comment number 45.

    I am not an economist and don't understand the arcane arguments posted here. All I know is, my salary hasn't increased in 3 years (I don't work in the public sector), the prices of food and, more importantly, fuel are rising fast (I heat my house with oil, which has doubled in price since September) and I have little spare cash for spending. Any rise in interest rates will be only mean having to sell my house. To me, and I would guess most people, Mervyn King is right. Most of those posting here just don't seem to understand the real world and are too bogged down in complicated econonomic theory: it is very simple really, we have less money due to price rises in essentials and this is having the same effect that an interest rate rise would have so none is necessary.

  • Comment number 46.

    SF: 'Many in the Bank will see yesterday's poor growth figures as a vindication of their decision to keep the official interest rate at a record low.'
    ------------------------------------------------------------------------
    Norman Lamont was interviewed on the TOADY prog.

    He said "People in Britain are de-leveraging (getting rid of debt)" If I had been in Naughtie's shoes I would have immediately asked "Why do you agree that interest rates should be kept exceptionally low?" JN did not.

    Lamont went on to talk up the US economy, obviously forgetting that for decades, the strength of the US economy has been built on ... debt.

    Norman Lamont and his analysis/view of UK/US/world economy appear to me to demonstrate the extent of the mess we are in. I consider it not unreasonable to expect that something of his view percolates current Government thinking ...

  • Comment number 47.

    I think Cameron, Clegg, Osbourne and Cable will regret not firing King immediately in light of King's speech last night.

    All King has done is rub the noses of the people in it last night.

    He has basically admitted that his economic policies have failed and continue to fail.

    He has basically admitted that all he has done is make life incredibly harder for hard-working people and small businesses whilst allowing the banksters to give themselves huge bonuses yet again.

    I am not surprised by the angry reaction I am hearing online this morning, on the radio and in the work-place to what King said.

    I think it will be a very naive politician who does not realise the growing anger in the UK over King's policies.

    King has basically stuck 2 fingers up to the electorate IMPO - but what does he care I guess as he, unlike Cameron and Clegg, is not dependent upon being voted into office by the people.

    Even worse, although King's policies have now clearly failed he seems intent on trying the same thing again. If at first you mess up then keep on making the same mistake appears to be his mantra?

  • Comment number 48.

    I meant to say

    Fixed wages and rising prices encourage a seige mentality. People get to a point where they can't afford to or don't want to spend more than a fixed amount on food, energy, etc so they buy less. Well the squeezed middle and working class does. The rich continue to live a golden life and increasingly hide themselves away, live it large abroad, etc.

    In some ways I think our elite have got a lot to answer for and the system that has evolved has got corrupted or distorted in a bad way. But we all have a personal responsibility not to let sophistry and rhetoric sweep our reason away. I'm picking up now a push to calm people down and for them to be happy from somewhere. I wonder if this is an effort to control or mitigate rising social divisions.

    Whatever....

  • Comment number 49.

    #36. writingsonthewall wrote:

    "...and still that clown Osbourne talks of recovery.....

    http://www.bbc.co.uk/news/business-12285628

    The whole nation's wealth is based on our valuation of property. If the valuation cannot be sustained through lack of credit then the bubble will truly burst for the UK.
    Of course such a reliance is undesireable and unsustainable....but then I didn't make this bed we're now lying in, successive Governments and greedy lenders have.
    "

    The one man who was responsible for prudent management of the volume of credit in the economy was(and still is heaven knows why!) Mervyn King - he is a thermonuclear economic disaster zone - he really must go.

    If we do not get our property prices down to economically internationally competitive levels the UK economy will continue to crash and burn. There is no hope of a sustained well balanced recovery generating jobs and making good use of our workforce until this happens.

    We are all Japanese now! But they have had a decade to start working things through and we are just starting - in fact we are still in denial!

  • Comment number 50.

    @ 31. At 09:52am on 26 Jan 2011, AnotherEngineer wrote:

    > surely the government is showing restraint

    Last time I checked, he was a bank boss. Is he in the cabinet now?

  • Comment number 51.

    Without being an economics guru it all seems so simple to me.

    MK couldn't keep inflation under control when he tried. It just rose.
    Now he says he's not going to try. So God help us.
    But if he's not going to try then he's admitting he's not doing his job.
    Don't people who admit to not doing their job get asked to find another?

  • Comment number 52.

    #40. Up2snuff wrote:

    "MK/SF: 'But, raising interest rates to prevent that leap in inflation would have squeezed living standards even more, by hurting growth. To think otherwise was a delusion: '
    ----------------------------------------------------------------------
    I just love to say 'I told you so'.

    The solution is fiscal.
    "

    But fiscal (or maroeconomic) policy does not work at Zero interest rates!!!! So rates must rise 'before' any other policy classes can start to work. We have worthless money and this must be redressed.

  • Comment number 53.

    14. At 08:51am on 26 Jan 2011, stillpuzzled wrote:

    "A slack day yesterday, in which I randomly came across this little gem.

    http://news.bbc.co.uk/onthisday/hi/dates/stories/november/19/newsid_3208000/3208396.stm"

    A lovely reminder that all Governments perpetually make the same mistakes as their predecessors. They are uneducated morons who can't possibly have a grasp of any common sense and who allow their ideology and beliefs to defy any logic or reason that's presented.

