Inflation is 5.2% – so let's print some more money


            The MPC meets today. We hear they might authorise more money printing today, or warm us up for more next month. (They announced £75 billion more QE -ed)

            They have clearly long since abandoned their Statutory duty to control inflation. They regularly report inflation at more than twice the target level on the CPI, which is well below in turn the RPI which is the rate more of us experience. They do nothing to bring it down.

             Apparently the MPC has redefined its own remit to do something about slow growth in incomes and output rather than control prices. The more they seem to follow this new idea, the more the UK economy slows. Growth now seems to suffer from the same MPC blight that has afflicted inflation.

              The problem the MPC should grasp is that the main cause of the economy slowing is the high inflation they have allowed. Last year people’s real incomes fell, leading to a fall in private sector consumption. The main cause of the fall was the inroad made into people’s personal budgets by the big rises in the prices of essentials like energy, and the tax increaes to help pay for the large public sector.

               The MPC’s interest rate strategy has cut the living standards of the prudent by slashing interest rates on savings. It has cut the value of everyone’s income, owing to the inflation. It allows the governemnt to borrow at very low rates at the expense of everyone else. Small and medium sized enterprises and individuals do not borrow at anything like the low interest rates we hear about as the MPC’s great success.

                 If they print more there is a danger of a weaker pound and more price rises. If they keep interest rates low they continue to punish the saver. The MPC follows a policy of public sector good, private sector bad. Their policy is not supporting the idea of a private sector led recovery. We need more cash and credit in the private sector, and more success in curbing infation.

                       Honest money should be part of the recovery package. Honest money would mean some new banks with enough share capital to lend money to decent new projects in the private sector. These could begin with the new cost efficient  energy provision we need to start to bring energy prices down again.


  1. Javelin
    October 6, 2011

    Totally agree. 5% inflation and frozen salaries means 5% salary falls. A dishonesty. We are deflating not inflating our domestic consumption.

    I’ve said for years now inflation needs to be tackled first. I’ve said interest rates need to go up. I’ve said until house prices fall then the economy will not recover. The Uk economy is a psychological beast based on optimism of house prices. Imagine if house prices would have fallen 20% more. Then the UK economy would now be seen as growing and there would be real optimism. It’s an irony that the UK works like this but it’s true.

    I put the psychology down to what I call “sunset” or “autumnal” economics. Basically we all have natural cycles built into our body. Until we see house prices falling or EU sovereigns defaulting we do not believe the world has or will moved on. The cycle has been suspendedat huge costs. It’s the psychology of the markets. Things must go thru the cycle. Trying to prop them up is counterproductive.

    1. Javelin
      October 6, 2011

      Of course the real (non psychological) cost of inflation is when the investors wake up and realise their real returns are poor and demand higher interest rates. This will happen once other Soverigns stabilise. We should not confuse bond investors using the UK as a safe haven for bond investors looking for real returns. When the Soverigns recover the UK will suffer.

    2. outsider
      October 6, 2011

      Also totally agree with this great post.

      The counter argument, parroted by the Chancellor and the Prime Minister, is that even a modest move away from emergency, inflation-promoting interest rates, would inflict crippling rises in mortgage payments for hard-hit families.

      Yes, it would hit some: people with interest-only mortgages and those who have previously cut their mortgage payments. But these are, I suggest, quite a small minority. In other cases, mortgagees would have the option of keeping their payments down and extending their debt (thus incidentally raising mortgage lending by the back door). That is what they should do if they are hard-pressed. They will therefore enjoy the untrammeled benefits of lower inflation to their spending power.

      You will note that, under the current Bank/Treasury thinking, any monetary action to curb inflation will have to be delayed indefinitely. Only when real incomes are rising strongly (ie wages rising at an inflationary 5 per cent or more) could rates be raised.

  2. Richard1
    October 6, 2011

    I hope you will keep going with the RBS breakup idea, it seems to be gaining traction as it becomes clearer to everybody that Gordon Brown’s bailout money has gone, we need to forget about the taxpayer ever making a ‘profit’ and think about whats best to do now. Its also a much better idea than any Govt-backed lending vehicle.

    Reply Thanks, I will

  3. alan jutson
    October 6, 2011

    They have already been given the green light to start the printing presses by Osbourne.

    In his recent conference speech he said he would agree, if they wanted it.

    One has to ask who is running the country, when a Chancellor makes the above statement.

    There should only be one rule.

    The government can only spend in the current year, no more than was raised by taxes in the previous year, and if it was wise it would only plan for 90% of that amount keeping 10% in reserve which should go towards paying off debt.

    Its clear, its honest, its simple, its transparent, its fair, and quite honestly Politicians should be jailed if they exceed that level of expenditure.

    Governments should have to live the same way as millions of families do, within their means, to do otherwise is a betrayal to those who try to do the right thing !

    1. scottspeig
      October 6, 2011

      Indeed. I always think that borrowing money ends up binding the next government which is unconstitutional…

      1. Vanessa
        October 10, 2011

        Also signing Treaties is unconstitutional, but they keep doing it.

  4. Martyn
    October 6, 2011

    Well, they are not alone in printing money as and when they like, so clearly it must be OK to do so? Slightly aside of topic, I see that the EU Parliament has voted itself a 4.7% increase in budget. Cameron ‘strongly objected’ to the proposed increase and been utterly ignored. The EU accounts cannot be audited, anyone who blows the whistle on the latest scandal is terrorised into silence and so the juggernaut rolls on and on.
    It seems to me that within the lifetime of this Parliament it will be recognised that the EU is in fact unstoppable and Cameron (assuming that he is still PM) will at some point have to say that it is in our national interests to hand over the last vestiges of sovereignty and our armed forces to the EU and join the Euro. What else is there for us to do? I suppose we might leave the EU and re-join the union of English-speaking peoples around the world, but even a hint of that would be anathema to the EU who would apply enormous pressure on us to abandon such a treasonable course of action.

    1. MickC
      October 6, 2011

      The EU is as dead as the British Empire but the people who run it haven’t realised that yet. They will still make their silly rules, ignoring reality until it forces its way into their house of dreams-about 10-20 years at most.

  5. lifelogic
    October 6, 2011

    Tax at 50% and 5,2% inflation so you need 11%+ return just to keep the value of your money.

    Get some lending to business going (with regulatory changes to the banks) start reducing the state sector, cheaper non green energy and stop “tax borrow and waste” – yet more inflation is not the answer.

    1. Nick
      October 6, 2011

      But even that ignores risk. If you have a 50% chance of losing your capital, you have to double the return.

      50% is the something for nothing society.

      50% of all profits, 0% of all losses, and no work to take the 50%.

      1. lifelogic
        October 6, 2011

        Yes and even with some of the banks the chances of getting your deposit back might not be much higher than 50%.

    2. Bob
      October 6, 2011

      Printing money and using it to pay people to do nothing i.e. welfare, non-jobs and foreign aid, and punishing anyone who makes any effort to be productive and risks their own money to create real employment for others.
      Will this:
      a) Build a strong foundation for future growth?
      b) Create rampant inflation and a collapse of the economy?

      Who is advising Mr. Cameron? Is it Robert Mugabe? or Gordon Brown perhaps?

      1. lifelogic
        October 6, 2011

        Often worse still – paying people to inconvenience the productive – not just do nothing.

        1. lifelogic
          October 6, 2011

          The BBC the government is “injecting £75B of money into the economy” are’t they kind – so it must be good surely? Mind you they also said the BBC “belongs” to its listeners while trying to say how very hard it would be to reduce staff by about 330 per year.

    3. lifelogic
      October 6, 2011

      Listening to some details of the “Green Deal” it certainly sounds like another waste of money. Complex, loan arrangements, complications when you sell, more legal complications for the lawyer to charge for. If people want to spend a few hundred or thousand to insulate their houses then better to just let them make their own decisions after taking advice if they wish. Just get some banks to lend again so they can borrow the money if needed. Others might choose to wear more jumpers and thermal underwear, just heat one small room, buy a heated blanket, stick tape and plastic round the windows or just go somewhere warm on a budget airline for the winter.

      It is for them to decide not Chris (I know best – even though I know nothing of your house or your lifestyle) Huhne.

      People need a scheme like this as much they need a toy wind turbine.
      Government has no reason to get involved in another scheme that seems even dafter than the HIP packs they (almost) abolished and the feed in tariff nonsense. Has he seen the typical quality of these idiotic energy reports we have to pay for.

      Ten pointless green jobs here 100 lost over there!

  6. Trevor
    October 6, 2011

    John, I do not always, or even mostly, agree with you, but in this case you are close to hitting the nail on the head! The more prudent amongst us have been suffering disproportionately for a considerable time now. As a pensioner relying on savings, my income has been hit hard by low interest rates plus the change to CPI linking rather than RPI on my occupational pension. You are also correct in saying that most peoples own inflation rates are nearer to the RPI than CPI, but even this underestimates the rate for pensioners and the less well off. My own inflation rate according to the governments online inflation calculator is in excess of 6%. Needless to say my spending has reduced, which must be the case for many people, and as you indicate, the effect of this is to hold down growth.

    I am not claiming to be on the breadline yet, and many are worse off than myself, but am pleased to have got that off my chest!

    1. Paul H
      October 6, 2011

      King doesn’t care – his own index-linked pension is protected.

      It can’t be long now before the inflation target is overtly set aside, if only to save the MPC’s face. There may also be some rewriting of history in respect of King’s protestations of “vigilence” about inflation, but by then the damage to the UK’s credibility will be done. Everyone can preserve the value of their currency in the easy times, but the UK has yet again demonstrated that when the going gets tough the old UK disease of inflation is far from dead. This will impact the cost of raising money in future – but Osborne won’t care as it will someone else’s problem.

    2. Martyn
      October 6, 2011

      You are not alone. My RAF pension 0f 38 years service increased by a derisory amount last year way below inflation, unlike those of the gold-plated civil servants on pension, and over the past 18 months the combined income from my wife’s and our modest, very safe investments has fallen by £80 a week. What have we people who have worked and saved for our retirement done to deserve this? Like you, we are not on the breadline, happily, but it is not inconcievable that we may all find ourselves in a very much worse position than we already are in the not too distant future.

    3. Tim
      October 6, 2011

      You are spot on Mr Redwood. I cannot understand why the Government continues with debasing our currency and reducing its value internationally by this strategy. Common sense points to everyone having flat or reducing wages, increasing fuel, energy and commodity prices. Everyone on pensions now have CPI and not RPI increases (MP’s notably excluded). Of course the economy is flat as the public haven’t got any spare cash. The last lot of QE didn’t work so why are they doing it again?

      1. Vanessa
        October 10, 2011

        They could not care less about the public but all this inflation is bringing down the debt – the only reason they are doing it (in my opinion). The ordinary people can go hang!

  7. Ralph Musgrave
    October 6, 2011

    The above is not one of JR’s best posts and for the following reasons.

    1. The popular idea that QE equals money printing is very misleading. QE simply consists of swapping two very similar assets: gilts and cash.

    2. Re the idea that the MPC have “allowed” inflation, the current higher than normal inflation is caused largely by spikes in world commodity prices, the effect of the 2008 devaluation. The BoE is banking on these being temporary effects, which is a risky policy, but I think the right one.

    3. Re the idea that we could get “cash and credit in the private sector” by “some new banks with enough share capital…”, the first problem there is that money created by commercial banks nets to nothing in the sense that for every pound they create, a pound of negative money (i.e. debt) is also created. Only central banks can created debt free money.

    Also, the idea that private investors will be rushing to put money into new banks is doubtful given the chaotic state of the banking industry.

    Plus, as I pointed out on this blog a day or two ago, there is a dearth of evidence for the currently popular fad that businesses are being seriously hampered by lack of access to credit.

    As to “new cost efficient energy provision”, there is a fortune plus a possible Nobel Prize awaiting anyone who can think up ways of significantly reducing the cost of energy production and distribution. I await further details on this.

    Reply: Combined cycle gas is much cheaper than a lot of the methods we currently favour

    1. A different Simon
      October 6, 2011

      J.R. ,

      There is a huge difference between the cost of electricity generated by the different types of gas and reserves of different kinds of gas :-
      – natural gas
      – coal seam gas (methane)
      – gas from gasification of coal (coal gas) which can be produced by underground coal gasification (ucg)

      In 2011 it is no longer acceptable to pump methane or coal gas into peoples houses . Only natural gas can be pumped into houses and it’s a very limited resource .

      Why are DECC only allowing precious natural gas to be used for electricity generation and opposing generation of electricity from coal gas produced by UCG (underground coal gasification) and opposing shale gas ?

      Why it is granting exploration licences for shale gas and UCG but refusing production licences ?

      (Huhne’s latest promise to stop the UK’s dash for gas)

      Why also DECC also insisting on capture and storage of carbon dioxide when it will increase our raw fuel requirement by one third ?

      Could you find out please J.R. ?

