The Bank of England is wrong again

 

                  Yesterday I agreed with much of the Governor’s analysis in his speech. He was right to stress that the high inflation we are experiencing has come from increases in the prices we have to pay for commodities and energy, all imported. He is right, as I have been pointing out, that the big squeeze so far has been not on the public sector but on living standards, as prices have risen faster than wages. He is right, at last, to recognise that inflation will get worse before it gets better, and right to warn living standards will have another bad year. He is right to support cutting the deficit as a necessary part of recovery.

                    Where he and the Monetary Policy Committee are wrong is to say there is nothing they can do about this imported inflation. They fail to ask themselves why Germany and the US do not have an inflation problem, when they too have to buy energy and commodities on world markets. The UK is different for one very simple reason – the Uk has had a bigger devaluation.

                      Let’s take a simple case. The price of oil is around $90 a barrel. That is well up from the lows of 2009, but well down from the high of 2008 of over $140. If we  were  still at $2 to the £1, a barrel would cost us £45. Instead, at around $1.5 to the £1 , a barrel of oil costs us £60. A 25% devaluation against a fairly weak dollar costs us an extra 33% on the price of a barrel of oil.

                       Yesterday’s speech by the Governor led directly to a 2 cent fall in the value of the pound, or a fall of 1.25%. That means more inflation on all those imports as we pay the price. The reason the pound fell was the markets realised that on the back of the Governor’s speech there would be no early increase in interest rates.

                         If we devalue more we will make ourselves poorer. We need to curb inflation and end devaluation. At the same time we do need a growth strategy, which incldues regulating the banks in a way which allows or makes them contribute to recovery by sensible lending for needed projects. That is why I have long advocated that the Bank needs to regulate banks as well as interest rates and money, so it can have a policy which both promotes growth and curbs inflation.  Briefing that a higher official short term rate stops the recovery is silly. Anyone in the private sector could tell the Bank that the official rate has little impact on lending rates which are much higher, though it does help penalise savers.

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56 Comments

  1. lifelogic
    Posted January 26, 2011 at 8:05 am | Permalink

    It is not imported inflation over which we have no control it is simple and deliberate devaluation of the currency as you say.

  2. APL
    Posted January 26, 2011 at 8:07 am | Permalink

    JR: “We need to curb inflation and end devaluation.”

    Inflation and devaluation have two distinct causes. Inflation is a policy tool of government that allows it to borrow money and pay it back in devalued £ the government whinges about inflation, but in fact fosters it for its own purposes.

    Devaluation in our present circumstance is the response of the market to the policy of the government to do nothing about government spending. We could have a counter devaluation policy tomorrow if the government started to ACT on government spending.

    JR: “which includes regulating the banks in a way”

    The correct way to regulate the banks is with the fear and example of bankruptcy, the government won’t do that and has bailed them out. The low interest rate policy is another ‘backdoor’ subsidy to the banks. Try getting a loan at 1%

    This policy also contributes to devaluation.

    • Simon
      Posted January 26, 2011 at 9:50 am | Permalink

      You are right about backdoor subsidies for the banks , they key word in your penultimate sentence being “another” .

      Think everyone realises that the banks have been rebuilt entirely by socialising the losses and not at all by legitimate profits on banking activities .

      Even politicians have stopped making the ludicrous claim that sales of the banks will make a “profit” for the taxpayer .

    • Barry
      Posted January 26, 2011 at 5:46 pm | Permalink

      Banks could go bankrupt, bankers live up to their responsibilities and bonuses be awarded on merit if we go back to the good old days of Merchant Banks. But then in the good old days we had all sorts of things that will be difficult to go back to including industry.
      In spite of this, our national strategy appears to be for industry to rapidly regenerate itself whilst banks go on in the same old way (and fail in the same old way)

  3. Gary
    Posted January 26, 2011 at 8:09 am | Permalink

    the banks will never lend to private businesses as long as they can sell bonds to the govt and receive free money from the central bank, with which they can speculate in the commodities market. This system is only for the benefit of the bankers and profligate govt. It is a system of theft for elite insiders.

    • libertarian
      Posted January 26, 2011 at 3:22 pm | Permalink

      Gary,

      Commercial/retail banks loan money to businesses.

      Bond trading is done by investment banks, whilst there are some institutions that do both there are an awful lot who don’t!