    What we have here folks is a classic 'backed ourselves into a corner' - the lies of politicians hadve led us to a situation where raising rates will doom us, but not raising them will also doom us. (and the people thought they were being led to a solution)

    In addition, I am surprised (and it's no criticism) how many people on this blog are surprised at the claim our wages have been declining.

    Our wages in the western world have been on the decline in REAL terms for longer than I've been alive. This was hidden as 'financial progress' was all supported by ever increasing debt issuance. We all felt richer - even though most of it was borrowed.

    In reality this has been coming for longer than most of us have been on this planet - and now it's PAYBACK.

    Generations of apathetic voters and generations of foolish and lying politicians are fully responsible.

    Want to know how serious this is? - well most 'media fads' - no matter how serious - usually don't make it beyond a year before we all get bored.
    The disaster which is our economy has been riding high in the headlines for nearly 4 years now - this is a clear sign of how serious it all is.

    I (optimistically) said we would be heading back to the 1970's - now I feel this was rather inaccurate and perhaps the 1920's is the better benchmark for this crisis.

  • Comment number 54.

    I read the reports of Mervyn's speech several times. Just to make sure I understood his reasoning.

    Regulations, plus the monetary policy of the past few years ensured that the UK Banks and the economy could not withstand any of the fallout from Lehman's and the financial crisis.

    I have absolutely no confidence that the present Governor - who has been in the job since 2003 and presided over us entering this debacle - can do anything to get us out of it.

    This is the Governor who caused the first run on a UK bank in over 100 years. Then spent hundreds of billions trying to clean up the mess. He's cut my disposable income by all but eliminating any income from my savings - and his deputy expects me to "spend" to aid the economic recovery. Now I'm to be squeezed. And Mervyn is still with us and the men in grey suits carry on as usual. Amazing. Truly amazing,

    And well said, JfH, Dempster, nautonier, Jacques and many others



  • Comment number 55.

    The King's Speech deserved no Oscar nominations on this occasion!

  • Comment number 56.

    'I sympathise completely with savers, and those who behaved prudently who now find themselves among the biggest losers from this crisis.'

    Thank you, Merv. Your sympathy will make a big difference to the decimated incomes of seventeen million savers these past twenty-two months, who collectively have lost an estimated £60 billion in unpaid interest.

    Some, at least, of this money would have gone straight into the high street this Christmas to buy gifts for children and grandchildren but, of course, you know best.

    Pity our stash of dosh is being hammered by inflation that rises relentlessly due to "temporary factors". I don`t understand how that can be, but then I`m not paid £300,000 a year to get it right, so my opinion isn`t really worth much.

    All I can see from my biased point of view is that savers have, and continue to be, punished for their prudence.


  • Comment number 57.

    So Mervyn has forgotten his micro-economics has he ? If demand is weak retailers and manufacturers will partially absorb their input price increases and raise their output prices by less than they otherwise would. By maintaining this absurd minimum interest rate policy he is maintaining demand at above its natural level, encouraging retailers and manufacturers to pass on in full, and often more than fully, input price increases and thereby promote inflation. This is surprising for someone who is also the governments banker - he is supposed to promote conditions of monetary stability not actively debase the currency.

  • Comment number 58.

    'King's Speech'. Is it a new title for an Oscar nominated film about a governor who overcomes the establishment to rebalance the economy?

  • Comment number 59.

    Monetarist controls (interest rates)are powerless to affect cost plus inflation sourced globally
    Merv and Co cannot reduce this inflation; all they would do by raising rates is to reduce the living standards in the UK even faster.
    It would also exacerbate the deficit problem as tax revenues would just fall further and faster

    The real question is are they brave enough (and sensible enough)to split high street from casino banking and to let a few, maybe lots, of the latter go to the wall and to properly regulate pay and lending in the former (I hope my pension is with the former !)

    We would not then need to keep borrowing more to further bale out the casino elements ,as they had to in Ireland, and this would restore trust in lending to otherwise sound governments

    As for the current bank bonuses ..so long as we get 50% (or more please)in tax revenues the bigger the better !It seems the only way the taxpayer can get a share of our money back from the pin strip gamble-aholics Are we getting it or is there a nice tax fiddle in place ?

    And As for deficit reduction and spending cuts..its politics !
    Someone (?) might just be spotted as a small government, alter the balance of public v private, tax rebates to the top earners, T party if they ever stop hiding behind, otherwise entirely managable, deficit smokescreens

  • Comment number 60.

    In response to Mervyn King's speech Norman Lamont was saying how irresponsible Trade Unions would be to start striking.

    The real crises will come when, having been effectively squeezed by an incomes policy for several years, the ordinary public will run out of patience and social unrest will ensue including more strikes.

    We are walking a tightrope in so many ways on the economy at the moment and I fear for social unrest over the next 2 years.

    This squeeze on standards of living last occurred in the 1970's - eventually ordinary people had just had enough. The same thing could happen again.

    Meanwhile the financial sector who lobbied for the political circumstances to help them have free reign have largely got off scot-free. They have benign conditions to make profits and reward themselves for the privilege of knowing they cannot fail.