      Reply: I have made points to Mr Huhne in the past and will do so again when opportunity presents.

      1. A different Simon
        October 6, 2011

        Thanks J.R.

        What happens when our electricity and gas imports increase in price by £200 billion per year ?

        Rather makes a mockery of our current £185 billion public spending deficit .

        In a previous life Mr Huhne was supposedly a founder and proprietor of his own company . He must be an intelligent person .

        Either his hands are tied (by climate change treaties) , he’s acting in the interest of foreign powers , he’s a genius or well intentioned but deluded .

        1. oldtimer
          October 6, 2011

          I think Mr Huhne must believe all this stuff about the virtues and effectiveness of renewable energy – along with Messrs Cameron and Clegg. The three of them signed the preface letter extolling the virtues of the Carbon Plan. This implements the provisions of the Climate Change Act and will beggar the UK if implemented.

          Despite many attempts, via my MP, to discover if the government has studied the comparative costs of different energy sources I get no reply from Mr Huhne. The question is dodged. My conclusions are that they have done the studies but that the results are too awful to release to the public. In short it is a classic cover up operation.

          1. lifelogic
            October 6, 2011

            Surely he is not really that dim – even if he did do PPE (not alas electical engineering or physics) – he cannot really believe it makes sense can he? He must know that his toy home wind turbine produces virtually nothing per year (perhaps £30 worth PA at true value) and that buying electricity worth about 5-6P at commercial, on demand, price for 41p feedin tariff is therefore not very sensible.

            Nor even at 41p does putting these on your roof make any sense.

            So why does he want to pay people to do it?

          2. A different Simon
            October 7, 2011

            Renewable energy does have a lot of virtues .

            It does work and it’s not all nonsense .

            There is of course the captured energy in it’s manufacture and it will never be a complete solution though ; not for a small country crowded with over 63million people – even if it is surrounded by water .

            I’m not convinced Cameron , Clegg and Huhne (or Osborne for that matter) are numerate .

            If they were stuck at a the last petrol station before the Sahara desert I’m not sure they could work out how much fuel they would need to cross it .

            Now scale that up to country level .

          3. lifelogic
            October 7, 2011

            A different Simon you say

            “Renewable energy does have a lot of virtues –
            It does work and it’s not all nonsense.”

            But with current technology it is far too expensive to compete other than by huge damaging market distortions.

            The laws of economics, physics and engineering say forget it at the moment – outside a few special situations. Wait until either, it gets much cheaper or the alternatives get much more expensive.

      2. lifelogic
        October 6, 2011

        Natural gas is mainly methane about 80%.

      3. lifelogic
        October 6, 2011

        What does he say nothing I assume. Ask him how much electricity he gets off his home wind turbine. I am sure he would not want other to waste their money on such nonsense now he knows how little use they are.

        1. A different Simon
          October 7, 2011

          “Ask him how much electricity he gets off his home wind turbine.”

          Which home ?

          He’s got about 12 of them hasn’t he ?
          Reply: fewer than that

          1. lifelogic
            October 9, 2011

            I do not know which house – but I read that one had a toy electricity wind turbine on one – a “I am very green you know badge” used to impress the neighbours and tell sensible people what dopes they are.

    2. Richard1
      October 6, 2011

      QE certainly equals money printing unless / until the gilts or other assets purchased are sold back into the market.

    3. Sebastian Weetabix
      October 6, 2011

      “the idea that QE equals money printing is very misleading” – what utter guff. It is an increase in the money supply. If it didn’t achieve that there would be no point in doing it.

      As for “dearth of evidence for the currently popular fad that businesses are being seriously hampered by lack of access to credit” I can give you a personal example in the case of our business. Our bank will not roll over our overdraft facility (which we only ever dip into occasionally, happily having a profitable business with decent cashflow for 10 months out of 12 on average) – but they will give us a loan, at 14.9% APR with an arrangement fee of 3% of the whole. It so happens this just about equals our return on sales. So, yes, credit is available to all, just like tea at the Ritz.

      My favourite piece of lunacy from the above post is the idea that there is no inflation when you take out the “spikes in world commodity prices”. If you take out the data you don’t like, you can always enjoy nicer looking data, but in the meantime prices have gone up & they are staying up. I don’t recall people saying in the first half of noughties “if you take out the effect of cheap Chinese goods, prices are not dropping” – they just enjoyed the low inflation and borrowed like hell to buy all those Chinese goods.

      1. Ralph Musgrave
        October 6, 2011

        As regards QEing Government debt, the latter is widely accepted in lieu of cash in the world’s financial centers. To that extent there is little difference between the two. Plus, there is not much difference between a SHORT TERM Gilt and cash. In other words there is not much difference between £X of cash and a promise to pay £X in a few months time. Of course when other assets are QE’d, there is a bigger difference. But I object to the idea that QE equals plain straightforward money printing, pound for pound.

        Re the idea that commodity price spikes etc don’t count as inflation, there is some method in the BoE’s madness here. Inflation is defined as CONTINUOUSLY rising prices. A rise in commodity prices which is then reversed shouldn’t contribute to inflation. Alternatively, if commodity prices rise and then cease rising, that is a step change in prices, but it is not inflation, and – most important of all – it is not a reason to hold back on stimulus and job creation.

        1. Sebastian Weetabix
          October 6, 2011

          QE really IS straightfoward money printing. I don’t understand why you cannot see that. The fact that electronics is used rather than a Gutenberg press doesn’t alter the fact. Money is printed and pushed into the economy. The money supply is increased. Inflation is stoked. Banks are saved (maybe). Savers and wage earners are screwed.

          As for continuously rising prices, etc… give me strength. Inflation is inflation is inflation.

        2. Jwoo
          October 6, 2011

          “Alternatively, if commodity prices rise and then cease rising, that is a step change in prices, but it is not inflation..”

          On the basis of that comment alone, which is the closest to insanity I have read hereabouts, I think I can say that argument with the author of this is utterly pointless. Perhaps ‘Care in the Community’ could take an interest?

      2. Bob
        October 6, 2011

        “As Japan has found out, extended periods of near zero interest rates gives no fiscal incentive to the banks to lend to each other and the interbank lending market ceases to function. Why should banks take unknown counterparty risk for a tiny reward by lending to their peers who might go bust at any moment (take Dexia and Morgan Stanley as current examples).

        Banks therefore channel these vast amounts of virtually free money into their algorithmic and High Frequency trading and delta one desks.

        George Osborne’s Operation Merlin is never going to work as banks are caught in a Japanese style ZIRP trap (zero interest rate policy).

        The BoE needs to set interest rates near 2% to kick start velocity of money and provide sufficient margin incentive to the interbank market to work again.”

        Cut and pasted from comments on “Osborne Responds to QE Announcement” on
        Commenter: Fiscal Gerrymandering October 6, 2011 at 12:47 pm

    4. Nick
      October 6, 2011

      Of course they have allowed inflation. Their tool for controlling inflation is interest rates.

      So given inflation is so high, and interest rates so low, its absolutely clear they haven’t controlled it.

      Commodities are a small fraction of the UK GDP. It’s an irrelevance.

      The cause is printing money which results in higher spending.

      Gov buys assets from banks, with newly created cash (printing).

      Gov forces banks to increase their capital, which has to be in the form of Gilts.

      So banks buy new gilts, which means the money goes back to the government.

      The gov then spends this money, creating inflation.

      Why use such a convoluted way of printing and spending? To make it opaque.

      1. Ralph Musgrave
        October 6, 2011

        Why use such a convoluted way of printing and spending?

        The “convolution” stems from the quaint method we and other counties have for keeping politicians’ fingers off the printing press. But we DO allow politicians to “print debt”, which as I pointed out above is not all that different to cash. To that extent, the current system makes little sense. Plus none of the arguments for letting governments run up debt stand inspection. Milton Friedman advocated a zero government debt system as does another US economist, Warren Mosler. See respectively:

        p.250, para starting “Under the proposal..”

        2nd last paragraph:

        If we dispensed with government debt, there would still be a need to print (and occasionally “unprint” money). And it would be wise to put the “print” decision into the hands of some independent committee of economists rather than allow politicians take that decision.

        Also (referring back to the original question above) the word “spending” is misleading. QE channels money exclusively into the pockets of asset rich people and institutions. We might as well channel money into the pockets of red headed females between the age of 30 and 40 and hope for a trickle down effect.

    5. Winston Smith
      October 6, 2011

      Just how temporary is this high inflation? 6mths? 1yr? 2yrs? 5yrs? The BofE regard it as long-term, which is why they switched moved their pension investments to index linked. Energy prices are inflated by State interference.

    6. outsider
      October 6, 2011

      Dear Mr Musgrave:
      On point 1: the cash to swap for gilts has to come from somewhere – it is created. Buying gilts is just the age-old mechanism (formerly called open market operations) for getting money that has been newly created by the central bank into the economy.

      On point 2: your argument almost answers itself. If the MPC was following a policy of keeping CPI inflation at 2 per cent, interest rates would be higher, the exchange rate would consequently be higher and the sterling prices of dollar commodities and other imports would be lower.

      One can certainly argue that high inflation is “a price worth paying” to keep unemployment down, but the evidence points the other way. Jobs are being lost because consumer spending is falling because inflation is cutting real incomes.

    7. Kevin Dabson
      October 6, 2011

      “1. The popular idea that QE equals money printing is very misleading. QE simply consists of swapping two very similar assets: gilts and cash.”

      What Does Open Market Operations – OMO Mean?

      The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.

      QE1 has not been unwound thus far to my knowledge.

    8. Mark
      October 6, 2011

      1. So where did the cash to swap for gilts come from? The back of the sofa? Trying to hide behind some semantic definition of QE that attempts to disguise its true nature by excluding it is like hoping that shouting a lie boldly and often enough will get the public to believe it.

      2. The spikes in commodity prices have been caused not because of fundamental shortages in supply, but by a massive influx of money into commodities as people fear that governments are debauching currencies which no longer offer an adequate store of value, while commodities fulfil that role rather more reliably. Debauching the currency with further QE will simply make matters worse.

      3. It is not true that only central banks can create debt free money. Where commodities come to be used as money, they were certainly not created by central banks.

      I agree that business is waiting for the other shoe to drop: no point in investing while governments have failed to sort out the underlying problems of debt fuelled asset bubbles. I also agree with JR that we are selecting some of the least cost efficient methods for investment in energy, when we could so easily be doing much better by investing in gas (including in our own shale production), while simultaneously reducing global CO2 output because it would replace Chinese coal fired capacity.

  8. Brian Tomkinson
    October 6, 2011

    Is it not the case that the MPC is not, contrary to popular view, independent from government but carrying out its wishes? Just as Cameron said erroneously yesterday that the government was paying down the debt and never mentioned taxation he never mentioned the word inflation even though he talked about the effects of higher petrol, energy and other costs. I have long held the view that this government’s strategy if they have one is taxation and inflation. The fact that so many politicians, with the exception of our host, say the problem is lack of growth but cannot see that inflation is a major drag on demand and hence growth confirms to me that they intend to inflate regardless.

    1. lifelogic
      October 6, 2011

      My rule of thumb is that any organisation that feels the need to claim it is independent usually is no such thing.

      1. outsider
        October 6, 2011

        What a wise and helpful rule. It is rather like people denying accusations that one has not even thought of making. You know they are lying.

  9. me
    October 6, 2011

    “These could begin with the new cost efficient energy provision we need to start to bring energy prices down again.”

    Remember this Conservative led coalition throws billions in subsidies at the wind turbine scam.

    UKIP will scrap wind farms.

    1. Nick
      October 6, 2011

      Doesn’t need to scrap the windfarms. It just needs to scrap the subsidy.

  10. waramess
    October 6, 2011

    This one really hits the nail on the head but it is almost as if you are talking about the opposition, which of course, in reality, you are.

    At what point I wonder do the Government’s policies need to differ so much from their own that the right wing of the party feel obliged to start a new pollitical party?

    The Liberals are a spent force and UKIP never were an alternative but there is a real need for an alternative with new robust and radical (by todays standards) ideas.

    Maybe there are already moves afoot although Cameron and his chums behave as if they do not need to be concerned.

    Zero interest rates, monetary easing pro-EU high inflation, what’s there not to like?

  11. Geoff not Hoons
    October 6, 2011

    Mr. Redwood, After 2 years of ignoring inflation and now what must surely be stagflation what do your readers think are the real motives behind the so called experts at the MPC?

    reply: Good question

    1. Mick Anderson
      October 6, 2011

      The MPC has been given a brief that is currently impossible, namely to keep inflation down.

      They have only two permitted actions – to change interest rates and to dilute the money supply with QE. However, they have no influence over the biggest part of the problem which is the rate that Government takes money from the economy (taxation).

      Reducing the base rate to nearly zero has not solved the problem, nor has a round of (inflationary) QE.

      I’d like them to try the one thing left – put interest rates up. They might see it as counter-intuitive, but that doesn’t make it wrong…. Don’t forget, QE was never going to have a good direct effect on inflation, and they still went for it.