      • Javelin
        Posted January 26, 2011 at 6:28 pm | Permalink

        That’s not true. The large UK banks (and I’ve worked for RBS, HSBC and Barclays investment banks) allocate funds and new investments to different subsidiaries (within the regulatory constraints) where they perceive the highest return/risk rewards. For example look at HSBC strategy to expand in Asia and the high end UK mortgage market 2 years ago rather than small businesses.

  4. Gary
    Posted January 26, 2011 at 8:15 am | Permalink

    “sell bonds to the govt” should read “sell govt bonds”

  5. lifelogic
    Posted January 26, 2011 at 8:42 am | Permalink

    The banks need to be regulated in a way that encourages them to lend to sound businesses.

  6. Geoff not Hoon
    Posted January 26, 2011 at 8:56 am | Permalink

    Mr. Redwood, I wish I could share your view on inflation coming down at some point in the future. I have felt for a long time that the factors driving it to where it is now will continue to affect it negatively for the foreseeable future. As you say an increase in interest rates might be the point inflation changes but given the coalition policy on letting inflation take care of so many things I do not see any real changes in interest rates for a very long time yet. We can live in hope or maybe join the GMB after listening to their leader on Radio4 this morning!!!

    • Sally C.
      Posted January 26, 2011 at 9:54 am | Permalink

      What did he say? I am genuinely interested. I am beginning to think that the only way to get the B of E to raise to interest rates is for the public sector unions to strike for higher pay in order to keep up with inflation.

      • Geoff not Hoon
        Posted January 26, 2011 at 1:23 pm | Permalink

        Sally C. In a nutshell his members do not intend to sit around watching the fat cat bankers take bonus’s that both the PM and Chancellor said they would halt and CEO’s whose earnings are rising way above inflation whilst redundancies, pay freeze or below inflation increases are given to those in work. He left the listener in no doubt as to what his union might do.

        • StevenL
          Posted January 27, 2011 at 2:30 am | Permalink

          Loads of trade unionists do want to have big strikes and demos, but:

          a) Most people won’t notice much bad happen if they do
          b) A critical mass of their members are 50+ sitting pretty and don’t really care that much about 4% inflation
          c) They want to strike ‘against the cuts’ not about payscales
          d) Only 50% of council workers are in unions, even if the unions do strike, people who don’t want to lose the cash can often just opt to ‘work from home’ for the day(s)
          e) There will be no will even among hardcore unionists to strike for any length of time
          f) They have little public sympathy
          g) It’s 2011, not 1972/74/78, and the world has moved on

          • Michael Corby
            Posted January 27, 2011 at 11:40 pm | Permalink

            Very good point.

            The days of the big unions in key industries holding the country to ransom have gone. Who would notice now if the miners went on strike, or the steel workers. The union hold over the motor industry has been broken by the demise of British Leyland; the rise of Japanese manufacturing, and the globalization and competitiveness of the industry. The rial unions can cause inconvenience but not problems on the same scale as in the 1970s. The competition and new technology in telecomms mean that it’s engineering union is a spent force (in the 1970s and ’80s switching was done by a labour intensive electromechanical system).

            Moreover, many

  7. Brian Tomkinson
    Posted January 26, 2011 at 8:57 am | Permalink

    If the BoE wants to inflate away the national debt why should we expect King and the MPC take any action to control inflation? The fact that that it is their responsibility to keep CPI at 2% seems to be of no concern to them. Is it not the case that since the government transferred the liability for most of all the toxic bank debts to the taxpayer it will take years and years for those potential losses to be paid for by the people of Britain?

    • Gary
      Posted January 26, 2011 at 11:41 am | Permalink

      It is now official that the debt incurred by the govt(ie we the people) for the banks is an eye-watering £1.3trillion, an amount that will never be paid back in 2008 pounds and probably never in any year’s pounds. And still they try to justify their bonuses.

      • libertarian
        Posted January 26, 2011 at 3:24 pm | Permalink

        @Gary

        Are there no assets associated with this then?

  8. lifelogic
    Posted January 26, 2011 at 9:10 am | Permalink

    In view of all the fuss on the BBC over some sports commentator’s sexist remarks can we assume they will be stopping radio 4’s Woman’s Hour. After all they spend much of the programme discussing how men are so much worse at: multitasking, finding things, communication, asking directions, cleanliness, showing their emotional side and much worse.