    Having lived through the late 70's and 80's I genuinely fear for the next 2 years.

    http://bit.ly/exEiRS

    http://extranea.wordpress.com/

  • Comment number 61.

    #45 John wrote:

    '...it is very simple really, we have less money due to price rises in essentials...'

    John, we have less money because some have a lot more. How much did the chiefs of your industry raise their remuneration by over the last 6 years ? How much have top bankers increased their pay and bonuses by over the last 6 years ?

    You have less money because they have taken it off you, simple.

  • Comment number 62.

    31. At 09:52am on 26 Jan 2011, AnotherEngineer wrote:

    "surely the government is showing restraint"

    Surely you are wrong - just last weekend DC held a 'bankbench soiree' in Downing Street at the taxpayers expense. Simply to woo the rebellious right wing within his party.

    The only 'restraint' being used is the restraints which are holding down the truth in order to alter public perception. The Government are not facing austerity, nor are the banks - the only people facing it are the wealth creators, the labourforce, the providers.

    I know you're only trying to be objective - but please consider that most people have suffered through this crisis - before you choose to defend the bankers who haven't.

  • Comment number 63.

    You seem to have missed Stephanie that another member of the Monetary Policy Committee voted for an interest-rate rise last month as Martin Weale joined Andrew Sentance. This rather contradicts your view on the state of play at the Bank of England!
    As to the speech by the Governor there are various sections where he implicitly admits mistakes for example by suggesting that some debtors faced higher interest-rates as his policy has been to give them lower interest-rates.Also according to notayesmanseconomics he is trying to re-write history.
    "This is plain wrong as back in 2009 and 2010 he used his own forecasts of low inflation to justify his policy. His forecasts as usual turned out to be wrong. Also if we use his two-year time horizon Mr.King is telling us that back in 2009 he would have been undertaking Quantitative Easing and asset purchases even if he felt that inflation would be over target in 2011! This is a sign of a man who knows that things are going badly and feels that a smudge or two on the history books will help."

    http://notayesmanseconomics.wordpress.com

  • Comment number 64.

    I'm not a financial guru, I know next to nothing about money and the movement of money. My lesson learnt and solution to my personal bit of all this cruel greedy mess is simple: never borrow money ever, ever again. I'm busy right now paying down every last pound and pence I owe to anyone. I will never contribute to a bank's income again if I can help it. If I can't afford it out of my metaphorical back pocket, then I won't get it.

  • Comment number 65.

    We live in a country, where the financial tail wags the national dog.

    And according to our Central Bank governor, we are about to be given a right good wagging.

    Which to be fair to Mr King, should come as no surprise to us, seeing that we’ve been given a right good wagging for many years past.

    The only difference between now, and then, is the internet, the amount of information contained therein, and our access to it.

    But for this BBC website, and the people who post comments and links, I would be none the wiser than I was three years ago.

    Thank you one and all.

  • Comment number 66.

    37. At 10:08am on 26 Jan 2011, Kit Green wrote:

    "23. At 09:24am on 26 Jan 2011, watriler wrote:
    The chickens of poor economic management are coming home to roost as the manufacturing industry is already talking of skills shortages."

    I heard this on Radio 4 last night too - and what struck me is the manufacturer's view that staff are like stock - you take them on if they're pre-trained by public funding, and cast them assunder when they're not.

    I wonder how many manufacturers protested about the students fees of the cuts to the EMA grant? - not many I bet.
    However this is where the skill shortage will come from - lack of foresight and lack of solidarity.

    The manufacturing industry will only have itself to blame - it's stood by whilst education and training is dismantled - and it's said nothing.
    As with most businesses, manufacturers want their cake and to eat it - they don't want to pay taxation to contribute towards public services - but they're happy to take the 'ready made' workforce that's provided with that money - and complain when they're not there.

    I stress that this isn't all manufacturers - but as an industry, it's no different to any other. Just more people totally unaware of the 'invisible public services' we all benefit from.

    The path of self-centeredness is one of self destruction - and this example of skills shortages is a classic.

  • Comment number 67.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 68.

    Press release from the EU re - The adoption by the European Commission of the Annual Growth Survey (AGS) will mark the beginning of the first cycle of coordination of the Member States' macro-economic, budgetary and structural reform policies, known as the "European semester". This is a real step forward for European economic governance. From now on, every year the Commission will present its "Growth Survey" – an evaluation of the economic situation and of the main challenges the EU must address, and its recommendations to the Member States.

    The crisis could have a lasting effect on potential growth. Medium term potential growth for Europe is projected to remain low and estimated at around 1.5% up to 2020 if no structural action is taken namely to resolve the labour productivity gap with our main competitors. Given its cyclical nature, recovery alone cannot provide the impetus for leading Europe back to the pre-crisis economic situation and absorb the deficit accumulated. To avoid stagnation, unsustainable debt trends, accumulated imbalances and ensure its competitiveness, Europe needs to accelerate the consolidation of its public finances, the reform of its financial sector and to frontload structural reforms now.

