High inflation undermines growth

 

           The Bank of England and some commentators seem to think the higher rate of inflation we now have was a necessary side effect of action to boost the growth rate. They do not apologise for almost two years of inflation above the   2%  target, or for the very high level of 5.2%/5.6%  (CPI/RPI)  it has now reached. They imply that if they had not taken monetary action to boost price rises, we would be experiencing even worse results on growth.

             In the 1970s this country learned a very expensive lesson. It could not keep on borrowing and inflating its way out of debt. Then inflation was  considerably higher than  today. There were  high levels of public borrowing. High inflation and excessive borrowing  depressed activity and led to a trip to the IMF and interest rates above 15% for longer term loans by the government. Government resolved to mend its ways.  In the 1980s better controlled public spending and borrowing, and lower inflation, enabled faster growth.

            In the last two years inflation has lost us some growth. Price increases have outpaced wage increases. Consumers have been able to buy less as a result. This has knocked demand. The high price rises in energy have adversely affected the UK’s attractions as a manufacturing centre.

           The government’s search for a stronger growth policy has to include as a central requirement, bringing inflation down and keeping it  down. Inflation is not yet in the dangerous territory it reached in the 1970s. Most commentators think it will come down in 2012. It is most important the Bank helps it down and then keeps it down. Taking the fear of price rises out of the system would do more good than printing more money. Reassuring people that there will be no further squeeze on their real incomes from prices rising faster than earnings would be an essential first step.

          The Bank needs to set realistic interest rates which are fair to savers as well as to borrowers and which bring base rate back into play for the private sector. Today base rate only seems to  apply to the government. The Bank  will find if it delivers its first duty to keep inflation to around 2% that will make a better contribution to growth than monetary experimentation linked to faster price rises.

           The government has this week acknowledged that energy price rises are a problem. Shopping around, and creating a more competitive market are part of the answer. So is pursuing an energy policy geared to providing more good value power from the best available sources. Mr Osborne has said the government no longer wishes to outdo the EU with dearer power and more rapid moves to carbon dioxide targets. The government needs to recognise that we are trying to compete with India and China as well, and energy is an important cost. They also need to see that we need more demand, and that requires lifting the inflationary burden from family budgets.

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128 Comments

  1. lifelogic
    Posted October 19, 2011 at 7:04 am | Permalink

    High inflation undermines growth – indeed it does hugely, it encourages perverse actions like buying gold or similar, discourages saving, pushes money into stronger oversees currencies and robs savers of their capital and interest.

    Growth as we all know needs bank lending, a positive low tax and smaller government vision, cheap (non green) energy, fewer EU and UK regulations and less interference and less market manipulation (CAP and energy for example) all round.

    Cameron is doing few, if any, of the right things and gives not vision. Actions not words are needed.

    • Greg
      Posted October 19, 2011 at 8:09 am | Permalink

      How is buying gold and silver perverse? They are the only store of value that politicians cannot devalue or destroy. It is an entirely sensible and reasonable reaction to decades of both overt and stealth theft by government. If our currency was linked to gold deficit spending on wars, unnecessary bureaucracy and stupid regulation would be almost impossible and we would not be facing collapse of money markets and sovereign default. It would mean the end of big government which is the real cause of current problems.

      • lifelogic
        Posted October 19, 2011 at 8:23 am | Permalink

        “Perverse” in the sense that the government should be encouraging investment in real business, real jobs and productive industry and real growth. Rather than “investment” in lumps of, non income producing, yellowish metal or the silly energy house bling that they encourage with their daft feed in subsidies. Or they endless jobs for parasitic lawyers and tax consultants that they encourage by over regulation and over complex tax systems.

      • Paul H
        Posted October 19, 2011 at 9:08 am | Permalink

        “They are the only store of value that politicians cannot devalue or destroy.”

        I suggest you google Presidential Executive Order 6102. Don’t believe that the b******s can’t get you no matter what you do.

      • Electro-Kevin
        Posted October 19, 2011 at 9:59 am | Permalink

        Buying gold is retrenchment.

        You can’t do anything with it but worship the stuff. And yes. I do believe that it’s value can be destroyed.

        • lifelogic
          Posted October 19, 2011 at 3:42 pm | Permalink

          You can’t do anything with it but worship the stuff – a bit like Huhnes PV and toy wind turbine house Bling then, Gold is, I suppose, at least a little better than that but not much.

      • scottspeig
        Posted October 19, 2011 at 10:46 am | Permalink

        I think on the basis that it is being invested rather than spent on goods.

