WHEN WILL THE MPC GET SOMETHING RIGHT?

The government experiment with a so-called independent Policy Committee of the Bank of England has been a disaster, made worse by the way the Establishment has made it a matter principle to genuflect to its success at a time of unprecedented economic instabiliy, made worse by its actions.

Readers of this site will remember how strongly I urged them to cut rates year ago to avoid deep recession. They resolutely looked in the rear view mirrow at the inflation that had already created by low rates in 2005-6, and refused to see the damage they would do in 2008-9 with the high rates that would bring the private sector borrowing binge to a screaming halt. In the good times they ignored the asset bubble in property and private equity. Then as the bad times began they ignored the damage they were doing to the inflated asset prices.

Today they are once again looking backwards and getting it hopelessly wrong. They are ignoring the bond bubble and the government borrowing explosion. They assume the banks will stay broken by setting very low rates. They should beware. Rates should not be cut any more. Indeed, the last cut was a cut too far. We need more savings and loan repayments in this country to create stability. Savers need a reward for saving. Above all the MPC charged with watching inflation should understand the impact of the very large devaluation of sterling they have encouraged.

Imported goods will be 25% dearer in 2009 they were for much of 2008. The sharp slide in sterling was concentrated in the second half of 2008, and got worse as the year neared its end. These higher prices for importers will at some point have be passed on, meaning we buy fewer goods, more retailers go bust, and the price level will reflect the currency changes to some extent. With sterling this weak keeping rates elow Euroland and hinting they are going to fall to near zero is economic suicide. The MPC should be ashamed of itself to be so blase about this worrying development.

The government and Bank decided sometime ago they needed to cut our living standards by the interest rate and banking policies they followed. Now they have decided that much of the hit on our living standards will come from a huge fall in sterling, increasing the prices of the many items that we traditionally import, and limiting the favourable impact of falling commodity prices on the UK economy and incomes.

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20 Comments

  1. Blank Xavier
    Posted January 1, 2009 at 3:00 pm | Permalink

    I’ve been looking at getting a pair of gold (actual gold) rimless titantium frames.

    In Holland, 1950 euros.

    In the UK? 1400 pounds.

    Todays exchange rate? 1.03 pounds to 1 euro.

    Those frames are 1400 pounds right now in the UK because they are old stock, imported before the collapse of the pound and so priced as if the pound was worth what it used to be worth.

    When new stock comes in, the price of those frames will rise to 1950 euros, give or take.

    What’s true for those glasses is true for everything you buy where the retailer is buying from an importer who pays euros for what he imports.

  2. Blank Xavier
    Posted January 1, 2009 at 3:14 pm | Permalink

    Oh yes – in answer to the titular question;

    NEVER IN A MILLION YEARS!

    Centralized economic control D O E S N O T W O R K.

    North Korea is the extreme example. China used to be the same, but they went through a period of liberalization and now they’re vastly richer. What makes us think our attempts at centralized control are going to work any better, for them being our own or being on a smaller scale?

    The existance of central control is not to achieve optimal outcomes for those who are ruled; it is to permit those who rule to direct the economy towards their own goals.

    Doing so produces outcomes which are non-optimal for those who are ruled.

  3. mikestallard
    Posted January 1, 2009 at 3:14 pm | Permalink

    OK, so what has this got to do with the price of bacon?
    Well, we have a small amount of family savings invested with Nationwide (thank heavens). Today,my wife looked up from a letter from the bank and said that our return would be only 1.5% this year, whereas last year it was somewhere round 5%.
    This means, of course, that we lose our annual holiday. We have absolutely no intention of wasting our family savings on a spending binge either.
    I have a friend who works in advertising in London and whose family live in France, where they keep their yacht. We were on the dole together in 1992. Now he has no work after Easter. In contrast, my son is on a round the world trip financed out of his Far Eastern advertising agency.
    So much for the “global crisis”.
    The MPC is hitting us English at grass roots now.

    • ken from glos
      Posted January 1, 2009 at 5:56 pm | Permalink

      You are correct and I am in the same position, losing thousands on my savings. I live within my means and do not believe in credit.

      Yet they expect people like me to save the nation by buying goods.No chance. Time to sit tight and wait and see.

      • Adam-
        Posted January 1, 2009 at 11:56 pm | Permalink

        With all due respect, you should examine the risks associated with continuing to hold sterling. Confidence in the currency is absolutely on the floor and it might take only a small scare of some description to break the camerl’s back and spark a substantial increase in its velocity.

        If that happens, it could very quickly lead to a hyperinflationary spiral if the MPC fails to restore confidence pronto – or worse still – starts printing money to pay higher salaries in line with the higher prices.