    The AGS brings together the different actions which are essential to strengthen the recovery in the short-term, to keep pace with our main competitors and prepare the EU to move towards its Europe 2020 objectives. Given the urgency, the Commission has chosen to present 10 priority actions, as part of an integrated approach to recovery encompassing three main areas:

    The need for rigorous fiscal consolidation for enhancing macroeconomic stability;
    Labour market reforms for higher employment;
    Growth enhancing measures.
    A more detailed analysis underpinning the Commission's assessment is set out in 3 reports that accompany this Communication and include an assessment of the initial setting up of the Europe 2020 strategy at Member State level. The text below summarises the macro annex.

    The macro annex
    The macro-economic report aims at pinpointing measures that have the highest potential of delivering positive macro-economic effects and that the Member States should consider in their economic policy strategies they set up in 2011.

    Europe is going through particularly challenging times
    While the EU remains a wealthy area, its economic growth in the past decade has been weak by international standards, pointing to structural weaknesses in the EU before the crisis. In the good years preceding the crisis, several EU Member States deviated from the basic principles of prudent fiscal policy making, and macroeconomic imbalances continued to build up. The European economy is slowly emerging from the deepest recession in decades, which wiped out on average four years of growth. The crisis has taken a heavy toll on Europe's societies with a sharp rise in unemployment. The crisis had a dramatic impact on public finances, and led to a sharp drop in investment. Although all the Member States have been hit by the crisis, the situation differs significantly across the Union both in terms of the public finances situation and external competitiveness. This calls for tailor-made policies.

    Reining in public debt through a rigorous and durable fiscal consolidation
    Fiscal consolidation remains a key priority for all the Member States. An annual improvement in the structural budget balance of 0.5% of GDP - the conventional benchmark of the Stability and Growth Pact – would clearly be insufficient in many EU Member States to bring the debt to GDP ratio close to the Treaty-based threshold of 60% in the foreseeable future. Fiscal policy makers in the EU face a double challenge: putting fiscal policy back on a sustainable path, while protecting or supporting economic growth and employment. Successful fiscal consolidation will rest on five interrelated elements: the composition of fiscal adjustment, the credibility of the policy strategy, the institutional context, complementary policy initiatives and the burden sharing across society.

    Healing the financial sector swiftly to find the path to recovery
    Balance sheet repair in the banking sector is essential to improve cost efficiency, restore competitiveness, return to normal lending, which will pave the way to recovery. A swift exit from sizable public support to banks will remove possible distortions to competition in the financial industry. Confidence in the banking sector is a prerequisite for maintaining financial stability. The crisis exposed a gap in the EU regulatory framework for the banking sector and strengthened the case for action at EU level. A permanent "European Stability Mechanism" will be established by euro area Member States to safeguard the financial stability of the euro area as whole. Basel III rules imposing tougher capital requirements on banks will enhance macro-financial stability.

    Structural reforms to support growth and correct macroeconomic imbalances
    Structural reforms can serve two goals: enhancing growth, and preventing or correcting imbalances. In the absence of resolute policies, potential growth is likely to remain weak, at around 1½%, in the coming decade, compared with 1.8% in 2001-2010. Urgent actions are required both at national and EU level. Progress with structural reform can generate significant gains in terms of increasing growth and creating jobs. Correcting macro-economic imbalances is a key condition for growth and is particularly relevant for the euro area. For Member States with large current account deficits, weak competitiveness and weak adjustment capacity, large price and cost adjustments will be needed, alongside measures supporting the reallocation of labour across firms and sectors. In Member States with large current account surpluses, the sources of persistently weak domestic demand need to be identified.

  • Comment number 69.

    49. At 10:29am on 26 Jan 2011, John_from_Hendon

    john,

    I think it's slightly unfair to lump the blame all on Merv - I mean he's the closest thing we have to 'the financial truth' at the moment.

    I know they say the BoE is independent - but face facts, it's not, and never will be. If it were truly independent then rates would have risen already and to hell with depression - controlling inflation is the BoE's independent concern.

    As rates haven't risen, and don't look like rising soon - I would argue Merv is taking directions from another.

  • Comment number 70.

    55. At 10:33am on 26 Jan 2011, DebtJuggler wrote:

    "The King's Speech deserved no Oscar nominations on this occasion!"

    Such a good joke....your talents are wasted on this blog. I noticed Robert didn't use this as his headline - maybe he should consider employing you for that position?

  • Comment number 71.

    @1. At 07:57am on 26 Jan 2011, Dempster wrote:

    Thank you. It's a dilemma. BoE are relying on inflation falling back over the course of the second half of 2011. I disagree. I believe that we are in for ~2 years of above target inflation, 2011 and 2012. Although I have ridiculed the excuse of weather to justify recent food and energy price hikes (and anyone watching futures markets knows it had little to do with the weather), I believe from now on factors affecting supply e.g. constraints on harvesting, processing, distribution, will more substantially contribute to market behaviour. As the cost of credit rises in production-driven economies e.g. Brazil, China, India, Australia, and begins to restrict demand, some investors will be looking for gains in areas other than energy, metals or property. Food's good. Everyone must eat. There's no substitute. Let's 'corner the market' eh?

  • Comment number 72.

    @27 Jaques Cartier
    "First, we need to see the bankers being squeezed 'til the pips squeak. We are all in this together, supposedly. Once his own industry shows restraint, he might be entitled to preach to the rest of us."