        • Bazman
          Posted October 19, 2011 at 9:05 pm | Permalink

          Goods that you use everyday like a new kitchen or other home improvements that last many years or a lifetime are a good way to beat inflation. What do you have money for if not in the end to improve your quality of life?
          Paying off debts would be the best way. Inflation will not really help you with this and again improves life immensely. The feeling and knowing that employers and landlords can ram it. Priceless.

          • alan jutson
            Posted October 20, 2011 at 7:54 am | Permalink

            Bazman
            Exactly my thoughts, just finished the kitchen, now on the utility room, next the bathrooms.

            Doing it all myself of course, as cannot afford to pay (20% VAT to the government) in addition to their labour charge.

            Now I have retired and wound down my own construction business (I had the skills) now I have the time.

      • Dan H.
        Posted October 19, 2011 at 11:58 am | Permalink

        Buying gold and similar things is only perverse if the Government of the country can be trusted to run a sane, sensible currency and set base interest rates at a little bit higher than the inflation rate. If this is the case, gold should be fairly cheap and stay cheap simply because the only uses for it are bullion, jewellery and corrosion-proofing electronics.

        When (as now) the Government decides to keep interest rates stupidly low and actively generates high inflation by over-taxing, over-spending, inputting extra money by quantitative easing and finally shows no clear indication of knowing where it is going wrong and stopping doing so, you have a problem. As a committed saver, I’m watching my savings being evaporated by inflation. There isn’t any incentive for me to keep money in a bank any more, but since I think I can see bad times coming I similarly have strong disincentives to spend on consumer goods.

        This leaves gold as the easiest refuge. By buying gold, I am transferring my money from Government control to my own personal control; I am also signalling my unease with Government policy. A very great many people are doing this as well; until the Government clearly demonstrates that it has got a clue and cuts spending, ceases quantitative easing and puts base rates where they belong, then many people will carry on buying gold.

        • Electro-Kevin
          Posted October 19, 2011 at 4:14 pm | Permalink

          And just as many will be selling it, Dan.

        • Damien
          Posted October 19, 2011 at 4:40 pm | Permalink

          Hong Kong has just opened the first physical market to trade gold using the Yuan in the form of Renminbi Kilo Gold! The Chinese demand for gold has leapt 40% on the same period last year and this has been mirrored elsewhere. The wall of QE will hit the markets first and give a nice sugar rush but some (including central banks) will seek to hedge their investments with a little gold.

        • davidb
          Posted October 19, 2011 at 5:21 pm | Permalink

          But surely the gold price is being driven by speculation. It may have been a clever thing to have had some when McDoom was selling it cheap, but at the present prices you’d have to be exceptionally pessimistic about the prospects for inflation and for the nominal value of fiat money. I would suggest that buying gold is not for the ordinary saver. It is a high risk strategy. And rather like when everyone you knew was a dotcom investor or had a handful of BTL flats, if everyone in the pub is talking about buying something you have most likely left it too late.

          I have been reading this blog for some time and it seems pretty clear that the last and present governments both share a clear strategy to inflate the debt away. The high cost of business borrowing may well be a disincentive to growth but it sure as goodness allows the banksters to rebuild their capital bases by stealth. They are robbing those daft enough to have saved – particularly for retirement. I lived through the great inflation BT ( before Mrs T. ), and I learned that it was unwise to borrow too much. Now I see that it is only unwise to pursue such a path if everyone else in the street is up to their eyes in debt. Politicians don’t care about what is right, only about what is popular.

          Reply: There has been a good two way pull in the gold market recently. Bears say it is now very high and too many speculators have bought. Bulls say there is heavy long term demand from Central banks (including China), from newly enriched emerging market business people and portfolio investors. This site does not give investment advice.

        • Bazman
          Posted October 19, 2011 at 9:16 pm | Permalink

          You could wisely invest in cars, drink and woman. Not a good long term investment, but excellent short term returns.

    • Mark
      Posted October 19, 2011 at 1:07 pm | Permalink

      We don’t need more bank lending: banks are hopelessly over-geared as it is. We need more equity investment in sensible projects, not subsidised windmills, HS2, outrageous PFI deals and the like. We need to be able to pay down some of the borrowing. That means having sufficient income left over to do so, rather than finding income consumed by price increases. The tax system needs to be rebalanced so that debt is not so heavily favoured over equity finance. To reduce bank gearing, we need depositors who are not fleeing to commodities as a store of wealth, not more interbank wholesale lending.