    I do hope not as it is always so amusing to listening to them rabbiting on.

    • waramess
      Posted January 26, 2011 at 3:18 pm | Permalink

      Pretty sexist I wuld say and I’m suprised that some Harriet or another has not petitioned for it to be closed down

      • Iain Gill
        Posted January 27, 2011 at 8:10 am | Permalink

        yes we have a very lop sided version of equality in this country

        equality only where it is fashionable

        elsewhere large sections of the population discriminated against without any comment from the chattering classes

        and tolerance of open discrimination when said by folk of one background but outrage when it comes from folk of another

        it wont last the anti regional accent, anti working class accent, anti white male, and so on abuse so common in the media will be seen for what it is eventually

        at some point we really have got to go back to trying to be a meritocracy otherwise we stand no chance paying our way in the world

  9. alan jutson
    Posted January 26, 2011 at 9:10 am | Permalink

    Notice that the Governor did not say much about “quantative easing”.

    Does this past action not feature in his calculations, has he just a short memory, or is he unwilling to say he had orders to it under instruction from the last Government.

    Almost everyone knows that printing money devalues its value, and given that we now import much of the basic stuff of life, including now more and more food from abroad, does this not ring any bells.

    Seems like the savers and live within their means people (doing the right thing to coin a phrase) are going to be screwed for a long time yet, whilst the feckless can survive a little longer.

    Listened to George O yesterday whilst circumnavigating the M25, his answers to interview questions, absolutely pathetic.
    He wants to stop looking at historic figures, and phantom forecasts and prepared documents by other desk jocky’s, get off his backside, and talk to some real (not selected) self employed people and small businessmen, to find out what is actually happening in the real World.
    But then would he know what questions to ask, has he ever run anything on a commercial scale, had to purchase competitively, had to search and win over customers !!!!!
    In fact have any of the cabinet, or shadow cabinet come to that ?

    John, people are getting frustrated, very frustrated.

  10. Andrew Duffin
    Posted January 26, 2011 at 9:24 am | Permalink

    I am puzzled as to why anyone is puzzled about inflation roaring away. Economists are reported as being “atonished and alarmed” by the jump this week.

    Why? If you create vast quantities of something (paper money in this case) which has no intrinsic value, naturally its price will fall.

    In what way is this a surprise?

  11. Rodney Dawkins
    Posted January 26, 2011 at 9:30 am | Permalink

    I share your view. It seems that people want to keep their over-inflated property valuations. I don’t believe that devaluing the currency is an essential spur to exports, perhaps it is more like selling ourselves short. A weakened currency makes companies like Cadbury’s easier prey, and as you say, we pay more for industry essentials like fuel. I thought there was a pre-election desire to restore the Bank of England to political responsibility and to dissolve the toothless FSA?

  12. Iain Gill
    Posted January 26, 2011 at 9:37 am | Permalink

    well said john

    absolutely correct everything you say

    the Govenors fake sympathy for savers was very sad to watch

  13. Sally C.
    Posted January 26, 2011 at 9:42 am | Permalink

    I notice that no-one at that event in Newcastle last night was allowed to ask the Governor any questions. I was amazed that no-one threw any rotten tomatoes at him. You really have to question his intelligence. He started off by telling us that Ireland’s problems, Greece’s problems and Portugal’s problems were all different -he obviously could not see that the reason for all of their problems is the same – namely that they all joined the Euro and, from 1999,were suddenly able to borrow at much lower interest rates than ever before in their history, and that this in turn led them to take on too much debt at every level of society – sovereign, bank, corporate and personal – human greed in action. Another crucial piece of information that he gave us was that ‘ the indebtedness of the UK financial system doubled, from 3½ times GDP in 1998 – already high by international standards ‘ according to the Governor, and at which point you might have thought that the B of E would have raised interest rates in order to take the punch bowl away from the banks and building societies ‘ to over 7 times GDP in 2008 .’ In fact, the B of E cut interest rates from 1998 to the end of 2004, and this cheap money was the fuel for the increased lending by the banks to the housing sector. Yet, he and the MPC cannot not understand how this happened!!
    He talked throughout his speech as though our emergency level of Base Rate at .5% was normal. In all of the Bank of England’s history, we have never before had interest rates this low and the consequences will be disastrous. I am particularly angry that he is deliberately leading individuals and companies to take on far more debt than they can really cope with.
    Then again, why should I worry. The last government, in the Enterprise Act of 2002, made it so easy to escape from bankruptcy that we may as well all go out and borrow stupid amounts of money, only to renege on our debts , declare bankruptcy, wait one year to be discharged and then do it all over again.
    Mervyn King should be fired immediately. Our patience with this man and his colleagues, with the possible exception of Andrew Sentence, is nothing short of astounding.
    I am sorry to say this JR, but I do feel as though I am talking to a brick wall.