        It’s very possible that it is just people like you “waiting and seeing” that is propping the currency up.

        Just something very sobering to consider.

        • mikestallard
          Posted January 2, 2009 at 5:09 pm | Permalink

          Thank you for that helpful comment. I discussed all this with my financial adviser (Nationwide). When push came to shove, I backed the dear old pound. I am hoping that the melt down will not happen, despite the best efforts of Mr (John Law) Brown.
          And I am English: I’ll go down with the ship, I think.

  4. APL
    Posted January 1, 2009 at 3:23 pm | Permalink

    JR: “Savers need a reward for saving.”

    A very welcome change of heart.

    Happy new year.

  5. Bill Quango mp
    Posted January 1, 2009 at 3:27 pm | Permalink

    Couldn’t agree more. this backwards looking committee has been a disaster. Why won’t they change something that is clearly faulty?

    There may be not so much a price increase in the shops, more like empty shelves. Restocking at unfavourable prices is very unattractive. Many retailers will try and muddle through with 2008’s paid for stock and that which was bought in summer 08 for 09 when the $ was high.
    A lousy summer left plenty of stock in the high street.
    It will be the terrible Jan/Feb footfall that panics the lenders into calling the administrators on the retailers.

  6. Johnny Norfolk
    Posted January 1, 2009 at 4:43 pm | Permalink

    It used to be called Communism, but that was all supposed to be the property of the community, but what we have now is the property of the Labour state.

  7. Acorn
    Posted January 1, 2009 at 5:12 pm | Permalink

    It appears the market is pricing the pound for a fall to zero interest rates by next spring. Either this is a cunning plan which I don’t understand or it is just incompetence; or, Usura Socialism that “whoops it on the people Teutonic style”. [Mel Brooks: Hitler Rap].

    Unfortunately, moving your economy from a manufacturing model; to a service model; to a financial model tends to bite you in the arse at times like these (ask Iceland). Large current account deficit; large consumer debt; large and getting larger government debt, is not going to get sorted anytime soon. The damage has already been done. Time to start opening bank accounts in foreign currencies and don’t be surprised if John Lewis starts accepting Euro notes.

    Did you hear the one about staff in our bit of the “worlds local bank” pricing flats in Hong Kong?

    As I have been cleaning out this computer today, I found this post which may be of interest to Redwoodians.

    http://www.financialsense.com/fsu/editorials/2007/0927.html

    It happens that the term “Usury” has cropped up again this week in its Latin form “Usura”at

    http://www.financialsense.com/fsu/editorials/quigley/2008/1231.html

    Happy new year to JR and fellow Redwoodians, may OUR star be in the ascendant in 2009, cos this country needs people like us to be up front and loud.

    • Robert
      Posted January 1, 2009 at 8:23 pm | Permalink

      Well said1

    • adam
      Posted January 2, 2009 at 12:44 pm | Permalink

      I agree, Acorn.
      People are anticipating zero 0% interest. There have been rumors for over a month now.

      • mikestallard
        Posted January 2, 2009 at 5:04 pm | Permalink

        Zero rate interest has two terrible results (as well as the obvious benefits).
        1. I am a saver. Why should I bother to save at all if I just sit there and watch my capital flushed away by inflation?
        2. Why shouldn’t I take my capital (a small amount actually), borrow a bit more (sorry, apply for a little leverage) and then take it to invest in a foreign bank which pays me a decent rate of interest? This clever ploy will flood capital out of the country just when we need it for investment in the future.

  8. Publius
    Posted January 1, 2009 at 5:56 pm | Permalink

    John,

    I’m not quite clear on one point. Do you think control of interest rates should be returned to the politicians, or do you just think the Bank of England should do it better?

    Reply: I don’t think in practise it has ever left the politicians. They interfere when they think they need to, as we saw with the concerted reductions organised between governments and central banks last year. I want a better Bank of England, with restored powers to sort out money policy and banking regulation as well as interest rates, within general political co-ordination of economic policy in the way it happen in the US.

  9. Matthew Reynolds
    Posted January 1, 2009 at 6:20 pm | Permalink

    Interest rates could be cut by 2% more to 1% during January 2009 and basic rate taxpayers should get a £1,000 cheque from April 2009. That would boost disposable incomes , help debt servicing and increase retail sales while tackling unemployment & GDP levels. This one off extra £22 billion stimulus coupled with the VAT reduction being axed and basic rate income tax being cut by 3p to 17p would get more money to those who need it the most. A further massive interest rate cut and £22 billion extra for taxpayers would get more money into the system.