      • lifelogic
        Posted October 19, 2011 at 3:45 pm | Permalink

        We do need more sensible lending many good projects are on hold for lack of cash they need bank lending and equity finance. The banks are lending less to meet Basel 3 and starving certain businesses RBS Natwest in particular.

        • Jwoo
          Posted October 19, 2011 at 5:30 pm | Permalink

          No surprise, they are insolvent, they don’t have any more to lend.

      • Electro-Kevin
        Posted October 19, 2011 at 4:15 pm | Permalink

        We don’t need HS2. We need more carriages.

    • Disaffected
      Posted October 19, 2011 at 1:28 pm | Permalink

      I agree Lifelogic. Any credibility Cameron had is very quickly disappearing. His position on the EU is becoming unsustainable. We read today he will use whips to force MPs to vote against having a motion to debate Eu in parliament. His answers at PMQs were equally poor and out of touch with the public.

      Spending could be cut tomorrow if there was a desire to do so. Even if spending was divided between what was necessary and what was desirable. Overseas aid, EU bail outs, IMF bail outs to EU would go. Welfare could be cut to welfare lifers. Winter fuel allowance sent only to those who need it. Make prisoners work on infrastructure projects to save labour costs, they could start with Hammond’s ill fated high speed rail link! We are still providing free university education to our EU competitors- madness. Expense of Libyan war. Mass immigration continues unabated. Asylum seekers have increased by 12% since the beginning of the Libyan war. There are so many ways of cutting spending that it has become depressing to hear Cameron whinge about the subject.

      • A different Simon
        Posted October 19, 2011 at 5:21 pm | Permalink

        Gordon Brown’s record of being the worst Prime Minister ever doesn’t look like it will stand for very long .

        Who would have guessed that he (Brown) would prove more Euro-Sceptic than Cameron !

        • lifelogic
          Posted October 20, 2011 at 11:44 pm | Permalink

          Was Brown the worst, he was indeed very bad, but you expect that of Labour – and he did keep us out of the EURO? There is very stiff competition from Heath, Cameron, Major and Blair with the pointless & loosing wars, entered into on a clearly dishonest deception.

  2. Mike Stallard
    Posted October 19, 2011 at 7:18 am | Permalink

    OK so let’s talk clever.
    The four quadrant business plan, shows me quite clearly that the idea of cutting spending is in the “not urgent/important” category. I suggest that it gets promoted to the “urgent/important” category or as the Great Man himself said: “Action this day.” Inflation is like drink, it is so easily to drift into alcoholism if you are that way inclined and we are drifting………

    As to the energy policy! Well! Words fail me. Christopehr Booker has banged on so long about this scandal that even the Spectator (James Delingpole) has got thoroughly depressed in this issue and Christopher Booker himself has given up and gone onto something else.
    Now the prices have gone up and – guess what? – it is all the fault of the Companies that provide the power!
    Well who would have thought it!
    Now all that has to be done is to delay and then ban shale oil and – bingo! – we will be in the dark, jobless, shopless and very,very cold and hungry.
    And then the Greens will raise a triumphant shout: “We told you so! It’s the Globalisation! Strip the Bankers etc etc etc.”
    Meanwhile, the government will be discussing the new war in Syria……

    • Robert Christopher
      Posted October 19, 2011 at 12:40 pm | Permalink

      I only you were wrong! If only ….. well, it might not be Syria ….

    • uanime5
      Posted October 19, 2011 at 2:31 pm | Permalink

      You forgot that most of the Coal power stations will go offline between 2012-13 (2015 at the latest), reducing the amount of energy generated by 8%.

      Also each large nuclear power plant takes about 10 years to build and will generate about 2% of our energy needs.

      In summary expect rising electricity bills as we need to import more electricity from abroad.

      • Mark
        Posted October 19, 2011 at 2:58 pm | Permalink

        Expect brownouts and blackouts. We lack capacity to import sufficient electricity. Perhaps we will apply for some last minute derogations from the LCBD, since the Germans seem to be being allowed to build new coal capacity.

      • A different Simon
        Posted October 19, 2011 at 5:39 pm | Permalink

        Mike Stallard ,

        What Uanime5 says is correct . The energy bills are not being inflated for windmills they are being inflated to pay for the next generation of Nuclear powerstations .

        Andy Duff of Npower said exactly the same at the Oxford Energy Futures meating in June 2010 .