    • norman
      Posted January 26, 2011 at 11:52 am | Permalink

      If you feel you are talking to a brick wall spare a thought for poor John Redwood. Day after day (how does he do it by the way, I’m sure I’d falter after a month) he puts up cogent arguments for growth, improving industry, improving government and what are the results of 9 months of a putatively right of centre government?

      They are comfortably out-spending, out-borrowing and, shockingly, out-taxing the Brown goverment – all we need are for a few Cabinet voices (and I’m not talking about Lib Dems here but the usual suspects) to start calling for a return of printing money and they will have continued Brown’s economic policies one hundred percent.

      It’s a pity Lord Mandleson has moved into banking, he would have been welcomed with open arms by the current government. That Alistair Campbell was a fine press officer too, pity he is so inflexible and has such an old fashioned view of the Conservative Party or there would be a place for him too.

      • Geoff not Hoon
        Posted January 26, 2011 at 1:33 pm | Permalink

        Norman, “how does he do it by the way” it isnt in the public domain (yet) but there two, maybe even three, John Redwood’s which allows him (them) to keep up such a high workload. More’s the pity there arent even more of them and we might see sense prevail.

    • Denis Cooper
      Posted January 26, 2011 at 1:20 pm | Permalink

      But under the Bank of England Act 1998 the remit of the MPC was and is narrow:

      “11 Objectives.

      In relation to monetary policy, the objectives of the Bank of England shall be –

      (a) to maintain price stability, and

      (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”

      “12 Specification of matters relevant to objectives.

      (1) The Treasury may by notice in writing to the Bank specify for the purposes of section 11 –

      (a) what price stability is to be taken to consist of, or

      (b) what the economic policy of Her Majesty’s Government is to be taken to be …”

      Having been given a price stability target by the Chancellor, first RPI-X = 2.5% and then CPI = 2.0%, considerations such as the indebtness of the financial sector or the rapid rise in house prices could only be second or third order influences on the MPC’s interest rate decisions.

  14. waramess
    Posted January 26, 2011 at 9:52 am | Permalink

    You hit the nail on the head. The Bank of England may very shortly have one of their policy blunders sorted out by the markets. Higher interest rates will start the recovery of the economy and the irritating part of it all is that our politicians and Keynesian economists will claim credit. No matter, what is important is that we see a recovery.

    On the other hand the banks have found something better to do than boring old banking with its asset risks so we should not blame the banks. Blame the politicians who are giving the banks better things to do and saving them from their folly when it goes wrong and have reduced interest rates to a point where no sane person would have confidence in the price of UK assets.

    This is the fault of the Bank of England who have permitted the banks to consolidate away all forms of competition over the years to the point where politicians now think they have no option but to bail the banks out.

    We are indeed led by donkeys

  15. Blue Eyes
    Posted January 26, 2011 at 9:58 am | Permalink

    Devaluing is also helping our only growth industry – manufacturing. Inflation and devaluation is cutting the cost of British labour relative to German and US costs. This is necessary because during the bubble we priced ourselves out of international markets.

    The government has a massive problem but it’s nothing to do with monetary policy, it’s about cutting regulation and red tape and barriers to new start-ups. Why is not the “Conservative-led coalition” pushing a more pro-business, pro-enterprise strategy instead of engaging in the ridiculous zero-sum-game debate about how quickly the budget deficit should be reduced?

    • Electro-Kevin
      Posted January 27, 2011 at 5:58 pm | Permalink

      I’m not convinced, Blue.

      As we produce few raw materials most of our exports are created using supplies bought from abroad at inflated prices. So which element of those exports is cheaper because of a devalued pound ? I’d say the labour content.

      If you’re saying that the only way for us to repay our debts is for us to get poorer and work for less then I agree with you.

      Inflation is one way for the government to make us take pay cuts.