      The prudent amongst us would see more income from savings, and those borrowing money are at rates so far above base that it is irrelevant. It would make Government borrowing more expensive, but perhaps that might encourage them to finally start doing less of it.

      Anyway, it’s the only thing they haven’t tried!

      1. Sir Graphus
        October 6, 2011

        Ignoring the politics and economics for a moment; I’d like to concentrate on democracy. This unelected body should stick to the formal remit given it by Parliament.

        If it wishes to have further powers (i.e. the general management of the economy), then I’d like the elected body to debate whether that’s appropriate. It may make me appear a pedant, but I quite like democracy, for all its faults.

    2. Electro-Kevin
      October 6, 2011

      Answer (prehaps): The inflated UK housing market appears to be sacred for some reason.

      1. Sir Graphus
        October 6, 2011

        The UK housing market is all I have left of my savings and pension, after the last dozen years.

    3. Gary
      October 6, 2011

      I will hazard a guess.

      The central bank by its actions has repeatedly shown that its allegiance is entirely to the banks and not the country. They have decided that under no circumstances can the banks be allowed to fail, regardless of how insolvent the banks are. The world is under a co-ordinated central banking system, under the BIS, that seems willing to sacrifice taxpayers by inflating the money supply to save the banks.

      In a distant age, that would be treason.

    4. outsider
      October 6, 2011

      Dear Mr not Hoons,

      The MPC is following a currently orthodox economic model called the New Neoclassical Neo-Keynesian Synthesis ( or something like that). As interpreted by Mr Bernanke and his disciples, a post-Crash economy needs negative real bond rates to overcome risk aversion. The only way to achieve that is by inflation, if possible, as it is in this instance. The biggest threat, in theory, is deflation.

      Unfortunately this theory is based on some unrealistic assumptions. One is that inflation is symmetrical (ie wages and/or profits can adjust to these higher prices) and the rest of the world does not count. Commodity prices are assumed to be determined by demand in the developed world (China, India and Brazil do not exist in this model).

      As we are seeing, the theory does not work because real incomes are falling, destroying any incentive that negative interest rates might give us to consume more and business to invest more.

      It also does not work because we all saw what happened when Mr Greenspan used ultra-cheap money to get America out of the post dot-com crash recession. Everyone knows that the asset-price-led recovery carried the seeds of its own destruction, just as we now know that big government deficits now mean pain later. So it destroys confidence rather than building it.

      The theory will soon become defunct. Meanwhile we all suffer.

    5. javelin
      October 6, 2011

      I would say that inflation is part of a “holistic” strategy to get out of debt. Part inflation, part carry on spending, part austerity, part growth.

    6. Robert
      October 6, 2011

      Written to my clients 3 years ago, in December 2007 ! STAGFLATION – IS IT MORE OF A REALITY?
      I believe that we are in a stagflationary world. Inflationary pressures will rise despite slowing global growth, as credit becomes scarcer and consequently more expensive. Rapidly accelerating money supply (in the US it is already at a 47-year peak), high commodity prices, an appreciating Chinese currency and growth in Asian wages are all combining to push inflation up. US import inflation has just hit 11%, the highest since records began in 1982. As the credit crunch continues to unravel, and despite the capital from Sovereign Wealth Funds, central banks will be forced to print more money to inflate away the debt. Given this scenario, bonds look very poor value, as does cash; commercial and residential property values will inevitably suffer too. So it will be a tough year in all asset markets, as volatility to increase and the appetite for risk diminishes. Surprisingly, the asset class that looks the most attractive is equities, but only selectively. Globalisation of capital flows means few regions or countries will escape the clutches of rising inflationary pressures and lower growth. I am sceptical of the broad consensus that emerging markets will be able to decouple from the industrial world, especially US consumption. There are strong headwinds which transcend national boundaries. The key issue for equities is, which sectors and companies will benefit from the huge piles of cash that will be printed as central banks try and inflate away the debt burden? STERLING – A DEFINITE SHORT!
      Out of the four major currencies, sterling is a disaster waiting to happen. Even though the US has stolen the headlines in terms of weakness in both its property and currency markets, the UK economy structurally is in a much weaker position. The UK property market is a bigger asset bubble than the US. For example, mortgage debt is 126% of GDP versus 104% for America. In terms of competitiveness, the current account recently hit its worst ever deficit as 5.7% of GDP. This comes at a time when global growth is set to slow. Not only is Britain at risk from a major consumer slowdown as the savings rate has to rise, but it could also lose on the export front as well. Unfortunately, this comes at a time when the public sector must also tighten its purse strings due to the current Government profligacy. In November, public sector debt also hit a record level at $23bn. It has become noticeable that the government has been vociferous in pressing for public sector wage restraint. To me, apart from the weakness of their particular business model, the bankruptcy of Northern Rock in the summer shows the fragility of the UK’s recent economic growth and the weakness of the banking system. Sterling investors are faced with a deflating economy and weak currency. It is worth noting that at $1.95, sterling is 18% above its 10-year average. It is not too late to move out of sterling. It will weaken further and then probably over-shoot on the downside. So far the Euro has been the currency suffering from dollar weakness the most, with the big Asian currency block (and Middle East) still pegged (some hard, some soft) to the dollar. This is likely to change as inflationary trends across developing countries in Asia and the Middle East force governments to adopt faster appreciation, thereby limiting inflationary pressures. BANKS – STAY SHORT FOR NOW
      If the telecom and pharmaceutical sectors still offer attractive valuations, then banks sit on the opposite side of the equation. This is one sector, despite last year’s performance, that is bound to get far cheaper, particularly in the more highly indebted western economies (UK, Ireland, and Spain). Even financials in lowly geared economies will be adversely affected through counter-party risk. I find the sector almost impossible to analyse; as no-one yet knows the time bombs lurking in their balance sheets; this includes bank boards. An easy temptation to catch a falling knife!

      With some sectors massive underperformance last year e.g. Banks, Property and Retail, many investors are currently trying to guess where the bottom lies. They blink at seemingly cheap price-to-earnings and price-to-book ratios. I believe that they could go a lot lower. The reality is that if some were to write down their balance sheets to the true position, they would have no earnings and very little book. The extent of the problem can be seen in the size of the securitised debt market which totalled US$97trillion at the end of 2006, up from US$46tr at the end of 2004. This amount, which excludes good old fashioned bank lending, is equivalent to double world GDP. A better approach I am told is to look at market capitalisation as a percentage of retail deposits. Thus HSBC, Citigroup and Barclays are now trading at 19%, 17% and 10% of deposits, with other western banks at between 10-25%. History suggests that in a credit downturn, banks tend to reach a bottom at around 3-8% of deposits. So we still need to watch out.
      Governments aren’t prepared to confront their electorates with the true realities!

  12. Nick
    October 6, 2011

    The problem is in your previous post.

    You’re spending more and more money, even in real terms.

    At the same time you borrowing more because the public hasn’t the money.

    Since your the major borrower, other people can’t borrow.

    You’ve also set up the rules so that people are forced to lend to you. Annuitants and banks.

    It’s tipped. It’s gone beyond the point of no return without Greek style harm being done to people.

    So that means more partial defaults to the creditors of the UK government who matter, the voter.

    For example, the state pension. If a median worker retiring on an income of 25K, had put their NI into the FTSE, they would have had an RPI linked joint life annuity of 21K. Instead they have 5K from the UK.

    75% of their retirement income stolen by politicians, and more on the way. Each year you raise the retirement age is another 5% off the 25% that is given to them.

    Reply I am not spending more – I have been urging spending less!

  13. Peter Dayson-Smith
    October 6, 2011

    The perfect summation of why QE2 is not going to work. In fact, so simply put that even I AND members of the MPC should be able to understand it. Yet still they proceed.

    I despair.

  14. javelin
    October 6, 2011

    I think I have to confess I’ve lost my trust in European banking now. All of the traders I talk to have the same opinion. It was only back in July the Belguim bank Dexia was given a clean bill of health by the EU banking auditors. Yet now it is in deep trouble and needing a bail out. What is going on. Honestly we’re an optimistic, polite bunch, yet how can you not call the EU banking regulators charlatans when they deliberately left out stress tests on soverign debts because they knew a lot of banks would fail. It must have been a political decision.

    Put quite simply. Nobody in the markets believes the EU banking regulators or politicans etc any more. Amongst traders its not a question any more of how poor the stress tests were – its question of the legality behind the EU hiding huge losses.

    How can you blame the markets for putting more and more money in the central banks over night at a puny 0.75% interest rate – when CLEARLY the EU is hiding catastophic failures in other commerical EU banks – yet banks are putting their money in the ECB because the over nights are backed by tax payers money. I posted a few months ago – can the ECB go bankrupt.

    Well I ask now can the the EU go bankrupt?

    Can they be sued for deliberately hiding such huge losses? The moral argument that if they published the full stress tests would have left equity, bond holders and depositors in the lurch is simply ignoring the law – that equity, bond holders and depositors should know their legal position – and that is one of taking risks. The EU is a kind of soverign, but really it has acted illegally and immorally. I think it needs to consider its position.

    1. Mick Anderson
      October 6, 2011

      Can they be sued for deliberately hiding such huge losses?

      My bet is that they have invented some sort of immunity for themselves, just in case the proverbial hits the fan. Parliamentary Privilage.

      The EU is a kind of soverign, but really it has acted illegally and immorally

      It didn’t stick to the rules during the good times, so there is no chance during the bad. The only position they care about is how far down the road that the can was kicked last time.

      Perhaps the traders should plan to withdraw from the EU markets for a week – effectively go on strike. Watch the whole House of Cards come tumbling down….

    2. javelin
      October 6, 2011

      I posted somewhere on this site a ThomponReuters soverign haircut calculator and its effect on banks. But it hasnt been made public yet. What is showed was the EU banks are actually not as heavily exposed to haircuts as the ECB likes us to believe. I guess to scare us into further integration.

      However what the ThomponReuters haircut calculator doesnt show is that the REAL loser fromthe haircuts will be the ECB who has bought so many soverign bonds. If I were inthe UK Government I would be asking why I shouldnt be playing hardball with the ECB. I still think the ECB could default.

      1. Derek
        October 6, 2011

        I believe it is the case that the UK has a share in the ECB – 25%?

        Reply: No- much smaller as most of its share is not paid up as a non Euro member.

  15. oldtimer
    October 6, 2011

    As you make abundantly clear, both the MPC and the coalition are travelling the wrong way up a one way street. This habit produces car crashes. Both the MPC and the coalition need to make U-turns without delay. The MPC, as you point out, needs a U-turn with respect to its interest rate and QE policy to secure a return to sound money. The coalition needs a U-turn with respect to its fatal energy policy (on which I note Mr Cameron was silent in his speech).

    There is no way that the coalition can expect a revival in business investment so long as (a) inflation is high and rising and (b) the cost of energy is rising and a regular, future supply is uncertain. Add to these two considerations the reality of current personal and business tax levels, then stirring words about a can-do spirit are meaningless. The numbers simply do not add up.

  16. David Whitley
    October 6, 2011

    I’ve long assumed that the BOE has been encouraged by the Treasury to change its remit and defraud the UK people with higher inflation.

    1. alan jutson
      October 6, 2011


      I agree.

      Theft by stealth from the population, pure and simple.

  17. Gary
    October 6, 2011

    Spot on. Except, we disagree how to attain honest money. At least it is now being discussed.

    Honest money is non-inflationary. The money supply of honest money is in line with the real growth/contraction of the real economy. The real growth is given by the real interest rate. If you could find a currency that grew and contracted in line with the real interest rate , that would be honest money.

    Govt and bankers issuing money have never been able to do this , because their motives are to their own benefit and not necessarily to the benefit of the economy.

    There is already a currency that achieves the tenets of honest money. Gold. Keynes said the correlation between interest rates and the general price level observed during the period of the classical gold standard. It was, he said, “one of the most completely established empirical facts in the whole field of quantitative economics.” J.M. Keynes, A Treatise on Money (Macmillan, 1930), vol. 2, p.198

    This is another way of saying the the price of gold tracks real interest rates. Summers and Barskey went into great detail of this relationship in the Journal of Political Economy (vol. 96, June 1988, pp. 528-550)

    Let the market choose the currency. Get the money supply out of the hands of the monopolies and the govt. Stop making the people underwrite these monopolies. Stop forcing the people to trade in devaluing paper. Let people choose which currency to accept.

    I will wager that they will choose gold. They have always returned to gold for more than 5000 years.

    1. Robert K
      October 6, 2011

      Agreed, but the chance of that happening is zero, unfortunately.

  18. Steph
    October 6, 2011

    “It allows the governemnt to borrow at very low rates at the expense of everyone else. ”

    But government money is our money too… and given they aren’t going to reduce spending really, we still might be better off this way… possibly.