        He also said wholesale prices need to almost double to over £90/MWh and stay there pretty well indefinitely .

        High and higher prices are here to stay .

        The only way Nuclear can be made competitive with Coal and Gas is by handicapping Coal and Gas with more regulations and insisting on carbon dioxide capture and storage .

        Even the cost of the nuclear fuel itself is due to rise once the U.S. has finished burning it’s way through the cheap plutonium from dismantled Soviet Union nukes .

        Expect the Blackpool shale gas to be blocked as a service to protect the investments which have already been made in conventional oil/gas/nuclear . Expect underground coal gasification to be blocked for the same reasons .

      • Bazman
        Posted October 19, 2011 at 9:23 pm | Permalink

        There are boilers that generate electricity as well as heat and hot water. Mainly this type is used on boats and the like. How long before a viable gravity fed coal boiler like this comes along?

        http://www.guardian.co.uk/environment/2010/mar/02/domestic-combined-heat-and-power-boilers-electricity

        • alan jutson
          Posted October 20, 2011 at 8:01 am | Permalink

          Bazman

          Battersea power station, long since decomissioned, used its waste hot water to heat thousands of homes in the local area, at least that is what I was told when visiting it as an apprentice in the 1960’s.

          Clearly it was far ahead of its time when designed, on a river, coal delivered by large ships direct from anywhere in the world.

          Its been preserved as a wreck for the last 30 years, completely unproductive with no roof.
          Such is modern day thinking, regulations for a non productive shell and eyesore.

  3. Antisthenes
    Posted October 19, 2011 at 7:39 am | Permalink

    When you mess with the natural laws of economics to fit in with ideologies which governments mostly of the politically left persuasion frequently do then the unintended consequences can be horrific. First capitalism and free enterprise was assailed with draconian regulations and forced to put social projects before profit. That made doing business only possible for the largest and richest so we ended up with corporatism, nobody likes it and wrongly accuses capitalism of being the culprit. Then we decided to put social projects before good economic governance and we have ended up with a debased society that is incompetent, corrupt and incapable of competing in the world around us. Inflation is just the natural forces of economics trying to re-balance the economic order. Unless the government makes even greater efforts to govern according the laws of economics then inflation will continue to spiral and other nasty things will kick in as well, eventually leading to state bankruptcy.

    • uanime5
      Posted October 19, 2011 at 2:34 pm | Permalink

      No we ended up with corporatism because there wasn’t enough regulations to prevent companies becoming very powerful and using their lobbying power to control the laws passed by the Government. We need draconian regulations to cut these companies down to size.

      Also Germany has for greater ‘social projects’ and workers rights yet outperforms the UK because it focuses on manufacture, rather than finance.

    • Bazman
      Posted October 19, 2011 at 9:27 pm | Permalink

      Part of good economic governance would include social projects. How would you have a healthy productive workforce without this?

  4. Mactheknife
    Posted October 19, 2011 at 7:49 am | Permalink

    You have to look at the root causes which are of course the Eurozone and US debt and the responses (or otherwise) from the BoE, ECB, UK government, EU governments etc etc. More locally we have sheer bloody-minded stupidity within the UK government on “green” policies, but hey – lets blame the energy companies say Huhne, Cameron and co.

    The vote on the EU Referendum comes soon and already we hear Cameron wants a three line whip to vote it down. Time for you Mr Redwood and your colleagues of like mind to “grow a pair” and express your (and our) dissatisfaction and ignore the three line whip. But will you…..?

    Reply: Of course I will vote for the referendum, as I did when the Conservatives proposed one in the last Parliament on Lisbon and Labour/Lib Dems voted it down.

    • alan jutson
      Posted October 19, 2011 at 9:07 am | Permalink

      Reply to reply

      Had no doubt that you would not do anything else than vote for the motion John, but good for you going public on your intentions so soon.

      If Cameron goes for a three line whip on this, to try and force Tory Mp’s to vote against the motion, I think he is a fool, he will almost guarantee that the conservatives will lose the next election, even my wife who does not often make political comment, but is very astute, says he would be stupid.
      He will guarantee a Euro split in his party for ever, until a referendum is eventually held.

      If Miliband really wants a real chance of getting elected as PM ext time, then all he has to do is vote for the proposal, offer the referendum, and he is going to be given the gift on a plate.

      Cameron had the trump card with the economy 18 months ago, but since he is failing on that, he no longer has that advantage.

      • Jwoo
        Posted October 19, 2011 at 5:33 pm | Permalink

        “Cameron had the trump card with the economy 18 months ago, but since he is failing on that, he no longer has that advantage.”