  16. Steve Cox
    Posted January 26, 2011 at 11:19 am | Permalink

    Mervyn King’s speech in Newcastle was reported in the Telegraph this morning:

    http://www.telegraph.co.uk/finance/economics/8282109/MPC-more-concerned-with-inflation-than-GDP-fall-says-Bank-of-England-Governor-Mervyn-King.html

    The title to the article is disingenuous as it is clear that Mr. King is not in truth much concerned about inflation or else he would not be spouting such sophistry. For example, this snippet is clearly nonsense:

    …he said that there was 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”.

    You know as well as I do that a rise in interest rates last year would have boosted the pound and made imports cheaper, reducing inflation. So Mervyn King comes across as some sort of yokel as far as his knowledge of economics goes, and yet we know that he is not. So where is (this line-ed) coming from? Since when was it acceptable for a highly paid public servant to (explain away his approach to inflation-ed) to us time after time after time, with no come back from his political masters? The inescapable conclusion is that he is making himself out to be an incompetent because he (and also presumably the “independent” MPC) have been instructed by Mr. Osborne that growth is the real target, forget about inflation. This would also explain Mr. Osborne’s recent inane comments about fully supporting the BoE’s efforts to control inflation (um, what efforts, George?). Why doesn’t Mr. Osborne have the guts and the decency to come out of the closet and admit the policy change to us? Because, of course, gilt yields would soar as a result, but that is going to happen as a result of the BoE’s abject and disgraceful failure to even start to try and get to grips with rampant inflation. All that Mr. Osborne is doing by his (word left out) behaviour is to delay the inevitable while the markets continue to give him and Mr. King the benefit of the inflationary doubt. We savers who voted Conservative are likely to have longer memories than the markets, however, and Messrs. Osborne and Cameron would do well to remember that.

    • waramess
      Posted January 26, 2011 at 3:37 pm | Permalink

      A pity nobody has opened a book on the chances of Osborne growing his way out of trouble. Not many ways of making easy money these days

      • StevenL
        Posted January 27, 2011 at 2:38 am | Permalink

        There’s all manner of ways to bet against Osborne and the OBR’s assumptions, not that I’m suggesting you should.

        Personally I think the dead cat bounce is over and the great house price crash will resume.

  17. David John Wilson
    Posted January 26, 2011 at 12:33 pm | Permalink

    It is all very well knocking the effects of interest rates and BofE policies when what we need to see are some more positive actions by the government to increase exports and decrease imports. There are dozens of examples every week where opportunities for positive action are passed by. These vary from major issues like a fishing policy which allows discarding of dead but consumable fish to failure to support actions which would replace milk imports. There is need as soon as possible to reduce employers national insurance contributions which are effectively a tax on exports and on employment. As a first step removing or reducing it for those age groups where unemployment is greatest would be a huge step forward.

  18. Denis Cooper
    Posted January 26, 2011 at 1:05 pm | Permalink

    JR, may I draw your attention to Section 19 of the Bank of England Act 1998, which I reproduce below.

    Under this Section on the Treasury’s reserve powers Osborne could ask Parliament to agree to a temporary suspension of the normal system whereby the Bank’s MPC has independent operational control of monetary policy under Section 11, effectively taking control of monetary policy back into his own hands.

    I suggest that this might be the correct course of action not because I believe that the MPC lacks the competence to perform the task assigned to it through Section 11, but because I believe that under the present economic conditions the faithful performance of that task is impossible without creating a real risk of renewed economic recession and therefore a ballooning government budget deficit leading to unsustainable borrowing requirements and finally state bankruptcy.

    In my view, if there’s going to be a political decision that for the time being economic recovery must take priority over the control of inflation, directly contrary to the statutory duty imposed on the MPC through Section 11, then that decision should be taken overtly and legally by a politician, the Chancellor, not taken covertly and unlawfully by the MPC under covert and unlawful pressure from the Chancellor.

    http://www.legislation.gov.uk/ukpga/1998/11/part/II/crossheading/treasurys-reserve-powers

    “Treasury’s reserve powers”

    “19 Reserve powers.

    (1) The Treasury, after consultation with the Governor of the Bank, may by order give the Bank directions with respect to monetary policy if they are satisfied that the directions are required in the public interest and by extreme economic circumstances.

    (2) An order under this section may include such consequential modifications of the provisions of this Part relating to the Monetary Policy Committee as the Treasury think fit.