    1. Gary
      October 6, 2011

      The govt takes money from productive private enterprises. Anything the govt does with the money is at the expense of a private sector enterprise. Why not just let the private sector get on with creating enterprises ?

      Entrepreneurs, using money that they are directly responsible for investing, and who will personally suffer the consequences if they waste the money, always invest better in aggregate, than govts who use other peoples money and whose members in this system get cushy directorships regardless of what they do in govt.

      If govt was the answer, the ussr and any of the communist countries would have been an economic paradise.

  19. Alan Wheatley
    October 6, 2011

    I hear on the BBC Today Programme that one thing that could be done with the money that is printed is to buy things. I have the ideal candidate for that money purchase, from which many good things would flow THROUGHOUT the UK.

    BT should be split in two: telecommunications infrastructure and telecommunications services provider. The government should buy the infrastructure and form it as a company for which they write the strategic terms and conditions of operation, which must include a mandatory rule that the infrastructure MUST be owned by the company; i.e. it is not an asset that can be sold.The Infrastructure company would sell use of its infrastructure to service providers. The Infrastructure company would be run by a Board appointed by the shareholders.

    The shareholders would be the service providers who buy the use the infrastructure, and their share holding would be free issue in proportion to the value of the services bought and for the duration, handed back to the infrastructure company when the service purchase ends. Buying and selling of share would not be allowed.

    The Infrastructure Company would ONLY be allowed to raise money from its shareholders, and the distribution of profits would be by share dividends.

    Consequently there would be formed a virtuous circle where by the those who benefit from infrastructure improvements are responsible for their implementation. BD(UK) would no longer be needed. Infrastructure growth would be in the hands of private enterprise who would be able to do more far more quickly and at much less cost than is being achieve by the current chaotic mish-mash. The government would set a strategic objective of rolling out High-Speed (at least 50Mbps) broadband to the WHOLE country in a short but realistic timescale, with failure and success incentives.

    There is no shortage of argument from Government as to the merits of High-Speed broadband, so there should be no voice against the objective. The WHOLE country will get a commercial boost as companies (and public service providers) anywhere in the UK will be able to communicate effectively with everywhere else. And the rest of the world, of course.

    There is a successful precedent for taking over a private infrastructure, the National Grid.

    Yes I know there are loads of things that could go wrong, but grasp the concept and work on the details so we can all benefit, and quickly.

    1. Electro-Kevin
      October 6, 2011

      Subsidising the energy bills of our manufacturers might help.

      Btw – why have our privatisations gone so awry ? (A propos the Big Six and railways.)

      reply: The railways are renationalised in the main, and the energy utilities are under the control of Eu green policies for dearer energy

      1. Electro-Kevin
        October 6, 2011

        Point taken on railways.

        I thought the energy problem was the generators/suppliers locking out the competition.

        Thanks for your replies btw.

    2. outsider
      October 6, 2011

      The same effect could be achieved much more simply and positively by just removing the crippling regulatory restrictions on BT, which have destroyed its incentive (and capacity) to invest strongly.

      1. Alan Wheatley
        October 6, 2011

        The problem with relying on investment from a commercial company is that that are large parts of the country where there is no commercial case for investing in High-speed broadband infrastructure.

        Further the principle upon which commercial investment is currently being organised by the government is guaranteed results in extremely inefficient projects, some of which are paid for by top-slicing the BBC licence fee receipts.

        What is needed from the government is an act of faith to implement the infrastructure throughout the WHOLE country, which is hardly a big call given they says about the importance of broadband, but leave it to private industry to implement the objective with the incentive that the faster and more efficiently they do it the more profit there is to make.

        1. outsider
          October 6, 2011

          Au contraire. The deal is (or rather should be) that BT is allowed to make monopoly profits in the rest of the country to subsidize its commitment to offer a universal service. Keep the Government and taxpayers out of it and get the investment moving.

          1. Alan Wheatley
            October 7, 2011

            In the “final third”, those parts of the country where it is considered that broadband infrastructure investment is not commercially viable, the Government is already in it up to its neck having persisted with the quango Broadband Delivery (UK) funded by top slicing the BBC licence fee. The fact that they are making a pig’s ear of it is why the infrastructure growth needs to be put in the hands of private enterprise, but in a way that will deliver a service to the WHOLE country.

  20. frank salmon
    October 6, 2011

    Inflation is only a worry when wages are rising. In real terms, we have wage deflation. Hence, higher interest rates would only make working people worse off. For honest money to exist, with higher interest rates, we’d need to cut taxes and puplic sector provision quite drastically. Governments always find it easier to debase the assets of the prudent though, rather than risk social unrest or electoral defeat.

    1. Robert K
      October 6, 2011

      A slightly contradictory post. You rightly say that governments always find it easy to debase the assets of the prudent [through inflation]. On that basis, inflation is always a worry.

    2. Electro-Kevin
      October 6, 2011

      British Governments certainly, Mr Salmon.

      Where else (apart form Denmark) would a ‘fat tax’ which penalises every healthy person be considered ?

      In many ways this is the same thing. Covering those who borrow to excess and those who eat to excess with the hard earnings of those who don’t.

      1. uanime5
        October 6, 2011

        The fat tax only penalises those who eat unhealthily, so it will have little or no effect on those who eat a healthy diet.

        1. Electro-Kevin
          October 6, 2011

          Why not simply tax people who are fat and not fatty food ?

          Alas the tax has to come from somewhere. We must expect such generalised taxation rather than it being fairly targetted.

          1. Electro-Kevin
            October 9, 2011

            It’s a funny kind of poverty that results in obesity.

            (In answer to politicians who claim that it is down to deprivation)

  21. Acorn
    October 6, 2011

    A few posts back I said “I am amazed the UK is still getting away with it”, (Sept 23). There is a guy at an Italian bank, asking the same question. Keep in mind that a budget “primary balance”, is the budget deficit without the cost of paying the interest payments on the national debt. .

    1. javelin
      October 6, 2011

      Whilst I think he’s right I also think the UK has problems ahead when investors start to demand more to lend for us. The only reason our rates are low is that the UK is seen as a safe have (aka tax payers in the UK don’t riot – Marx’s failure to predict a revolution backed that up). Once rates start to rise the UK growth will slow too, whilst EU Government borrowing costs will fall as risks of soeverign defaults fall away.

  22. Dr Bernard Juby
    October 6, 2011

    When will the powers that be come to their senses and realise that printing more money (without the necessary colateral funds to support it) simply reduces the value and thus purchasing power of savers, such as pensioners, and therefore prevent them from spending?
    Simple mathematics states that if you have something and double it by simply issuing more “tokens” you, effectively, halve what you have got. Do it with money & you diminish its value.

    1. frank salmon
      October 6, 2011

      That’s right, but by the same token, you diminish debt.

      1. Dr Bernard Juby
        October 7, 2011

        Buyt that would only be a token diminution since the value required to pay for it would be equally devalued!

    2. alan jutson
      October 6, 2011

      Exactly Bernard.

      It is not as if history has not already told us this, many, many, many times already.

    3. rose
      October 6, 2011

      Governments have always printed money to cancel their debts.

      Their employees, not just civil servants and local government officials, but everyone from Trade Union representatives and their troops, to hospital consultants, vicechancellors, and judges, are all on inflation-proof salaries and pensions, so they connive at this. They never see the personal cost to themselves and theri families of bankrupting and destabilising their own country, until it is too late. Even then they blame other factors. That is why inflation-proofing the public sector is so dangerous and unhealthy. Interest rates would go up as soon as these pampered people had to save honest money during their working lives and live on its proceeds in retirement.

      Continuous growth is madness. The cycle is necessary, in nature and the economy. “Flatlining” is desirable after a period of unhealthy boom. We must stop sneering at the order and stability of Japan. We could do with a bit of it ourselves. We must stop importing 600,000 foreigners a year into a finite already over crowded space, and rediscover social stability and hard work.

      The boom and debt driven prosperity conjured up by Brown has been excessive and destructive, and it must cease. It has not been prosperity in the true sense, but a national malaise.

      1. rose
        October 6, 2011

        The other thing we must stop is transferring wealth from savers to borrowers. Hard-earned savings are being devalued, at the same time that next to no interst is being paid, while borrowers are able to acquire property with appreciating capital values at no cost to themselves. It pays them even more to have inflation on top of that unfair situation because it cancels their debts, which they didn’t have to pay proper interest on in the first place, as well as the government’s. So it isn’t just inflation-proofed public sector people conniving at the ruin of their country; it is all those privately employed people with mortgages as well. This is yet another reason the government won’t stop printing money: they don’t want to upset the mortgaged people in both the public and private sectors, who are acquiring free capital at the expense of savers.

        1. British National
          October 6, 2011


          You are “Spot On” with these comments. As a retired Saver, I have been battered this year particularly as long term Bonds made in 2007 ran out and I am offered desultary interest for my cash, from all UK Banks. If they do offer an “Inflation Balancing Return” they will not let you cancel the bond at any time, until the full contract period has run. That means to me that UK Banks are now planning for a Public Bank run, as soon as Greece defaults and a few major Banks go to the wall

          1. alan jutson
            October 6, 2011

            B N

            Money locked away.

            Have noticed exactly the same recently.

            You have to lock any long term investment away with a number of so called providers, and cannot get it out at any cost during that fixed term.

            I refuse to do business with such organisations and have told them all so.

            All they are doing is borrowing on the cheap from their customers, rather than borrowing interbank, makes you really wonder how sound the whole system is.

            Scary stuff really.

          2. rose
            October 7, 2011

            I notice today the dons are on strike at the thought of being slightly less index-linked than usual.

  23. Iain
    October 6, 2011

    Agreed, you don’t get a recovery by making people poorer, yet this seems to be just what Government’s QE policy is achieving. We also have a corporate sector where the market no longer functions, for how is it that in a recession the energy sector can prioritise maintaining their profit margins?

  24. James Reade
    October 6, 2011

    Er, no. Their looser monetary policy is about the only thing between us and an economic catastrophe given how tight fiscal policy is (and it is tight, John).

    SO many points to make. Thankfully, Labour made monetary policy independent of politicians like you back in 1997, one of their best decisions in their entire 13 years. They left policy in the hands of those who know best about the economy, not those who know best about politicking. They left it to a group of highly trained people who look at a vast amount of information for days and days before convening to make a decision – based on evidence, not political considerations – the kinds you allude to a lot in this post.

    They left it to people who are aware that the world isn’t as simple (or wrong headed) as “the main cause of the economy slowing is the high inflation they have allowed.” Do you really think firms are deciding not to invest, people deciding not to spend, because inflation’s a little high at 5%? In your governments John of the 1980s and 1990s, how many times did you have inflation below 5%, again?

    They’ve lost sight of what their remit is, because they don’t act immediately? Well, they are trained, and know that the transmission mechanism for their policy isn’t immediate, it’s 12-18 months in the making, so attacking inflation now is fighting the last war. They fight inflation in the future. If they engaged in tight monetary policy while fiscal policy is tight, then we’d quickly see inflation fall through the floor, yet they need to see that inflation remains symmetric about 2%, so that’s an equally great threat to avoid.

    Then, why is inflation at 5%? Is it because of QE1? Or is it because of the VAT rise? Added to the depreciation in the pound that surrounded the financial crisis (which happened six months before QE1), these are the reasons why inflation is high – not because somehow the Bank has forgotten its mandate. Sure, jacking up rates may lead to the pound appreciating, but are you sure? Why would anyone put their investments into the UK if growth prospects were even worse than they currently are? (oh and that’s why the relevant interest rates for govt borrowing are low, not the Bank’s handy work – it’s the total absence of growth prospects).

    Hence, it’s quite easy to make an argument against what you’re proposing. And to propose to do so on behalf of those poor savers?! Given the savings ratio turned negative before 2008, the answer is not particularly many. Not that that means we should ignore them, but it begs the question – why bleat on about them as if they should be the focus of policy, instead of keeping inflation in check?

    Last few times I commented, I focussed on just one or two things you were patently wrong about, hopefully with this long post I’ve managed to cover much more of the areas you’re wrong on.

    Reply: Dream on. If a public deficit of 10% is a tight fiscal policy , can you tell me what a loose one would look like?
    Over the last 4 years I have made a series of calls on monetary matters on this site which would have avoided some of the banking disasters, ensured a less violent boom to bust movement and allowed lower inflation. I do not see how you can think the last 5 years of policy was optimal.

    1. rose
      October 6, 2011

      If you increase the supply of money, James, how can you not decrease the value of money? Inflation is caused by governments doing just that, not by price rises or tax rises. And a higher cost of living is not to be confused with the disease of inflation. Ask any Swiss or German housewife.

      1. James Reade
        October 6, 2011

        rose: The exchange rate is akin to the share price of the UK. If people expect the UK to grow, they buy into the UK, just as if they expect a company to grow, they buy shares in that company.

        Hence, if the monetary authority prints money, but the implication of that printing is that the economy will grow, then it’s perfectly feasible that the exchange rate will appreciate despite the increase in the supply of that currency. Just like the share price of a company could increase when more stock is issued.