        It is almost unbelieveable how he has squandered that ‘trump card’. There is only one conclusion, the man is a fool.

    • Mactheknife
      Posted October 19, 2011 at 10:39 am | Permalink

      Good, but I fear your colleagues will cave in as its reported that the government is applying pressure already to “help backbenchers support the government position”.

    • scottspeig
      Posted October 19, 2011 at 10:48 am | Permalink

      I’m not even under the illusion that John, Carswell, Cash et al will even be under the 3 line whip – they’d ignore it anyway. Its the new intake that will be pressured.

      Reply: Yes, the whip applies to us as well as to the others, but the 3 people you mention are likely to decline the advice of the whips on this occasion. Any sensible MP would vote for the motion, as it covers all sensible options for esolving the EU problem.

    • lifelogic
      Posted October 19, 2011 at 1:11 pm | Permalink

      How many votes this time 25? Cameron need to make some real promises on EU renegotiation and a multichoice referendum to take effect imidiately, post the next election, perhaps in blood rather than cast iron this time. It looks as though he will lose anyway so it will not cost him anything. He won’t even do that I suspect.

      Reply: 60 have signed up to support the motion so far, with many more promising to do so. None from UKIP of course!

      • Mike Stallard
        Posted October 19, 2011 at 4:20 pm | Permalink

        Congratulations to our host on his courage! Me, I have only had the experience of standing as a LIbDem Councillor. It was truly terrifying at meetings of thirty people or so, including the majesty of the sitting MP, to even question the Party Leader who was even more important than the Agent!

        So warmest congratulations to all MPs who have the courage to throw away their futures.

      • Paul
        Posted October 19, 2011 at 6:41 pm | Permalink

        There may be no UKIP mps to vote on this motion John, but we all know it is extremely unlikely this motion will go through. So the real eurosceptics in parliament will be no closer to getting what they want. The only thing this motion will show is how pro EU the old failed three parties are.
        The likes of yourself, Cash, Carswell etc must be wondering where your party has gone and willing a UKIP break through at the next election.

        ReplyNo, such thinking would just ensure another federalist majority

      • lifelogic
        Posted October 19, 2011 at 7:12 pm | Permalink

        Good but we need a referendum with a sensible menu of choices.

  5. James Reade
    Posted October 19, 2011 at 7:55 am | Permalink

    It’s good to see another long spiel about how inflation of 5% apparently significantly impedes growth with any evidence to support that, other than what is supposedly obvious.

    Another long spiel from a politician, criticising those who look at the economy for a living because apparently he can do a better job than they can, despite spending most of his time looking after his constituents’ concerns, and playing politics.

    Sadly, the relationship between interest rates, growth and inflation is a little more complex than John would like to believe. Sure, we could have had higher rates during the recession, but how exactly would that have contributed towards consumers being able to buy more, and stimulating demand? After all John, in this following statement you show that you want consumers to be buying more, and demand to be stimulated: “Consumers have been able to buy less as a result. This has knocked demand.”

    Have you done a study into the relative effects of 5% inflation vs 5% interest rates in the current circumstances, to determine that it’s entirely inflation that’s holding us back? Did you factor in fiscal policy (which is tight John, despite what you hilariously continue to assert here)? If you did, please link it up. Otherwise, it’s better to leave economics to those who know a little bit about how complex it is, and how simple arguments usually are wrong. Contrary to your belief, you don’t know better than them.

    Reply: We disagree about QE, sterling, and the causes of the current inflation. I still await your explanation of why we have 5.2% CPI inflation. I would also be interested to hear why you think the sharp reduction in real incomes brought on by this nasty bout of inflation is a good thing for growth. A good number of economists agree with the argument here that this high rate of inflaiton has damaged demand and growth.

    • Robert K
      Posted October 19, 2011 at 8:55 am | Permalink

      When you say “it’s better to leave economics to those who know a little bit about how complex it is, and how simple arguments usually are wrong” perhaps you would point us in the direction of the experts you are thinking of. (I thought you might be referring to yourself, but the quality of your anlaysis suggests otherwise.)

      • lifelogic
        Posted October 19, 2011 at 7:15 pm | Permalink

        Certainly far better to leave managing companies, money and investments to the great experts they had at Lemans, RBS, Northern Rock, Halifax, Lloyds of London, the Bank of England and Equitable Life

    • stred
      Posted October 19, 2011 at 9:27 am | Permalink

      Inflation at 5% affects everybody, but a similar increase in interest would only affect borrowers. In the UK, savers outnumber borrowers 4 to 1 (?). So how does Mr Reade justify his position and which Universities have economics departments who agree with him?