    (3) A statutory instrument containing an order under this section shall be laid before Parliament after being made.

    (4) Unless an order under this section is approved by resolution of each House of Parliament before the end of the period of 28 days beginning with the day on which it is made, it shall cease to have effect at the end of that period.

    (5) In reckoning the period of 28 days for the purposes of subsection (4), no account shall be taken of any time during which Parliament is dissolved or prorogued or during which either House is adjourned for more than 4 days.

    (6) An order under this section which does not cease to have effect before the end of the period of 3 months beginning with the day on which it is made shall cease to have effect at the end of that period.

    (7) While an order under this section has effect, section 11 shall not have effect.”

  19. BobE
    Posted January 26, 2011 at 2:47 pm | Permalink

    Why does nobody with any power seem to have any common sense? Or is it just a matter of time serving until the pension kicks in?.
    Bob

  20. stred
    Posted January 26, 2011 at 3:36 pm | Permalink

    HMG may be quietly using inflation to erode debt, but how much debt is inflation linked? The details of PFI contracts obtained by the Telegraph yesterday did not disclose this.

    This ‘off balance sheet’ disaster is avoided by Conservative and Labour politicians, as the former invented it and the latter turned it into an industry. Even this week there was a bright boy from the Ministry telling us that private investors could pay for remedial teaching for children reaching school unable to speak or think properly. This was an investment with a guaranteed return because it saved money later putting them in prison etc… There is no money to pay for it now, so putting it ‘off balance sheet’ was the answer again.

    If they keep this idea up we can always have today what we would normally have to save and pay for. John Prescott extolled the virtues of PFI at the Labour conference about 7 years ago and how they cheered. Now we may be paying taxes for it five times over. Whether the money is borrowed inflation- linked or not will be very important, but do the civil servants care or understand?

  21. Mark Parker
    Posted January 26, 2011 at 5:08 pm | Permalink

    I recently wrote to Mervyn King and among other points drew his attention to the fact that inflation in France is 1.6%, Germany 1.5%, USA 1.1%, Switzerland 0.5% and Japan 0.1% and asked him why he couldn’t manage anything close to what they manage.

    So far I have no reply.

  22. Bernard Otway
    Posted January 26, 2011 at 5:33 pm | Permalink

    No Stred they don,t care their futures are secure at our expense,as I said in another comment the entire public service including Quangos and everything ,is INFESTED with a certain kind of mindset all it took was 13 years of internal political pressure,and employing the kind of people who could be brainwashed,until a govt ie not leftwing Terrorises these people we are stuffed.JR talks utter sense and should be PM,unfortunately he is not, any of his ilk a …ting
    against thunder.John if you really wanted to drop a bombshell much more than Uncle Vince threatened,JOIN UKIP ie cross the floor or if not do a gang of four except that I think it could be a Gang of at least 30 maybe more,you would have much more sway than the cleggites.
    I am waiting for a tipping point moment like that and believe it will happen,the Republican
    responder to Obama,s state of union used the phrase Tipping Point yesterday.If it happens soon it will be much gentler than if it happens later I see (massive protests-ed).

    reply: A former Conservative MP joined UKIP and crossed the floor in the last Parliament, but no good came of it.

  23. Electro-Kevin
    Posted January 26, 2011 at 7:27 pm | Permalink

    Let’s take a simple case. Petrol.

    (My figures here are guesstimates but should help make my point.)

    We are told by politicians that we are paying 60% tax on fuel. Well that’s not how I see it.

    A pump price of, say, £1.20 comprises 40p petrol and 80p tax.

    This means drivers and hauliers are paying a tax on fuel of 200%. Not 60%.

    Please don’t forget to include this as being a main cause of inflation.

  24. JimF
    Posted January 26, 2011 at 8:58 pm | Permalink

    Was speaking yesterday with a Swiss supplier, small family precision engineering firm from whom we have been buying for nearly 20 years. Old Mr. X is 81 and still runs the place with wise words. When I explained how the “franc fort” was making it difficult to buy from them , his thought was not that the franc was strong but that other currencies were weak. Looking at the price of gold and other commodities that’s true. They’ve risen vs the CHF, but not like the Pound Euro and Dollar.

    So with Printing and ZIRP we are making holders of our currency poorer, and spenders of it richer. A weak currency has to discourage the exchange of work and enterprise for that currency, because unless it is spent quickly it becomes worth less. If instead of being held it is spent on buying other stronger currencies or commodities this will surely result in a downward spiral in the value of the currency.