        Inflation is caused by many things, and given it’s defined as price rises, I think it’s kind of obvious one of the things that cause inflation are price rises, and hence if VAT rises, this causes all prices to rise, and hence causes inflation. Governments can cause inflation by printing money, but this need not always be the case.

        1. Brian Tomkinson
          October 6, 2011

          You wrote: “it’s perfectly feasible that the exchange rate will appreciate despite the increase in the supply of that currency.” Funny then that the pound immediately depreciated and Mervyn King said, when asked about this, that this depreciation showed the policy was working!

          Reply: Indeed! The City headlines were pound plunges on announcement of QE2

          1. James Reade
            October 7, 2011

            Do people on here not understand that I’m talking in the abstract? You all here talk as if one thing immediately must follow the other, but I pointed out that it needn’t do so. What’s so hard about that?

            So pointing out that in this case, thing B did follow thing A really doesn’t affect in the slightest what I’ve said – and I’d really have thought someone of your intelligence John would be able to appreciate that. Clearly not.

            Do you actually reject the idea that the exchange rate can rise/fall based on expectations about the future viability of an economy? How else do you explain the 2008 25% depreciation then?

            Reply: Of course markets often move on expectations. They expected QE and inflationary policies in the Uk that would undermine the economy, they sold the pound in advance, and they were right.

          2. James Reade
            October 11, 2011

            Wow John, that is absolutely stunning. You just don’t read what people who disagree with you write, do you?

            We’ve already been through, ad infinitum the fact that nobody had QE1 in mind 6 months before it happened.

            If you think they did, show me some evidence.

            The fact is, you’re desperate to spin this particular story, and you’ll contort every little bit of evidence until it’s unrecognisable to support your story.

            I doubt I should bother, but I will try once more. The pound fell 25% in value because the economy was crashing, not because somehow somebody expected QE1 to come. It fell because growth prospects evaporated big time.

            I’m lost for words, and saddened that a politician, someone who represents the public, is so unable to listen to the views of others. Mind you, you fail to bother to listen to economists on the MPC, so I don’t see why you’d bother to listen to any other economist. You already know it all and aren’t prepared to listen to a thing anyone more qualified than yoursef says (unless it supports your prior prejudice).

            Reply: I am always happy to listen. This is the first time you have even tried to answer my simple quesiton, what caused the collapse of the pound if not printing more money. You now say the decline in the pound was caused by the evaporation of growth prospects. Why did this cause the pound to fall, and not the dollar or the Euro, where growth prospects were also crashing?

    2. James Reade
      October 6, 2011

      Again, John, as I’ve said before: Go back to econ101. The fiscal stance is NOT defined by the fiscal deficit. The fiscal stance is the direction of policy, not where it’s at. To announce and implement the kinds of cuts that have been announced cannot be anything but tight.

      I’m glad (you think) you’ve been able to be so prescient on here John, but I’m sceptical. Your government in the 1980s and 1990s made some remarkably bad monetary policy calls. So would any government because it’s driven by politics and not what the economy is doing. I haven’t defined any particular policy decision at any point as optimal – I didn’t say the Bank was perfect at its job, but it will make decisions not based on political judgements and calculations, as any elected party would.

      I don’t dream thanks – I just study, learn, research and teach economics, and observe politicians distorting and warping it to suit their own devices all the time – being the slaves of dead economists to quote one famous economist of the past.

      Reply: The fiscal stance is defined by the size of the deficit and by movements in the direction of the deficit. In August the deficit was well up on August last year, so on your definition it is loose.

      1. James Reade
        October 7, 2011

        Erm, no. One thing you can say against me is I didn’t fully define what the fiscal stance is: It’s the intended direction of fiscal policy.

        It’s intended because governments cannot control the minutiae of their fiscal position because of the existence of income taxes and benefits which are contingent on the condition of the economy.

        Hence it’s perfectly viable, and was perfectly predictable (you aren’t the only one feeling smug that the recent movements in the deficit have proved you right John by any stretch of the imagination), that the deficit would not fall with Osborne’s actions to try and cut it, because they lead to a worsening of the economy, and hence a worsening of the fiscal balance.

        But that does not then mean that fiscal policy has been loose. Are you trolling, per chance? Part of me wonders why I’m continually saying this kind of thing because it’s so utterly ridiculous to suggest that we have loose fiscal policy at the moment.

        Particularly ridiculous when the deficit run in 2008 was, relatively speaking, smaller than the one run in 1992, and also ridiculous when that deficit didn’t start falling until 3-4 years after the depth of the recession. I assume fiscal policy was loose throughout 1990-96 then?

        Reply: Yes, fiscal policy was loose in the early 1990s and equally damaging.I opposed ERM membership and proposed lower spending at the time. The Uk economy does best when the deficit is under control and falling. What level of borrowing today would you regard as loose? Do you not accept that the current deficit is well above the cyclical stablizer level, because there is a large udnerlying structural deficit? Why don’t you regard that as loose?

        1. James Reade
          October 11, 2011

          I’ve already told you exactly why I don’t regard the current situation as loose (and why no economists do either). The intended direction, all announcement, all movements, are in the direction of tightening.

          All economists who aren’t political lackeys also said that this wouldn’t cut the deficit because it would worsen the economic situation. We’ve been proved right (it wasn’t hard). But that does not mean thus that the fiscal stance was loose.

          As I’ve said now on more than one occasion, it’s the intended direction of policy that defines the stance, and that intended direction has consequences – the kind you’re unable to recognise since you also think depressed demand is because of inflation not because of the job uncertainty the tight stance has induced.

  25. English Pensioner
    October 6, 2011

    When Gordon Brown set up the present arrangements, I thought that the main priority of the committee was to control inflation and keep it within specified levels. I liked the idea (which I now realise was all smoke and mirrors) as it seemed that at last someone was prioritising the need to keep inflation down.
    Yet if the government has not, officially changed the MPC’s terms of reference,, why can it be allowed to unilaterally change them so as to prioritise other concerns.
    I know I’m an engineer not a banker, but to me it seems that, if inflation had been kept down, everyone would be able to buy more with their money which in turn would have boosted the economy. Rampant inflation means that I (and everyone else) am spending more money on food and essentials and less on “extra” items which we might normally buy.
    Can’t anyone challenge the MPC? They’re not even trying to do what was stated to be their main objective. Ministers can be subjected to a Judicial review, its a pity someone can’t seek one into the actions of the MPC.

    Reply: Good point. The public can challenge through kicking up a fuss and bringing to bear the pressure of public opinion.

    1. rose
      October 6, 2011

      How could you have thought it a good idea when the committee was packed and the civil service politicised? John Major thought he was doing the same thing with our entry into the ERM. He was a banker first, then a politician.

      1. Public Servant
        October 6, 2011

        If you and fellow contributors continue to peddle this line of a politicised, presumably, anti Conservative, Civil Service then please provide some evidence. The Civil Service loyally supports the government of the day irrespective of political stripe. Mr Redwood why do you, who have been in government and are part of the political class sit by silently whilst these libellous remarks are made on your site. I dare you to correct these baseless insults. It was exactly the same when Labour came to power. The constant jibes that the Civil Service supported the Conservatives. The only politicised civil servants are the Special Advisor political appointees such as Mr Coulson.

        Reply: I do not support libels.

        1. Public Servant
          October 6, 2011

          Mr Redwood
          Do we have a politicised anti Conservative civil service in your opinion or not? I think you know that we do not but do not want to alarm your band of followers by saying so.

          Reply: I think generalisations are difficult. The civil service has a range of political views and party sympathies amongst its staff. The professional ethos and requirement is civil servants act for the government of the day and do not involve themselves in party political disputes. They need to give impartial advice and execute decisions fairly once made by the politicians on that advice. Some people writing in here I think are not alleging civil servants break the code over party politics. I think they fear that the mind set of some civil servants is towards state solutions to problems and to higher public sector spending as a natural solution to problems, when they think this is not the right approach.

          1. rose
            October 6, 2011

            Yes, very well put Mr R.

            The question I would like to ask Public Servant is this:
            Do you consider an active belief in the big state, social engineering, and big public spending solutions, to be apolitical?

          2. alan jutson
            October 7, 2011

            Public servant

            I think the phrase turkey’s do not often vote for Christmas springs to mind.

            I do not know how long you have been a public servant or even if before it you had been in the private sector, but I can assure you, as can a number of family members who have worked in both sectors, that the mind set of the public service industry and is workers, and that of private industry are a million miles apart.

            You may not like it, but in the vast majority of cases, for the vast majority of workers, this is the case.

          3. Public Servant
            October 7, 2011

            No doubt that is the mindset of some civil servants just as some others are deeply conservative in their views but as you acknowledge the issue is not the personal politics of individual civil servants rather whether they follow the Civil Service code. What do contributors suggest? Only recruit those professing fiscally conservative views?

          4. lifelogic
            October 7, 2011

            The problem is that what is needed for recovery is a smaller more efficient state sector and lower state sector pensions which are about 10 times the size of average private ones.

            This puts a sensible right wing government (should we ever get one) against the personal interest of the civil servants – which are for more pay, more pension and a bigger civil service. Also it is a job which often appeals more to women, due to flexibility and working conditions and to people attracted to working in certain areas such are as health, equality, tax, the disabled, health, education and similar which tend to be to the left of centre issues and encourage lefty BBC type thinking. This even rubs off on politicians who spend their time dealing with these areas too.

            The 80%? who work in the private sector are largely ignored other than as a source of cash, licence fees or similar.

            which this government need to provide t

          5. alan jutson
            October 8, 2011

            Public Servant

            Many thanks for your response, sounds like you indeed have had an interesting life, and certainly one which was with Armed Forces and the Police a very varied one, with a certain set of particular rules on discipline and behaviour, and now certainly rules about proceedure, as indeed were the first two.

            But firstly let me address a point you made in the paragraph in which you gave your original reply.
            I have never made any accusations about you or the civil service favouring any one political party or another, indeed individual political beliefs are the norm in any civilised society.

            My comment about the mindset of civil servants as opposed to the private sector may be of interest to you, as it would relate to one of your occupations.
            One of our family members has served some considerable time working both in the Private prison sector, and also the Public prison (Secure hospital) environment .

            Whilst both work to defined budgets, the private sector one is much smaller and relates directly to how many prisoners are being managed, as they are paid on a cost per prisoner basis from the Home Office.
            Thus everyone is urged to keep costs under control at all times, not by short staffing as there are official levels and the repercussions could be huge, both financial and security wise for failure.

            The Pubic Sector appears to have a much larger budget per establishment, has many more staff for a similar output, better pay and better pensions, sick and holiday entitlement, and staff do not appear to be encouraged to think savings at all.

            I see now (Conservative conference) that a first time contract has been agreed with the private sector, that the government is now only going to pay the private prison Company for their work, on a payment by results basis, to be based on re-offending rates over a set period of time.
            Think they said Doncaster Prison was to be the establishment.

            There in lies the difference, one has an open mind, the other somewhat closed, one works to a tight budget the other less so, one is paid by rewards and performance the other no such targets, one costs significantly less per prisoner than the other.

            Work for prisoners and rehabilitation is also practiced widely by the private sector, so its not as if they are just locked up and left in a cell. I think the relative re-offending rates stack up well against the Civil Service version as well.

        2. rose
          October 6, 2011

          Nor do I.

          How did the National Curriculum of the 1980s mutate from the then PM’s simple plan for children to be taught the 5 Rs, into the complicated destructive bureaucratic alienating dogsdinner of regulation it became in the hands of the civil servants, if there had not been a whole lot of Ted Wragglets in the DES, determined to wreck the policy and turn people against the government? Or was it just stupidity?

          1. Public Servant
            October 7, 2011

            Clearly a belief in big state solutions is to take a political position as is to believe in small government and market solutions. Is there any sentient being that does not have personal political opinions? But policy is decided by Ministers and not civil servants. Civil Servants implement the policy of tge government of the day. Please tell us which government minister cannot implement his or her policy agenda due to politically motivated civil servants? Do they stop free schools at the DoE? Have they opposed the immigration cap at the Home Office? Is it civil servants that have forced the Chancellor to adopt his money printing policy? Perhaps civil servants are to blame for the opposition to the reform of planning law. Your argument is insulting, mendacious and intellectually lazy and made without a scintilla of evidence.

            Alan you wonder how long I have been in the public sector. The answer is 28 years thus far. I served for 10 years in the British Army, 8 years as a police officer and the balance as a civil servant. Prior to joining the Army I had a couple of manual jobs in various factories. I have been incredibly lucky to have had such a rewarding working life. My own department is implementing a 23% budget cut and I say fair enough. My generous pension is being reduced significantly. I dont like it but would never strike. I am incensed however by the accusation that my colleagues and zealously implemented the Labour agenda but are now frustrating the current government’s agenda. It is as baseless as the accusations by Labour in 1997 that the Civil Service was packed with closet Conservatives.