    Fully agree.
    But let's not also forget that the FTSE 100 boardroom boys also enjoyed an increase in pay of 55% in 2010 while the rest of us were "all in this together" Oh, but I forget they need tax cuts now don't they?

  • Comment number 73.

    ...and here we have the 'Plan A' (because I think yesterday we established there is no Plan B)

    http://www.leftfootforward.org/2011/01/george-osborne-intellectual-leap-of-faith/

    So plan A is actually an untested theory of Ricardian equivalence - a theory so simplistic that the author himself (Ricardo) rejected it!

    ...and you thought George knew what he was doing? Does any chancellor know what they're doing?

    See the blind mice running up the stairs to the farmer wife...

  • Comment number 74.

    "38. At 10:11am on 26 Jan 2011, writingsonthewall wrote:
    5. At 08:30am on 26 Jan 2011, Oblivion wrote:

    I agree with your sentiments...but there is one little problem.

    "We have to face up to the facts: the endgame for any Western social model is already with us in the form of Japan. The only way out is for the public to buy state bonds, to save with the state, and for private debt to be converted to public debt. "

    The Japanese had savings, we only have debt - they could keep their Government afloat - we cannot unless we borrow privately to lend publicly.

    This is why the situation is far, far worse than Japan"

    Agreed - and not only that but Japan has a balance of payments surplus - so money is not being sucked out of their economy like it is here - every day.

    Also, Japan has a declining population so it's low GDP growth (what a deeply flawed measure it is) over the last couple of decades needs to be taken in that context compared with UK/USA which continue to have population growth - so there has been more 'real' growth in Japan than the headline figures suggest. Whatever way you look at it they are still better placed than the UK.

    In the end if we get out of this mess with a slow steady decline in living standards (but not necessarily in quality of life) then we will have done well. This mess has been a long time coming and can either correct in a long drawn out, but ultimately bearable, way or something much quicker and more unpleasent......


  • Comment number 75.

    64. At 11:12am on 26 Jan 2011, stormbrook wrote:
    "I'm busy right now paying down every last pound and pence I owe to anyone. I will never contribute to a bank's income again if I can help it."

    Unfortunately, the politicians will ensure that your contribution to our banking buddies is maintained through your tax payments.
    I think we need something a bit more radical.
    Extinction of private banks perhaps.

  • Comment number 76.

    @53. At 10:31am on 26 Jan 2011, writingsonthewall wrote:

    Real wages? I seem to recall reading a report commissioned by the Union movement about.....what.....20 or 25 years ago (?), detailing the gradual erosion of real wages since their peak in the late 60's/early 70's. We just gave it all away. It will be a fight to regain that lost ground. You mention the 1920's. I'm going back a tad further, say 1890's-ish.

  • Comment number 77.

    King is starting to lose it - I think he will be deposed soon, the fall guy once inflation gets out of control next year.

    Telling the masses to sit tight and see cost of living rise whilst not matched by pay rises is going to play out like the football manager lashing out at the fans for not getting behind the team when they can see it is the players and manager - there is only one end game. Lets hope he doesn't last much longer!

  • Comment number 78.

    #36 wotw

    "The whole nation's wealth is based on our valuation of property. If the valuation cannot be sustained through lack of credit then the bubble will truly burst for the UK."

    Yep. Capitalism tends to over-production, leading to periodic crises where valorisation fails and huge amounts of capital are destroyed. Capitalist apologists keep insisting that there is a Holy Grail of permanent sustainable growth which makes everyone richer as long as we allow the really rich to get the lions share. The latest wizard wheeze was to finance over-production through relentlessly increasing debt secured on asset values, mainly land and houses (where bankers tend to park their ill-gotten gains as someone commented recently). Personal debt levels currently are about a year's income: in other words we have already spent, on average, all our personal income until this time in 2012. And now the lenders want it back. Hmm...

    The asset bubble is the key to our present situation. Some time ago a group of villagers came to me for advice on buying their local pub and setting up a co-operative to run it. They imagined that they could run it as a business as easily as the present owner could. However, the magnificant detached building with a large car park was worth far more (approximately double)as apartments than it was as a pub, which indeed the owner had spotted. It is fair to say that when property is worth more as residential than as a (wealth-creating) business then the economy is seriously out of balance, yet this situation has got progressively worse over years.

    The Tories talk about re-balancing the economy but it is clear that to do so would require a capital tax on property and land. A 1% tax would raise some £50 billion per annum and be almost impossible to evade/avoid. Such taxes are common elsewhere, as rich people often find when they've bought that really cheap place in Normandy. It would also address the need for a fiscal element to economic management rather than the Tory obsession with lowering income taxes at the expense of the public realm. It would also go some way to convincing me that we really are "all in this together."

  • Comment number 79.

    67. At 11:15am on 26 Jan 2011, DebtJuggler

    Brilliant article - this is my favourite bit.

    "In a note to Mrs Clinton, Mr Susman said: “King expressed great concern about Conservative leaders’ lack of experience. [He] opined that party leader David Cameron and shadow chancellor George Osborne have not fully grasped the pressures they will face from different groups when attempting to cut spending.”