    The public spending freeze I suggest could apply from 2010-11 onwards up until 2012-13 with a view to both cutting the budget deficit and making the reduction in basic rate tax permanent while avoiding higher NI & increases for top rate payers. Age Related Allowances could be axed and replaced with a flat rate basic personal allowance for taxpayers aged over 60 of say £15,000 p/a and basic rate tax on incomes on savings & dividends/shares can be ended. Child tax credits can be ended and families with at least one child aged 0-18 paying income tax at only the basic rate get a credit worth £300 per child rising to £600 per child if the parents are married & living together.

    The middle classes & people on low incomes would gain hugely from this package and it would help the economy by dismantling the high taxes & bloated state sector which caused this malaise. The changes to age related allowances , tax on share & savings income and child tax credits can kick in from 2012-13 once the budget deficit is lower & Gordon Brown’s tax rises have been stopped while the basic rate tax cut has been made permanent.

  10. Mark Wadsworth
    Posted January 1, 2009 at 6:32 pm | Permalink

    In reply to the question, “Seldom, and then only by accident”.

    There is no more reason for having a politically appointed committee to set interest rates any more than there is to have one to set exchange rates, minimum wages, tarrifs, quotas or anything else.

    The least-bad solution to most things is to let the market set interest rates, which, even within the UK fluctuate between rates on government bonds (inflation plus 1%) to interest rates on credit cards (20% plus).

    I personally have no idea whether a free market interest rate would be lower or higher than what the MPC says, and neither does any other individual.

  11. David B
    Posted January 1, 2009 at 9:08 pm | Permalink

    There’s a huge hit coming in January too. The self assessed tax bill will drain the coffers of those with a liability. Since the bills are related to taxable income prior to April ’08, and thus before the crash, they will fall as a particularly heavy burden this time around.

    I suspect that come February there will be no market for anything, because Baldrick Brown will have taken any money we have left.

    I also tend to think the correspondent above who predicts destocking of european goods may not be far off the mark. I have thought the quality of soft fruit particularly poor these past few months, but I can see how a seller of not particularly fast moving goods might try to keep stock down in the hope that the pound recovers later this or early next year ( when Mr Cameron inherits the mess? ).

    Roll on that election…

  12. Tapestry
    Posted January 2, 2009 at 12:28 am | Permalink

    According to any standard of common sense they are failing. But there is method in their madness. Brown’s strategy is to slide Sterling into the Euro. The rate will be near to 1:1 and the fall in the GBP to the floor is a necessary part of the process.

    The threats to cut interest rates to zero are part of the political programme. Economics has always been irrelevant to Brown except for its political implications. John Redwood does not see what is going on, as he cannot believe that such stupidity could ever exist. But Brown has demonstrated the extremity of his destructive nature for over 10 years now.

    Believe your eyes, John. Brown’s trail of destruction has hardly begun. Sterling is his next target.

  13. rugfish
    Posted January 2, 2009 at 6:20 am | Permalink

    “The government and Bank decided sometime ago they needed to cut our living standards by the interest rate and banking policies they followed”.

    Then it’s time to change the government and be straight with people about the fact our living standards are materially false as they are based on debt.
    Banks should be merged or nationalised and profits returned to the people in lower taxes, so it is the living standard of the rich, rather than the poor masses, which is “cut”.

    Now they have decided that much of the hit on our living standards will come from a huge fall in sterling, increasing the prices of the many items that we traditionally import, and limiting the favourable impact of falling commodity prices on the UK economy and incomes.

    Then it’s time we started buying British goods and making British goods and selling British goods around the world with our new cheap currency, as China and India tried to do before we went flying into a recession as a result of not doing those things and instead relying on illusionary growth made on the back of debt.

    We need to say bye bye to the old world and hello to the new, and stop thinking that our lives revolve around decisions made by The Bank of England. We actually need “POLITICIANS” to make decision not bankers.

  14. Mike Gill
    Posted January 2, 2009 at 6:52 pm | Permalink

    Imported goods becoming more expensive due to the weaker pound is not necessarily bad news for retailers. Their turnover will increase for a given volume of sales, and margins should improve. Assuming that our new age of austerity means that consumers are buying only what they really need anyway, they will have to purchase irrespective of price rises

    The culture if discounting is suicide, a panic measure to shift excess stock. It destroys the perception of the value of goods, and presumably will come to an end when stock is cleared and retail capacity has reduced to meet reduced demand. Once it is realised that inflation is back in the system, consumers will want to get what they really need as early as possible. This will apply very strongly to imported cars, where manufacturers costs are going to rise because of reduced economy of scale and emergency measures taken to survive the intense downturn.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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