            Reply: As one who does not make these accusations, I would be interested to hear your take on how the errors came about in the cancellation of the Labour programme for building new schools at DFE

          2. rose
            October 7, 2011

            Public Servant,

            “Please tell us which government minister cannot implement his or her policy agenda due to politically motivated civil servants?”

            Please note my example above, from the 1980s. As you have been a civil servant for 28 years, then please forgive me for appearing to make a personal criticism. It is not intended as such, and I had hoped it would predate your individual service. Perhaps it still does.

            I expect we all know excellent civil servants. I certainly do. That is understood in the general criticism made by so many of us.

          3. rose
            October 8, 2011

            By the way, where does Tom Watson get all his dirt from, if not from a string of agents throughout the civil service? He must have as many there as in the press and broadcasting.

  26. British National
    October 6, 2011

    Being retired for the past three years, my wife and I rely on a small pension and our savings. If inflation is at 5.2% we are being punished, s Savers. Yesterday, I was offered a measly 1.4% per annum from a major high street bank for a simple deposit account, but with a capital sum exceeding £50,000 sterling. All UK Banks now offering savers “Bonds” want to lock in your money for a minimum of one year, usually three years and go up to five years. It is only when savers buy a “Bond” can you even have a chance of reaching near the inflation level, with the interest you earn.

    Savers and Pensioners particularly are being penalized most if quantative easing continues. A weaker pound means more inflation for the old particularly as we survive on quite low incomes. Food and Utilities (heating) are very high percentages of our monthly income. Has the Coalition thought through the fact that the Baby Boomers and all those already retired are spending their “acorns” now to survive. Millions are spending their last capital and are in no position to ever earn income again- we are retired ,often in poor health.

    Who will pay us a higher State Pension when our savings are gone? Who will pay for Care Homes when we are broke too? The Government must grab the Public Sector by the throat, control and cut inflation by keeping a strong pound and a sound money policy. The Coalition is in danger of angering the whole Community of Britain at this rate, as they seem rudderless and powerless in the face of this huge Financial Storm in Europe, which can only get worse.

    Banks in the UK, b forcing Savers using higher interst bonds, give me a clear signal that they are planning on a “Public run on the Banks” once a major European Bank fails or Greece defaults. The huge bonuses these Bankers are planning for Christmas are no longer a scandle, but plain simple “Theft” from their Customers and Depositers. We have no where else to place our Savings, with Equities and Sovereign Bonds so risky today.

    Mr Redwood, can someone at your Conference or Party please speak up for Pensioners spending out the last of their capital? Millions will suffer real hardship, food shortages, hyperthermia etc this Winter if nothing is done. Public Sector Mandarins supported by the BBC are financially “raping the rest of us” finanicially. Everthing must be subject to audit and cuts, particularly the Union and Public Sector Pensions. Watch how hard the Unions fight when it comes to the Government trying to cut back their pensions, which are way,way higher than the rest of us have obtained in the Private Sector.

    1. rose
      October 6, 2011

      As a young woman I saw old people dying of heart attacks and even in some cases committing suicide because of the anxiety caused to them by the Heath/Barber inflation and the wreckage of all their careful and conscientious plans for retirement. Does the PM want to be remembered for presiding over another such period?

    2. Public Servant
      October 8, 2011

      British National have you considered using a portion of your money in peer to peer lending. It is not risk free but you can specify that a maximum amount to be lent to an individual borrower e.g. £10. I have a few hundred pounds in the system and have suffered no bad debts. I am earning 7% gross on that money which you could not find on the high street and the money is being used in the real economy. I am not qualified to give financisl advice and am not trying to but there are some alternatives that could suit some people depending on their circumstances.

  27. sm
    October 6, 2011

    Increasing inflation (with unemployment) will just contract private discretionary demand in a spiral.

    When will interest rates be allowed to rise and offsetting debt-deflation to be allowed to squeeze out the mal-investment or are we hoping to bailout certain interests until it is impossible.

    With the current system and policies it will soon be higher interest rates and steady inflation or more inflation then higher interest rates.

    What will we have we achieved with the bailouts then. Keep going with the new/good banks it is a small step forward.

  28. Jer
    October 6, 2011

    I really don’t understand this post.

    Mr Redwood, you are a senior member of the senior part of the government.

    The MPC gets all of its authority from the government, if they are failing to deliver what the government wants then the government has the power to change it.

    In truth though I suspect that the MPC is doing exactly what the government wants, acting as a shield for a policy of debt devaluation by inflation. I can’t criticise it myself, as I can’t see a better alternative, other than government cuts of course.

    Reply: I am not a senior member of the government. Only Ministers are members of the government. I have n o power myself to change the MPC, though I have consitently pointed out that they are n ot doing what they are supposed to do. Ministers could of course change it if they wished, but at the moment they do not wish to change it further.

  29. Robert K
    October 6, 2011

    Inflation, as your post so clearly explains, is taxation in disguise.

  30. Electro-Kevin
    October 6, 2011

    Personal inflation is much higher than 5.2%.

    In fact it feels pretty unsustainable at the present rate.

  31. Caterpillar
    October 6, 2011

    Seconded (I believe) JR is correct here.

    Questions that needs urgently to be answered is why the BoE/MPC pursues its actions, why the Chancellor permits it and why the Shadow Chancellor doesen’t question it. What can be done to stop it?

    [I would not dare to say any of the following are true, but given that there appears to be no reasoned basis for the MPC’s actions, one cannot help wondering:

    (1) Perhaps some MPC members may have an academic career invested in unconventional monetary policy, and wish to continue the experiment of the QE/ZIRP playbook?
    (2) Perhaps the MPC are suffereing from psychological biases e.g. group escalation of commitment, risk-seeking in losses etc?
    (3) Perhaps the Chancellor and the Governor have unofficially agreed to a nominal GDP growth target of 5-6%, however it is split between real growth and inflation, allowing the Chancellor to make nominal plans (and everyone else to adjust to the real within this)
    (4) Perhaps the Chancellor has made a political decision not to question the Governor / MPC. What would the effects on the markets be if the Governor & Chancellor publicly disagreed? What attacks from the Opposition would occur if the Chancellor questioned an independent MPC having set up an independent OBR, and pushed more powers to the BoE?
    (5) Perhaps the Shadow Chancellor can not ask a question because it shows that the MPC not the Coalition is making a significant ‘contribution’ to failing growth? Or perhaps it is simply that the previous Government put the system in place and do not wish to admit that the fire exits are locked?
    (6) Perhaps the Government (wrongly) believes that the BoE can do nothing about inflation, in which case monetary policy must be set on other grounds. The MPC can only consider other policy areas “subject to” the inflation target being hit … if the MPC cannot do this then the Govt has to explicitly set another target or the Chancellor can take emergency control of the rates (I believe this is premitted under the BoE Act). Is the Government capable of doing this?
    (7) Perhaps there are not 325 other MPs with enough integrity to join with JR’s reasoning. Upping interest rates would reverse some of the benefits flow to wreckless mortgagees … but these are voters, the “virtuous savers” have no alternatives to give their vote, so simply don’t matter.
    (8) Are there 325 MPs who will openly say that house market clearing is restricted, that businesses that were marginal in boom times cannot be profitable in bust times, that cash rich companies will hold cash until the delayed opportunities develop (and shareholders won’t demand a buyback because they wouldn’t know what to do with the cash anyway – who’d put it into disrupting companies when the status quo is so protected?) and the really unspeakable, that sometimes deflation actually brings back demand as people can afford to buy. ]

    The UK/BoE/MPC missed an opportunity in early 2010 to start a little tightening, the longer it is left the harder it gets. The path being followed seems to be:

    inflation to stagflation to stagnation,

    All that additional money creation will now do is move from stagnation back to stagflation; a bit of tightening and deflation, could cause a temporary double dip, but give the foundations for real not nominal growth (… but intentionally getting worse before it gets better is again unspeakable).

    1. Denis Cooper
      October 6, 2011

      I’d go mainly for (3) with a touch of both (4) and (6); plus pace javelin below it could be that the government foresees an urgent need to provide money to commercial banks if/when the Greek government defaulted and if that triggered defaults by other eurozone governments – although I’m sceptical about that “domino” theory.

    2. uanime5
      October 6, 2011

      Inflation is high because it allows the government to reduce its debt and borrow more cheaply.

      1. outsider
        October 6, 2011

        That appeal undoubtedly makes a pro-inflation policy easy to sell to Chancellors, Prime Ministers and Treasury officials.
        But the MPC is pursuing a theory cooked up by Mr Bernanke and other central banking academics over more than a dozen years that the interest yield on bonds should be lower than the rate of inflation after a financial crash (ie the real long-term rate should be negative). The theory is being proved wrong but that has not yet been conceded.
        So we are trapped as guinea pigs in their mad laboratory.

      2. rose
        October 6, 2011

        And because too many other people think they benefit from it and low interest rates.

      3. davidb
        October 6, 2011

        And they have to get rid of the debt cos the last PM was even worse as a chancellor than he was as a PM.

  32. javelin
    October 6, 2011

    To continue with the theme that the ECB is trying to SCARE EUROPEANs into handing over more powers.

    Over at ThompsonReuters they have produced a web application that tests Euro banks against a soverign default. And very good it is too.

    The reality turns out to be even more SINISTER than even I could imagine. I thought I was in touch with reality. But not the reality of the EURO leaders minds. Because it turns out that haircuts on EU soverign debt ARE NOT that bad after all.

    So what does this mean …

    In my naivity I presumed that the reason the EU held back on adding soverign stress tests was that they didn’t want a run on those banks. OH how FOOLISH I was !!

    The reality is that the EU didn’t include the stress tests BECAUSE they results were not that bad. In fact it turns out all the EU wanted to do was to INDUCE FEAR into Governments to make them hand over power power. They wanted Governments to sign over fiscal powers to the EU in order to save their countries.

    Machivellian. Yes. Even Lord Mandelson must be squinting into the shadows on this one (well maybe not) .

    So France and Germany tell Greece to go to hell in a hand cart. Tell the PIIGS to go skewer themselves.

    Anyway the application is here. Its very cool. You can play around with the hair cuts yourself. All the traders are playing with it.

    (deleted as told it is not public)

    1. Denis Cooper
      October 6, 2011


    2. javelin
      October 6, 2011

      Trichet is being asked about Do we still need to recapitalise banks. He doesnt actually answer the question he just says where ncessary we will recapitalise. Which may mean no banks need recapitalising – and no mention of haircuts.

      I really think the biggest risk here is the ECB and not the commercial banks – because the ECB has bought so much distressed soverign debt.

      When I listen to Trichet speaking he never actually says that the commerical banks are at risk from soverign default. I think there is an elephant in the room hee. We all know the ECB has bought a lot of soverign debt.

      For me the question is what will the impact of soverign haircuts be on the ECB. For me it will be taxpayers money totally wasted for 10 years.

    3. javelin
      October 6, 2011

      Trichet – again sidestepped the capitalisation of bank question. He came close to saying there was “not” a problem – as well as he would do what is necessary. He also said he had confidence that the new European Banking Authority can do what is ncessary (which is actually not alot). So if he has confidence and its “not” really a problem why is the EU making such a loud noise about a banking crisis following a sovereign default. Only to push for further integration from Germany.

      I say let the PIGS default.

    4. oldtimer
      October 6, 2011

      Thanks for that application. I see the full calculator details the effects on the individual banks.

      I see your point that the recapitalisation sums for the banks are less than might be supposed. But surely what the Europols are concerned about is the prospect of failing to roll over maturing sovereign debt by lenders unwilling to take more haircuts in the future.

  33. Denis Cooper
    October 6, 2011

    To be fair, part of the MPC’s statutory remit is to support the government’s economic policies, but subject to the control of inflation.

    However if the government wishes to reverse that order of priorities it should do so openly, which would be possible by asking Parliament to agree to the activation of the 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.”

    Section 11 being the part of the Act which lays down the Bank’s normal monetary policy remit:

    “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.”

    That would be the honest and transparent thing to do.

    1. Brian Tomkinson
      October 6, 2011

      It may be “the honest and transparent thing to do ” but it would still be the wrong thing to do!

      1. Denis Cooper
        October 6, 2011

        But if it’s going to be done I’d rather it was done honestly and transparently, not by behind the scenes pressure from Osborne – which is arguably unlawful and which is certainly undermining the reputation of the Bank and the MPC and destroying the credibility of the government’s inflation policy.

        Reply: Remember precedent is that it is a joint decision by Bank and Chancellor, where the Bank needs the Chancellor’s consent. I think they are both in this together, willingly.

  34. JimF
    October 6, 2011

    Yes, another £1500 per person printed off to spend as-u-like. Equivalent to every person in the Country breaking a window and pinching a high-spec TV. Sure it makes work for somebody in the short-term, but what is the long term benefit? Oh, and spot the loser.