    ....now that's divine foresight - I mean now the cuts are here it's clear that the plastic Tories thought they could airbrush their way through these cuts and nobody would be too bothered.

    Oh how they underestimated the public, it's getting harder and harder to find anyone these days who isn't angry about the cuts impact on them - now that they are clearer and not some wishy washy conflabulation in some party's manifesto which nobody can actually understand.

    Fortunately people do understand "your A&E will be closing" and "You won't have a local library anymore" and "your job is in danger" and "your school will not be refurbished"

    Did the Government seriously believe they were going to get away with it? - I mean there's naeive, and then there is this failing attempt to defraud the nation.

    What the Government failed to account for (possibly because they're so out of touch) is that people care about hospitals, schools and other public services - much more than they care about the public debt.

    We're all de-sensitised to debt as most people are swimming (or drowning) in it - the Government were foolish to think the people haven't started to work out the alternatives to destroying public services.

    DEFAULT.

    I mean with so many people having IVA's and repossessions, do you really think they'll care if the country does the same?

  • Comment number 80.

    50. At 10:29am on 26 Jan 2011, Jacques Cartier wrote:
    @ 31. At 09:52am on 26 Jan 2011, AnotherEngineer wrote:

    > surely the government is showing restraint

    Last time I checked, he was a bank boss. Is he in the cabinet now?
    ===================
    I consider him to be a civil servant

  • Comment number 81.

    54. At 10:31am on 26 Jan 2011, The-itinerant-ex-pat wrote:
    I read the reports of Mervyn's speech several times. Just to make sure I understood his reasoning.

    Regulations, plus the monetary policy of the past few years ensured that the UK Banks and the economy could not withstand any of the fallout from Lehman's and the financial crisis.

    I have absolutely no confidence that the present Governor - who has been in the job since 2003 and presided over us entering this debacle - can do anything to get us out of it.

    This is the Governor who caused the first run on a UK bank in over 100 years.
    =================
    I thought that was Robert Peston

  • Comment number 82.

    The election was May 5th. It is now the end of January. Can anyone name one economical policy that the Coalition has announced to improve business in the UK?

    Just one?

  • Comment number 83.

    76. At 11:37am on 26 Jan 2011, Duxtungstu wrote:

    "You mention the 1920's. I'm going back a tad further, say 1890's-ish."

    I'll match your 1890's and I'll raise you 1873 and the 'Long Depression'

    "Economic problems in Europe prompted the failure of Jay Cooke & Company, the largest bank in the United States, which burst the post-Civil War speculative bubble. The Coinage Act of 1873 also contributed by immediately depressing the price of silver, which hurt North American mining interests. The deflation and wage cuts of the era led to labor turmoil, such as the Great Railroad Strike of 1877. In 1879, the United States returned to the gold standard with the Specie Payment Resumption Act. This is the longest period of economic contraction recognized by the NBER. The Long Depression is sometimes held to be the entire period from 1873–96."

    Sound familiar? - bank fails, wages cut, workers strike, Government tries to claim seperate recessions rather than one big depression.

  • Comment number 84.

    I know the cuts are not popular and it's great to have a go at the Tories some people are at their happiest in life when doing so (see it's not just about rampant consumerism making us all happy)- but what exactly would Brown/Balls in their rainbow coalition be doing right now that would make things better?

    For starters we would have a MUCH weaker £

    GBP/USD = 1.20

    GBP/EUR = 0.90 - yes a pound worth less than a euro

    How would that impact inflation and interest rates.

  • Comment number 85.

    The Irish debt clock now stands at €94,577,114,305 with a population of 4,450,446. That is a debt of over €21,000 for every man, woman and child. On top of this they have the highest rate of personal debt in the world. As they have not yet passed their finance bill so have not fully signed up to the bail out what will happen if they refuse the terms. Will it lead to a withdrawal by the ECB and IMF of backing / funds and by doing so will they breach their membership of the Euro for they cant meet their commitments to the Euro. Would this also then lead onto their membership of the EU beeing questioned.

    The situation is very similar in the other PIIGS along with a number of the newer members. This gives credence to the two tier economy of the EU and Euro zone with Germany in the driving seat. However there are questions being raised by members, ECB, IMF, WB Etc on the requirements for the Northern States to bail out those of the other members. The size of the fund required is growing day by day with terminology also changing from loan to grant. Something that will cause great disdain from the countries that will be bailing out what are seen as the countries who squandered and wasted while they built on their success. In Germany for example there is a swell of opposition as they feel that they have been supporting these nations through grants, programmes Etc through the good times and they have had enough and it will just be good money after bad.

    I heard a rumor that IMF officials have been in detailed talks along with ECB officials with both the Portuguese and Spanish finance departments. If there is any truth in this then a move may be afoot and we could see one if not too bail outs in the not too distant future.

  • Comment number 86.

    81. At 11:51am on 26 Jan 2011, AnotherEngineer wrote:
    54. At 10:31am on 26 Jan 2011, The-itinerant-ex-pat wrote:
    This is the Governor who caused the first run on a UK bank in over 100 years.
    =================
    I thought that was Robert Peston
    ====================

    No, it was Adam Applegarth
    Still he did well out of it all

  • Comment number 87.