    Interest rate rises would seem to be the most effective means of reversing that trend and encouraging enterprise and work, rather than borrow and spend.

  25. adam
    Posted January 26, 2011 at 11:14 pm | Permalink

    apparently the oil companies extract it at $3 a barrel.
    Its a mystery to me how it ends up at 90

    Reply: Most of the price is tax – there is no mystery – governments like spending the money

    • norman
      Posted January 27, 2011 at 9:51 am | Permalink

      It’s around $8 a month for North Sea oil, which is why a lot of the large oil companies don’t want to bother with the UKCS any more.

      A large hidden cost is exploration – you may only have a strike rate of 25% and drilling rigs cost upwards of $300,000 per day to hire and a well can take a couple of months to complete, before you count the cost of planning, geological suveys, building the platforms, pipelines, etc.

  26. English Pensioner
    Posted January 26, 2011 at 11:39 pm | Permalink

    It easy to see why you are not in the government, your thinking is far too logical. The biggest cause of inflation is the rise in energy prices, and, as you say, the main cause of this is the falling pound.
    I can’t believe that the Chancellor and the Treasury are unaware of this simple truth, and thus one can only conclude that they actually want inflation. This assumption is not unreasonable, as a few years of high inflation would reduce the governments debt in real terms which could be hailed as an “achievement” at the next election.
    I would agree with David Davis that the present cabinet, because of their personal situations, are totally out of touch with the average person in this country and, as a result, they are totally unaware of how inflation is hitting other people and their savings.

  27. Mark
    Posted January 27, 2011 at 11:26 am | Permalink

    If we leave aside the Bank’s ritual Nelson act on forecasting inflation (something it is supposed to ignore precisely because it is supposed to be its responsibility in the topsy turvy world of Labour quango regulation) it has in fact been quite prescient in drawing attention to looming problems since the credit crisis blew up. The prescriptions it has offered have served its previous political masters well by deferring the real problems for their successors to handle. The prescriptions it offers now are based simply on the perceived need to rob via inflation those who have real assets to pay the debts of government and others who overborrowed.

    Those who understand that they are being subjected to a boiled frog treatment are starting to emigrate and keep or move assets offshore or in real commodity inflation hedges. Of course, their actions to protect themselves will add to our perceived inflation and economic difficulties. That is perhaps the real reason why the Bank needs to think again about trying to inflate its way out of debts: the strategy risks the very collapse it seeks to avoid. We need to confront our debts and deal with them – we should be seeking to stop adding to them.

  28. David John Wilson
    Posted January 27, 2011 at 11:31 am | Permalink

    We don’t need the Eton dominated British parliament to have stronger controls over the EU parliament. What we need is it spending less time and money revamping EU laws. At the same time we need effort to be spent in making the EU Commission more responsible to the elected MEPs. The sooner we move to the situation where we have a fully democratic EU government and more devolved government in the UK including in England the better. Why for instance can’t one day a week in the UK parliament be spent on English issues on which only MPs from English constuencies are allowed to speak and vote? How much longer must we suffer the situation where the electorate in Scotland Wales and Northern Ireland have a larger say proportionally in English issues than the English electorate. The power of MPs elected by countries which have their own devolved governments to vote on issues which solely affect the English must be severely reduced. I would much rather have such powers if they must exist sitting with a European Government thus reducing the influence of the Eton/Oxbridge brigade most of whom have no experience of the real life of our working population .

  29. Gary
    Posted January 27, 2011 at 11:53 am | Permalink

    If there is any doubt that the banks are still hopelessly bust and the sovereign bailouts are for the banks, then these two reports in the past 2 days should dismiss any such illusions :

    From the BBC :

    “Davos 2011: Dimon warns of debt restructuring risk
    Forcing eurozone countries to restructure their debt would be “far too risky”, the head of US bank JP Morgan Chase has warned.
    Jamie Dimon said doing so could result in banks taking losses and needing to be rescued.”

    http://www.bbc.co.uk/news/business-12295834

    From the WSJ :

    “Banks Have Their Way With FASB
    BY DAVID REILLY

    The banks got what they wanted. Accounting rule makers on Tuesday dropped a plan to require banks to value loans using market prices.