    This is crazy.
    It is madman economics.

    1. Caterpillar
      October 6, 2011

      JimF: I don’t think we’ll see the media reporting it in this clear way. A ‘nice’ comparison.

  35. Bernard Otway
    October 6, 2011

    The patient IS in charge of the Loony Bin,Jack Nicholson and his Rictus Grin is there for all to see.And to cap it all a TRUE visionary passed away today,would that the political class
    had but one ounce of Steven Jobs abilities,from his start in his garage HOW much wealth has he created and HOW MANY jobs,ironical that his Surname is that “JOBS”.ONLY the private sector can do this the public sector is INCAPABLE,because of the mindset of these people and their bosses,I only know of ONE who was different ,the Scot sent to Hong Kong after WW2
    many columnists have commented on this Group Think mentality,and for instance in this adoption fiasco the quite frankly SINISTER and SCARY tactics,one article was headlined
    “they would not let you adopt your OWN children” if they had to assess you.I am so cynical that I am never surprised that there is a propensity to Guard ‘THE CAMPS” as in 1939-1945
    KNOWING FULL WELL WHAT WAS GOING ON INSIDE,by what would otherwise be thought of as ORDINARY PEOPLE.I am afraid I Tar the public service with this BRUSH
    and of course almost the entire political class[JR and a few exempted].

  36. norman
    October 6, 2011

    So, £75bn more of UK PLC shares to be created in the latest giveaway share issue. Should give growth a nominal boost in Q4 / Q1 before inflation does more damage than any good it will do and puts us further away from a lasting recovery.

    Here’s some free financial advice to everyone – buy shares in tin cans, it seems that our intellectual betters are still in the learning lessons phase of this crisis. Hopefully someone learn something soon before much more damage is done.

  37. Caterpillar
    October 6, 2011

    Well today’s MPC/BoE decision, suported by the Chancellor has destroyed any future hope for the UK to recover, either its economy or its integrity. The answer to the UK’s economic problems, by a Govt supposedly replacing an economically incompetent one, is to print. It is easy to blame the unwise decision making on the members of the MPC, but as JR has said on here the Chancellor has to sign it off and so he must have.

    No other political issue will now be worthy of discussion, no value can ever be attached to any UK politician in the international arena. It can be forgiveable for stupid people to make decisions unwisely, but if intelligent people make decisions unwisely only integrity can be questioned.

    (I would never join the calls that are sometimes written on here for Cons to join UKIP, but I am shocked that Conservative MPs continue to remain in a high inflation, printing money party or continue with the Govt as is.)

  38. uanime5
    October 6, 2011

    Lending more money to small and medium businesses won’t lead to a recovery unless they have sufficient customers. As people’s income is falling in real terms they will have less disposable income, reducing their ability to support new and existing businesses.

    Until inflation is lower and taxes for the lowest paid have been reduced the economy will not recover.

    1. outsider
      October 6, 2011

      Exactly right, as Mr Redwood points out.

    2. Quietzapple
      October 6, 2011

      VAT cut is the way to boost spending and motivate entrepreneurs and lenders to renew activity: ergo Growth, more income to be taxed.9

    3. Kevin Dabson
      October 6, 2011


      Depends how it is done is my answer. Better to give SME’s/Limited companies capital injections directly than rely on the alternative maze variety!

      Lets not forget that german industrial exports are efffectively subsidised by their own govt owned banks!. Plus the 1% inflation rule (devaluation of 25% over 10 years or something of that order of magnitude in the eurozone.)

      Maybe why there banks are upside-down with debt in the PIIGS…

      Banks cannot lend. Banks will not lend or they will go bust. Risky exposures, lack of accounting transparency, plus Basel 3, ICB etc and all the rest of it.

      Quite honestly, the BoE could deposit money into the limited/SME companies bank accounts directly through the banking system to firms like I suggest. Alot with the good credit ratings/best management. Bypass the banks!.

      Let’s go in at £120K as a ball park. I would need to check my stats of course.

      Then enforce by law that they take on several employees (pref. british prospects) for a few years! . (real recovery will be underway by then). Court of law, judge & legal tender and all that! 🙂

      I have no figures exactly but these are the best people to get growth – Entrepreneurs.

      Also politicians need to tell and inform british firms they have a patriotic duty to do this. It will make no difference to astute business people financially etc. It will help econonically and help politicians with unemployment figures at an instant!.

      Demand begets demand and all that – the multiplier affect. 400K off the unemployment register (with increased purchasing power) in a qtr and probably the same after that. Plus 6 or more postive side effects/feedback loops for the banks if it fails.

      I appreciate that there could be fraud. People wanting longer employees off their books to reduce costs for newer ones etc. Tax avasion or avoidance etc. It would have to be looked at.

      Final point before I have a few more drinks is this!. I accept, unlike most economists, that aggregate demand in the new word for britian, must be primarily in productive investments not consumption (albeit this will help meaningless “GDP figures”). I cannot stand Krugman, Blanchflower and so on.

      We need a new post-war type tax framework & mentality ( encouraging infrastructure,R&D and new skills. Serious get up & go. )

      Regrettably their is no quick fix to this.


    4. alan jutson
      October 7, 2011

      Increase the personal tax allowance to £15,000 this puts money into everyones pocket, and you still get the current rate of vat on some of the spending to pay for it.

      Surely better than just a simple vat cut for the low paid who spend a considerable percentage on zero rated items, food, rent, mortgages, council tax, and 5% vat on heat, light, power.

      1. Public Servant
        October 7, 2011

        Actually Alan I am intrigued by the flat tax idea which Edward Lee has been developing. I am no expert but if Mr Lee’s figures bear scrutiny then it appears to be a win win policy.

  39. Thomas Ec
    October 6, 2011

    If it is such a bad policy, why did Osbourne authorize it?

    To be honest, the way I see it, this is an admission that the BoE expects us to be in recession within 12 months. Or am I wrong?

    1. norman
      October 6, 2011

      ‘If it is such a bad policy, why did Osbourne authorize it?’

      Because the governments economic policy, such as it is, is completely incoherent with no underlying principle and direction. They’re just throwing everything at the wall and hoping something, at some point, will stick. And they wonder why there is no confidence out here in the real world.

      Maybe this move is designed to lift consumer confidence?

      Or maybe the BoE are expecting deflation to tear the economy apart in 18 months time (about the lead for inflation via money printing)? Who knows how their minds work, not rationally is about all we can say with certainty.

  40. Martin
    October 6, 2011

    Your comment about inflation is quite right. The BoE ought to have raised interest rates today to counter inflation and attract free cash into the economy.

    Interestingly the ECB has left interest rates unchanged to focus on inflation.

  41. Brian Tomkinson
    October 6, 2011

    I don’t suppose you and your colleagues have any sway with Cameron et al but how can we bring an end to these actions by government and their agents at the BoE which will impoverish the majority in this country? We are being lied to and no one seems to be publicly prepared to bring these people to account.

    1. BobE
      October 6, 2011

      Cameron is just a pleasant front man with nothing of his own to offer. Nice guy, but blown in the wind of others. You would need to get to the string pullers in the background to get anything changed. This is about making us part of the EUSSR. Region 6.
      I hear tractor production continues apace.

      1. JimF
        October 7, 2011

        Hence our nick-name for him, Huff N Puff

  42. Mike Stallard
    October 6, 2011

    I just want to look at the moral high ground for a minute.
    I am worried, you see, about selfishness masquerading as caring and sharing.

    The Government depends on our votes. So it takes our money and hands it generously back in forms that it thinks we should appreciate. We are expected to be grateful as we all get richer and richer. That, of course, simply is not happening at the moment.
    So let me ask some basic questions here:
    Why should I have to pay out of my own money for other people? Why should I have to suffer for “the economy”? Why should my savings be pinched so that the government is re elected? Why, frankly, should I care if people who refuse to work starve or if lots and lots of people who spend their time swanning round pretending to “work” for the government lose their jobs?
    From a government point of view, of course, the answer is obvious.
    But this question is at the bottom of the EU crisis (Germany and Greece), it puts a huge question mark over the Welfare State and it underlies the present QE as the government refuses to contract and, instead, takes over “the economy” for us (I include professional bankers here) because it knows best.

    I feel that I am being completely taken for granted and my patience is wearing thin – and several of the commentators above this post feel the same. My question is not even being raised, let alone answered.

    1. Tedgo
      October 6, 2011

      I think most of us feel that way. Ultimately I think the only way to get the governments attention will be a mass withholding of Council Tax as this is the only stick we still control.

    2. Caterpillar
      October 6, 2011

      Mike Stallard:

      My patience too has worn thin. I just think the Government and the BoE need to get out of people’s way, they contribute nothing, but appear to simply loot. Apart from leaving the country with the hope of finding one with less cancerous* institutions I do not believe there is anything that any of us can do.

      *I couldn’t think of a more polite word, my apologies.

    3. JimF
      October 6, 2011

      You have your vote 🙂

  43. Glenn Vaughan
    October 6, 2011

    The imcompetence of the MPC has been clear for several years. However, this latest fiasco involving QE must be blamed on Mr Osborne and his Treasury colleagues. Yet what else can one expect from a left wing coalition government other than more “voodoo economics”?

  44. Andrew Smith
    October 6, 2011

    With the benefit of the internet they will be able to quickly look up the fallacies used back in the 1960s to 1970s to ascribe the causes of inflation to, well whoever you please.

    Trades Union(ist)s
    Greedy bankers
    Exchange rates
    Useless management
    Useless workers
    Britain’s gone to pot

    Whatever you fancy really.

    The only cause which will not be blamed is the one under the control of the Conservative led and Libdem supported coalition government. (BTW – causing inflation was not a part of the coalition agreement, so how come they are doing it; I thought Cameron repeatedly said desirable policies could not be done because they were not in it!).

    Just fast-forward a year or so, a general election in sight and inflation running at 7-8 per cent and rising; deficit still out of control and registered job seekers over 3 million. Dave calls in the titans of business and trades unions (plus a few quangos I suppose and Guardian economics writers) and asks them to sign a solomon binding undertaking to leave the meeting and say what a jolly good chap that Dave is, really.

    And this is a “Conservative” led government.

  45. Tedgo
    October 6, 2011

    What are the real motives behind this round of QE?

    Simple, we are coming up to bank bonus time, so the banks will need plenty of liquidity to fill the troughs.

  46. Bernard Otway
    October 6, 2011

    Dear Mike Stallard
    I am 66 and from the sound of it you and most on this site are the Wrong side of 50, I have decided that I have nothing to lose so I have become a Revolutionary,I make myself as obnoxious as possible to all in the public sector,I never cease to lecture [with facts which are irrefutable] ,I urge all to become such revolutionaries [and JOHN not violent] .It is the only way, the public sector and the Rulers who will get enormous uphill from such pressure will only listen when they get fed up.So make them fed up, let the politicians know we will vote them out .Other posters have also asked what I ask, WHY and WHEN will we get a proper right of centre party to support,the party we have all supported in the past has let us down badly and in my opinion conned us to vote on May 6, there are at least 6 million like me,if we don’t vote at the next GE DC is finished ,I would vote for a TRUE PROPER CONSERVATIVE PARTY as would the others.So I work towards that end.If I see a picket line like the Firemen when their trouble was happening I take the time to CONFRONT them ,with in their case my intimate knowledge of the fire service via my best friend who
    was a Surrey fireman for 30 years,FACTS demolish their arguments. NAG NAG NAG

    1. Iain Gill
      October 6, 2011

      hey I am not that old

    2. alan jutson
      October 7, 2011

      Bernard, I also try to argue the point, and have a bit of a reputation as speaking my mind, but you make me sound like a pussy cat, although not the Home secretary’s version.

      Like Mike, I have lost complete faith in most politicians, other than JR, and whilst I do not agree everything he says, this blog seems to be the only beacon of light on the horizon with sound financial ideas.

      The fact that so few politicians of all Paty’s seem to understand finance, means we are headed for disaster ad have been doing so for decades.

      I have just viewed Question Time, what an absolute travesty, not a single politician has understood what the Bank of England with the backing of the Chancellor has actually done by printing more money.

      We are all the poorer for it.

  47. Denis Cooper
    October 6, 2011

    Will the Commons be asked to approve this latest round of QE?

    Reply: A good question. The Chancellor clearly has approved it, and we were not asked to vote on his early consent. I guess the answer is we will not, unless the Opposition choose to raise it on an Opposition day motion and force a division.

    1. alan jutson
      October 7, 2011

      Reply to reply

      What a bloody shambles this whole scenario is.

      Democracy my a..e

  48. Kenneth
    October 6, 2011

    A great deal of sense is spoken in this post and in the comments. Why are the comments written here not reflected in our media?

    It may be a dry subject for some, but we pay vast sums of money to the BBC to report these issues – and the arguments that surround them – to the general public.

    It is a travesty that the BBC has not learnt lessons from the past.