    84. At 11:53am on 26 Jan 2011, StartAgain

    You're arguing in circles again - the lower value of the pound would stimulate export growth - and we could pretend we're going to get a 'export led recovery'.
    However as manufacturing only provides 1/8th of GDP then it's like a sweet shop doing a raoring trade in penny chews - but selling nothing else. It won't pay the rent for sure.

    It's not really about comparison - both (all) parties promote neo-liberal economics - and all parties are totally misguided. I put this down to the fact that politicians aren't clever people and economists are proper charlatans.

    With Labour I think we'd be closer to default by now - which may be seen as bad - but to be honest I think we'll end up defaulting anyway, the current 'blue policy' is just going to prolong the inevitable.

  • Comment number 88.

    Re 45. At 10:23am on 26 Jan 2011, John wrote:

    Amen.

  • Comment number 89.

    If you all think GDP is such a faulty/misleading conept why not press for something better?

    And can I humbly suggest that Britain and America cease our pantomime party political jousting and form an Anglo Saxon war cabinet to tackle our national debts before they destroy our civilisation.

    I notice Iceland has quietly walked away from her debts and is all the better for it.

    What we need to remember is that a lot of "our" debt was not self inflicted but imposed on us by the rich elite to whom we owe all this money.

    We have taken on their banks and toxic assets and borrowed money to fight wars for global capitalism...and cancelled third world debts etc......so why aren`t the moneylenders cancelling or reducing our national indebtedness?

  • Comment number 90.

    @75: In the UK yes. As soon as I'm free and clear I'll be off mate, taking my skillset, work ethic and taxable income elsewhere. Boycotting the banks is what I intend to do, and if the UK, as represented by the government of the day, is in with them, then I'll wave byebye to the lot, no skin off my nose

  • Comment number 91.

    68. At 11:18am on 26 Jan 2011, Chris London

    Thanks for that and who said the EU was slow at reacting? Whilst we have to wait until Sept to probably get our analysis/report/recommendations.

    I think MK like many in banking circles are underestimating Joe Public’s distain at the imbalance of the austerity measures, particular by putting the emphasis on the common Joe and not on the Banks but there again he would, wouldn’t he because he is one of them (lets not forget this).

    So we have had Barclays, RBS, and now BoE, one can expect HSBC to come out in the next week or so. Isn’t it interesting that Lloyds seem to be keeping their heads down or can we expect them after HSBC?

    Don’t just sack King! Upset all of them!

    P.S. This AGS isn’t made up of economist is it? Well it may just be their time to get the 1 in 5 predictions correct?

  • Comment number 92.

    Did i just hear inflation may go out to 5% but BOE needn't panic as it'll fall back, as no one will be spending by year end?

    Given our growth especially over last 10 years has already been fueled by individuals and businesses taking on debt - which is no longer an option and now compounded by falling house prices, general belt tightening, job losses, price rises because increased production costs and a projected rise in interest rates. It seems that unless wages increase there is no slack in the system!

    As wages have been fairly stagnant across many sectors for most workers and now confirmed as being in retreat for last 6 years, it seems that because we've been taking on personal debt against anticipated perpetual house price rises etc to supplement income, companies have been able to mask their true profitability - how many could afford a 10-20% rise in wage bills at the moment and survive?

    Added to this looking at the broader picture, with a growing global population (both physical and in terms of aspiration), dwindling resources, because of depletion and natural disaster, surely there will be greater competition for those resources, meaning costs for everything will rise further for both public and private consumption.

    Whilst some take comfort that we recovered from previous crashes, the difference then was that we were on the upward curve for energy finds and had a far smaller global population. Now we are on the downward carbon curve and have at least twice the global population! The carbon problem is best evidenced by the number of previously unviable wells and mines that are now re-opening as energy prices sky-rocket and how much deeper we are having to go to get oil such as with the recent BP oil-rig incident and the cost that such exploration costs. At one time it used to take in energy terms, one barrel of oil to extract 100, now that ratio is down to 1-5 or even 1-3 according to some sources. This of course impacts on all sectors and prices as all are reliant on energy.

    What are your thoughts on Jevons Paradox and energy efficiency?

    So are we being slightly mislead in the UK when commentators talk about 3 - 5 or even 10 year timeframes for 'recovery' when perhaps 20 - 30 years seems more likely, when set against the debt and global clamour for resources, especially as wages will inevitably be sat on as a way of maintaining British businesses being competitive in a global marketplace?

  • Comment number 93.

    ....it's about 30 seconds into PMQ's and Dave has already used the line....

    "due to the mess left by the previous Government"
    It seems the Tories are confused, by repeating it over and over again they think it will make it true!
    Seems that blaming the last Government isn't the view of the Governer of the BoE (who cites a world financial crisis)

    Please watch PMQ's - it seems Cameron is being exposed for his poor economic knowledge by what looks like (for the first time in years) - an OPPOSITION!

    Lets look at it from the 'simple Tory' point of view.

    You loose your job and you have a whopping great credit card bill- do you

    a) Scrape everything together, sell everything you own to pay off the credit card as soon as possible?
    b) Go look for a job to pay off the debts? - which may include using the credit card to get to interviews, buy a suit etc.