    That means investors will remain reliant on banks’ own views of the worth of their assets. Those judgments proved seriously flawed during the financial crisis and left many with insufficient capital.”

    http://online.wsj.com/article/SB10001424052748704698004576104382179065752.html

    We have an banking albatross around our necks and they are killing economic growth, while they pay themselves fat bonuses.

  30. sm
    Posted January 27, 2011 at 12:12 pm | Permalink

    Increase interest rates and the banks will maintain margin- there is no real competition- where is the restructuring of the banks. Over borrowed private sector companies and people will be restructured with little support. The public sector and those with connections into public support will continue as there is no political will to change the system. The public sector will not all be protected particularly the real frontline and lower down.

    Our GDP was abnormally high , just deduct the debt spending public and private ( circa £2 trillion) by 13 years and you get growth not paid for by borrowing. It cant support such a high cost public service as we now find out.

    Real GDP will probably continue to fall, while inflation will erode purchasing power and debts. The tipping point will come when those not in the lifeboat working in the non supported taxed private sector have no discretionary income after taxes and living costs.

    We probably need 20% cuts in salary and headcount of all public servants above £50k.Plus an abolition of non jobs and of all inflation protection on all public sector pensions except those less than say £10k pa. The credit card bills are due and they are sovereign debts.

    This is a past and continuing failure of HMG/EU and fiscal policy in relation to banks ,bonuses, debt and the economy.

    The government is in stealth mode by hiding behind the structures (BOE, MPC) and needs to be more direct,open and assertive in its policies. Fiscal policy needs to be addressed and spending curbed in non frontline areas. (The EU budget and all such profligacy)

  31. stred
    Posted January 27, 2011 at 5:22 pm | Permalink

    I too suggested JR should leave the opportunists and start the English Bitter Party. But he doesn’t want to. Maybe, when the inner city Labour vote bias is sorted out, he and 30 others might be so sick of the Coalition they could leave. Then we might have someone to vote for.

  32. Gary
    Posted January 27, 2011 at 6:54 pm | Permalink

    Hoping to grow our way out of the crisis and avoid double dip ? Well, the Baltic Dry Index , the measure of actual worldwide shipping activity and hence many look to it as an actual measure of worldwide trade activity, just can’t get off its knees. It is plummeting to new lows in almost 2 years. Last year we were told it was the glut of Cape size tankers that was the reason, but that would have been discounted by now, and still the index falls relentlessly :

    http://www.lloydslistdcn.com.au/archive/2011/01-january/12/baltic-dry-index-hits-20-month-low

    • Mark
      Posted January 29, 2011 at 12:59 am | Permalink

      I think that is probably the consequence of the Queensland flooding in part: there are ships with no cargo to move until those mines are working again. Without the coking coal there is little point in shipping as much iron ore from Brazil so that it can be turned into steel. It will lead to a slowdown in China and have knock on effects elsewhere .

  33. Lindsay McDougall
    Posted January 28, 2011 at 1:31 am | Permalink

    As I keep saying, we need a new Govenor and a new MPC, one that accepts that GDP growth is none of its business, an inflation index that includes house prices and excludes VAT and duties, and an inflation target that is reduced by 0.5% every year until it reaches zero.

    Is anybody out there listening?

  34. Gary
    Posted January 28, 2011 at 9:54 am | Permalink

    Is the fear of huge losses or even insolvency another reason why the BofE is reluctant to raise rates ? In a report by CNBC the FED has used an qaccounting trick and moved its capital losses to a liability of the treasury, ie the govt, ie we the people. The chicanery just gets layered upon layers :

    “The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

    This enhances transparency by providing clearer, more frequent, snapshots of the central bank’s finances, analysts say. The bonus: the number can now turn negative without affecting the central bank’s underlying financial condition.

    “Any future losses the Fed may incur will now show up as a negative liability as opposed to a reduction in Fed capital, thereby making a negative capital situation technically impossible,” said Brian Smedley, a rates strategist at Bank of America-Merrill Lynch and a former New York Fed staffer.

    “The timing of the change is not coincidental, as politicians and market participants alike have expressed concerns since the announcement (of a second round of asset buys) about the possibility of Fed ‘insolvency’ in a scenario where interest rates rise significantly,” Smedley and his colleague Priya Misra wrote in a research note.”

    http://www.cnbc.com/id/41198789

  • 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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