    It was only because BBC favourite Gordon Brown did not want to join the Euro that we were saved from that potential disaster.

    This time there are no left wingers to grab the BBC’s attention and so the madness of money creation goes virtually unopposed.

    1. sm
      October 7, 2011

      Cancel your subscription.

      I can’t cancel my Council Tax Bill so the TV license had to go. I spend more on Council Tax than on anything else, food and basics.

      Its a small price to pay and a signal of civil disobedience to follow.

    2. Public Servant
      October 8, 2011

      I keep reading criticism of the BBC but what about all the other news outlets? Is it being adequately covered by the private news channels?

  49. Andrew Johnson
    October 6, 2011

    Three brilliantly blinding posts in a row. Thank you Mr Redwood – keep telling us how it really is.

  50. Disaffected
    October 6, 2011

    John, could the QE in any way be used to help bail out banks who might be affected by sovereign debt? In other words is this a back door method of getting involved in the EU crisis? I am also confused why the ECB has kept interest rates to reduce inflation when it appears the BoE is doing the opposite. Finally, did I hear Mr Darling say that some of the previous QE was not used and is in bank vaults waiting to be used, if so what does he mean?

    Reply: No, Mr Darling said he wantesd the Bank to use up to £50 bn of the last QE to buy corporate b onds, but they chose to spend all but £1 bn of the total on government bonds instead. The ECB takes a tougher line on inflaiton than the Bank of England. QE can only help UK banks with Euro risks if the UK government that is the main beneficiary of the largesse through lower borrowing rates spends some of it on that.

    1. Caterpillar
      October 6, 2011

      To JR’s reply:

      (As you have noted yourself an Operation Twist twist could have been done to credit ease within the scope of QE1, this may have seemed a reasonable action today.)

      So what signal can be taken from the observation that the previous Chancellor wanted some credit easing in QE1, but the BoE bought gilts only; no sooner has the current Chancellor announced credit easing then the BoE jumps (him) into presumably more gilts? Sore toes?

      1. Caterpillar
        October 7, 2011

        And if the Opposition doesn’t call for a debate, tehn the Back Bench Business committee, I think the Ft article ‘A belligerent Bank has put purity before pragmatism’

        says much.

  51. British National
    October 6, 2011

    How do we start a Number Ten Petition “J Redwood for Chancellor” voted by the British Public at large.?

  52. zorro
    October 6, 2011

    So, do you still think inflation will come down next year John?…..As expected George has joined the QE club…oops….’And quantitative easing – printing money by another name – is the last resort of desperate governments when all other policies have failed.’…

    It is indeed regretful, perhaps he secretly respected Mr Brown’s stance (they did after all want to keep pace with Labour’s spending plans).

    What a fine mess they’ve gotten themselves into! Without doubt there will be further QE until we become as much a basket case as the rest of Europe. We will sooner than we think all be like Greece – slaves of the banks.

    Cameron and Osborne will not stand up to Britain’s interests and are covertly bailing out Europe through increased fees to the French run IMF.

    I see that Europe’s regulators were on the ball with the Eurozone’s 10th ‘strongest’ bank DEXIA going down the tubes. Of course, our regulators assure us that our banks are fine….

    It is also reassuring that the EU has increased its own spending by 5%. Doubtless Mr Cameron will be racing to fund it, having failed to persuade them to moderate their largesse.

    Even more reassuringly, apparently it wasn’t just Greece that cooked the books….If you can believe this even the Germans and French have been less than economical with the actualite….,1518,790333,00.html

    If only we had been in here to exert our ‘influence’ on them…hahaha. This is awful but the awfulness of this will hopefully convince people that we need to disassociate ourselves from this nonsense once and for all.

    Merv the swerve is not ruling out further QE either…as predicted (I am not bombarding him with my thought waves, I promise)..

    If you know what the end game this prediction game is easier. There will doubtless be another major event within the next 10 days.


    Reply: Next year’s inflation should be lower than this year, unless the pound falls sharply on the back of QE2 and/or world commodity prices take off again. It will still be too high.

    1. Caterpillar
      October 6, 2011

      Indeed would Sir MK be as happy at a long period of below 1% as he is at above 3%? Would he happily tighten policy and say it is OK we expect to trough at negative 1%?
      (I suspect not, Sir MK seems to be very happy running at 4% and peaking at 5%, he seems desperate to avoid the symmetry of running at 0% inflation and troughing at negative 1%)

  53. zorro
    October 6, 2011

    Please explain to me why a Conservative government with a ‘fiscal Conservative’ as a chancellor thinks it is OK to throw money to banks to invest risk free knowing that the risk is being taken by the government. Does he think that the banks will act responsibly with the money…? Will they be lending it to men in vests?


    reply: he is not throwing the money at banks. The Bank creates the money and then buys government bonds with it. It could be pension funds, banks, individuals or charities selling the bonds to the Bank. They have paid good money for the bonds in the past, so they are not being given anything when they sell, other than the modest increment to value that comes from having such a large buyer around.

    1. zorro
      October 6, 2011

      I’m sorry writing quickly and did not proof read that one…I hope I am wrong about the corporate bond purchase programme. (not a good day at work either. Never mind, Baroness Warsi and Mr Burnham are on QT, I feel reassured, maybe they have a solution (God help us).


  54. zorro
    October 6, 2011

    The wisdom of Mervyn King…..’I do not know when it will come to an end. What I do know is that in order for it come to an end we have to find a way for imbalances to unwind, for the debts to be repaid and for the countries that need to repay debt to other countries to be able to export their way out of difficulty’

    So Mervyn decides to unload some more debt onto the economy to help it grow quicker….I guess this means the 2% inflation target is on the back burner for the next ten years (or more). He looked rather enervated when challenged about the inflation target, politely implying that savers could go to hell.


  55. zorro
    October 6, 2011

    QR – Baroness Warsi says that we are in control of the ‘fiscal’ part of the economy (right hand) so we can let rip a little with QE (left hand). The control of the fiscal part apparently means what the government is currently doing with its real terms increase in spending and borrowing….I am glad that we have the troika of Warsi, Burnham and Bragg to guide us through this maze.


  56. zorro
    October 6, 2011

    Baroness Warsi states that because the British public do not know the ins and outs of the EU arguments then there is no point in having a referendum…..quite remarkable.


  57. Matt
    October 6, 2011

    Here we are inflation over 5%, destroying wealth, eliminating savings, yet the MPC appear to be more concerned with stagflation.

    Interest rates should be eased up, the bank making it known that the only way is up, this will help the pound to rise and stave off some inflationary pressures.

    Mr R is spot on in his view. We need more high street banks willing to lend on to business, on good business plans.

    A few years ago we would do a beauty parade of banks and get terms from each of them, and then negotiate the best deal.

  58. kennethrmoore
    October 7, 2011

    It’s good to see people getting angry on here about the latest round of QE , quite rightly so. Mervyn King and the coalition are effectively helping themselves to savings and earnings because they are too spineless to get a grip on spending.

    Far more convenient for them that the mechanism of inflation does the job for them.
    It’s another slap in the face for those who have tried to do the right thing.
    I am disgusted by the MPC’s dishonesty and I sincerely hope Mr Redwood passes on this view to all concerned.

    Watching BBC’s question time tonight perfectly demonstrated the vacuum that exists in this debate. It’s deeply depressing that a sizeable proportion of the electorate believe that money and wealth can somehow be created from nothing.
    It’s a condition born of envy stoked up by the left and the breaking of the link between useful effort and earnings presided upon by both Conservative and Labour governments.

    Some fool suggested that everyone should be given £4000 to spend from the quantitive easing pot seemingly unaware that :-

    It can only borrow it , take it through taxation and redistribute or devalue earnings and savings by printing it .

    It’s all going to end in tears as inflation creeps into double figures.

    Mervyn King and our adolescent chancellor remind me of something. It’s a mad dog chasing it’s tail. .

    static economy ? – print money – weaker pound – higher inflation – dearer commodities – no growth – print money – static economy ? – print money – weaker pound – higher inflation- dearer commodities – no growth – print money……

  59. kennethrmoore
    October 7, 2011

    “Printing money is the last resort of desperate governments when all other policies have failed. It can’t be ruled out as a last resort in the fight against deflation, but in the end printing money risks losing control of inflation and all the economic problems that high inflation brings.”

    George Osborne 2009

  60. Steve Whitfield
    October 7, 2011

    Why are we so useless at politics and in the general day to day running of this country when it is of such vital importance ?.Why do we allow an assortment of policy wonks and slick, careerist politicians anywhere near important offices and influence on our lives ?.

    Why can’t the most suitably experienced and qualified people be found for what are the most important of jobs . For example I think John Redwood would make a much better chancellor than George Osborne. Unfortunatley Mr Redwood’s reasonable and popular views are portrayed as being ‘extreme’ so this seems very unlikely

    Why can’t the same intelligence and attention to detail be put into running the economy as, for example what a formula one team puts into designing a new car ?. Or Westinghouse put into designing a nuclear reactor ?
    If the same muddled thinking and disconnection from reality applied as at the Bank of England, next years car would be a pile of scrap and the reactor would blow up.

    What qualifications has George Osborne got for presiding over the GB economy ? What relevant previous experience has he got other than being a political wonk and a chum of Dave Cameron?.

    Why can’t an Engineer or an Architect ever,ever be the next Conservative PM ?
    Are we supposed to be reasured by the fact that David Cameron once had a job in a PR company ?

    What does Theresa May know about running a prison system or police force ? . Her only qualification seems to be that she is female. Apologies to Ms May if it transprires she is a seasoned scholar of the legal system and has years of experience at the sharp end of running a large organisation.

    Atleast Defense secretary Dr Liam Fox is an erm medical doctor??

    Francis Maude appears to have been appointed to squash any policies that might be popular with the general public. That is a skill of sorts I suppose but not very useful to a political party.

  61. Steve Tierney
    October 7, 2011

    The new round of QE, coupled with the “credit easing” threat, is just utterly depressing.

  62. javelin
    October 7, 2011

    Just to remind readers of a whiteboard (I mentioned last month) on one of the top bond trading desks – it had a list of the PIIGS crossed out with Belgium and the UK next.

    FYI. Italy just got down graded (again) by Fitch from AA- to A+ and Spain got down graded from Aa+ to Aa- (2 notches).

    FYI. Dexia – rumors have been coming all day that Dexia the Belgium bank is about to be nationalised.

    14 UK banks have been down graded by 2 or 3 notches.

    It reminds me of sitting in the garden watching the Thames flood water creeping up the garden lawn. I was spared, but I have the sinking feeling that the rating agencies have only just started to nibble away at the UK credit rating status.

    It would not surprise me in the least if the UK get a shock downgrade from S&P – they measure their rating based on a set of weighted probablities and are quite unemotional and objective about it. I think some poor growth levels, retail sales, optimisim indexes, inflation, low tax takes and lowering house prices will make the guys at S&P reappraise the Governments credit worthyness.

    But then again I think France might be first in line for a bullet.

  63. James Reade
    February 14, 2012

    Hi John. Could you comment (maybe post a blog article?) about today’s inflation figures?

    Could you point out how, in spite of an announcement of another £50bn of QE this week, inflation has just fallen to 3.6% from above 4% and down from the 5.2% when you write this post.

    Could you acknowledge in doing this that perhaps you were somewhat wrong when castigating the MPC in this post?
    Reply: I forecast this fall in inflation and said this time the Bank was right to forecast a downwards move – it is because the VAT rise drops out. If you wish to criticise me intelligently try reading what I write first

    1. James Reade
      February 15, 2012

      Ah so you do recognise the VAT impact on inflation – good!

      It’s just you made such a big thing about QE and how that would be inflationary when inflation is already at 5.2%.

      My apologies for reading too much into your title and various bits where you write things like “They have clearly long since abandoned their Statutory duty to control inflation… They do nothing to bring it down … The problem the MPC should grasp is that the main cause of the economy slowing is the high inflation they have allowed.”

      They have allowed? The Bank of England didn’t increase VAT.

      Now I’ll grant you one thing; you did say “the tax increaes (sic) to help pay for the large public sector.” Not massively specific though really given the main contributor, which I repeatedly wrote on here to the ridicule of others, was VAT.

      It’s quite clear John that what you write in your reply here is very different to what you wrote back in October.

      I’m sorry you don’t think reminding you of things you said is intelligent criticism, and if you really do want to show me how prescient you were, I’d love the links to the posts where you wrote about your forecasts.

      Reply: You just try to mainuplate small parts of what I say to misrepresent the consistent and sensible analysis. I made clear I blamed the Bank for past high inflaiton, pointing out that much of the 5% inflation came from the devaluation which their money policy helped fuel. I also said the latest QE will only be inflation inducing if we have another devaluation, meanwhile VAT dropping out and lower energy prices was bound to bring inflation down at last from unacceptabily high levels, as I and the Bank forecast. My forecasts of infation and economic growth 2007-12 have been nore accurate than the Bank’s – not difficult!

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