    The answer is obvious - but the Tories have gone for option a)

    They are far more stupid than even I give them credit for.

  • Comment number 94.

    The only way out of this is to destroy the debt, and default is the obvious way. Once the Irish vote in their new government it will be interesting to see if they take this option. It will certainly put the cat amongst the pigeons if they did.

  • Comment number 95.

    Fascinating attack on MK today, after the blog elite have got rid of him, I wonder what his successor will do?

    Exactly the same perhaps?

    I see 2 issues with low interest rates:

    1) real issues of savers, mortgage holders, and companies
    2) intellectual and economic issues

    In the case of 1), in the current market, the high street banks have determined what the real interest rates are, the BoE don't have any say, and can only raise the current rates we all pay. Although this will increase saver's income, I can't see that it will decrease costs. If my business loans go up, and I'm already running lean, my consumers will have to pay that cost, or I go out of business. Most of our inflation is due to external comodities, that UK rates won't affect. I really can't see how at this point, how raising rates will benefit anybody, as the banks control the money and what they give with one hand will take twice with the other.

    in the case of 2), while I can see some intellectual merit in some of the ideas, I can't see how they can be accomplished without wholesale collapse of the country. The nett result may be better, but will it worth the misery and death that will accompany it? Raising interest rates to say 5% over the next 12 months will make about 8 million people and their families bankcrupt, homeless and unemployed. If you can reconcile this to the populus, then please do so. I don't think you'll get very far.

    As always in the UK, we seem to need to make changes instantly, rather than slowly over decades, like for instance Germany does. Seems to work for them.

  • Comment number 96.

    #61 Bob Rocket
    "John, we have less money because some have a lot more. How much did the chiefs of your industry raise their remuneration by over the last 6 years ? How much have top bankers increased their pay and bonuses by over the last 6 years ?"

    #72 Ted French
    "But let's not also forget that the FTSE 100 boardroom boys also enjoyed an increase in pay of 55% in 2010 while the rest of us were "all in this together" Oh, but I forget they need tax cuts now don't they?"

    I was listening to someone from Suma wholefoods, a worker co-op that pays a single flat rate across the organisation, a rate which is above the median income for their area. When asked how thay can afford such 'high' wages he said "We can, so it might be better to ask captains of industry what they do with their money instead of paying it to the people who create the wealth."

    The rich are an unaffordable luxury...

  • Comment number 97.

    #57: I am not as convinced as you the King has forgotten economics. Whilst I am not particularly convinced by the argument he is raising and would prefer interest rates to be higher to reflect true cost of money (a point John_from_Hendon repeats regularly) I do recognise that raising interest rates now may hurtle the economy into headlong ruin.

    King's argument is roughly as follows:

    1. Interest rates only really effect domestic demand

    2. Inflation is not being driven by a surplus of domestic demand (at least at the moment)

    3. There has been and will continue to be real wage erosion which will reduce domestic demand further.

    Therefore, raising interest rates is not the right response.

    Whether this argument is correct really depends on whether you agree with the assumptions set out above

  • Comment number 98.

    62. At 11:07am on 26 Jan 2011, writingsonthewall wrote:
    31. At 09:52am on 26 Jan 2011, AnotherEngineer wrote:
    "surely the government is showing restraint"
    Surely you are wrong - just last weekend DC held a 'bankbench soiree' in Downing Street at the taxpayers expense. Simply to woo the rebellious right wing within his party.
    The only 'restraint' being used is the restraints which are holding down the truth in order to alter public perception. The Government are not facing austerity, nor are the banks - the only people facing it are the wealth creators, the labourforce, the providers.
    I know you're only trying to be objective - but please consider that most people have suffered through this crisis - before you choose to defend the bankers who haven't.
    ============
    The point of the original post was that Jacques Cartier had implied that Mervyn King was a banker whereas I consider him to be a civil servant. As often happens I was being too clever for my own good.
    And I consider that the government is being very restrained in its spending. I benefited greatly from the previous government's profligacy and my income has dropped by 30-40%, but still do not deserve sympathy.
    I was not aware that I was defending bankers although some of them have suffered e.g. Dick Fuld CEO of Lehman Brothers who has been said to have lost a billion dollars, being objective.

  • Comment number 99.

    #64 stormbrook
    "I'm busy right now paying down every last pound and pence I owe to anyone. I will never contribute to a bank's income again if I can help it. If I can't afford it out of my metaphorical back pocket, then I won't get it."

    #75 economics student
    "I think we need something a bit more radical.
    Extinction of private banks perhaps."

    I have a list of major purchases. I pay a monthly figure to the Credit Union. When I have repaid one loan I get a new one and get the next thing on the list. And no capitalist gets a penny...

  • Comment number 100.

    94 Well said Average Joe....we got into debt saving their skins by fighting their wars and bankrolling their fraudulent financial system and cancelling third world debt and giving foreign aid to oil the wheels of global capitalism....and all they do is overwhelm us with immigrants and asset strip/privatise our countries to the bone. STUFF `EM

    Let them pay for the wars that keep them rich and protected from Islamic terror....and why don`t we do a deal with Islam to keep out of their territory if they will cease hostilities against us?

 

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