    • Electro-Kevin
      Posted October 19, 2011 at 9:54 am | Permalink

      Mr Reade – Low interest is encouraging lots of people to pay down debt rather than spend. This isn’t encouraging growth (what type of growth btw ?)

      Presently I’m finding inflation tough and my circumstances are better than most. I’ve resorted to fixing my own car, paying for things through barter, expanding my allotment, turning down the thermostat, flushing the loos less, using the train a lot more … Lord knows how some people are surviving.

      Do you have experience in running a government or in industry by the way ?

    • norman
      Posted October 19, 2011 at 9:55 am | Permalink

      The BoE have done such a good job (not really) so far I have more trust in the bacteria in a carton of 4 month old orange juice to do me less damage than their policies.

      If 5%+ inflation isn’t such a bad thing why don’t the BoE come out and say this and tell us that this is their aim rather than tell us month after month that it’s simply temporary and that in 18 months time (and you can look back at BoE inflation predictions from longer than 18 months ago and verify this) inflation will be back at 2%? Guess what, latest prediction is that in 18 months inflation will be below 2%! I could bookmark this and link to it in 18 months time and I guarantee we won’t be anywhere near 2% but also guarantee we’ll be predicting to be at 2% in 18 months time.

      If there is a case to be made for high inflation from economic wizards of smart then let’s hear it rather than excuses all the time.

    • scottspeig
      Posted October 19, 2011 at 10:51 am | Permalink

      Right, so I choose between the following:

      John Redwood – was in merchant banking prior to being MP and claims QE = inflation and this is bad (pretty obvious to me)

      Mervyn King – Has been consistently wrong over 2 yrs, has his investments protected from inflation, and keeps saying deflation next but doing the inflationary practices.

      Sorry, but I’ll go with John.

      • HJBbradders
        Posted October 19, 2011 at 11:50 am | Permalink

        Wasn’t our friend Mervyn King also one of that large group of economists who stated in a letter to a daily newspaper that Mrs Thatcher was wrong? He was wrong then and he is wrong again now!

      • Jwoo
        Posted October 19, 2011 at 12:19 pm | Permalink

        “Sorry, but I’ll go with John.”

        Me too.

        If I am correct, savers still outnumber debtors. Low interest rates or not, debtors can only now service their debt. Savers could, if they received any income on savings, do what they have always done, save and spend. How difficult is that to comprehend?

    • Martyn
      Posted October 19, 2011 at 11:04 am | Permalink

      You may well be an expert on the economy, I am most certainly not but I can tell you that from my own personal experience you are wrong in saying that low interest rates are not really the problem. After a lifetime of work, prudent but enjoyable living and careful, safe investments for my old age (I am now 70) that as a direct result of the low bank interest rate in the past 2 years my income has been reduced by over 20%. Which of course means I have less money to spend in the shops and I am thus of no help to the economy. And so it I suspect it will be for tens of thousands of others who are seeing their pension and other investments go down the drain and their spending powers constrained by low interest rates. That is not mere speculation, it is an indisputable fact largely affecting what is now, sadly, what the government appears to consider an economically unimportant group of people. We do of course have a vote, but by the time we are allowed to use it I suspect it will all be too late.

      • Sean O'Hare
        Posted October 19, 2011 at 3:41 pm | Permalink

        @Martyn I am only 3 years younger than you and yes we do have a vote. With a bit of luck this coalition shower won’t last another 3.5 years and we will get to have our say long before then.

        I do not have any faith in King’s assertion that inflation has peaked and that it will be down to 2% again by the end of this parliament. What they have done by their QE is debauch our currency by around 50%. Our only hope is that our major trading partners follow King’s stupidity and do likewise.

    • forthurst
      Posted October 19, 2011 at 12:17 pm | Permalink

      Is someone getting confused here between the effects of higher interests rates on the balance of trade and its impact on UK growth and reducing the fiscal deficit?

      VAT should be used to control consumption of imports if at all necessary, not inflation and negative interest rates.

      For how much longer is the housing market to remain in a state of morbidity, held at artificially high non-clearing levels? The economy is not healthy at all.

      • Sean O'Hare
        Posted October 19, 2011 at 3:45 pm | Permalink

        How does varying VAT rates control consumption of imports given that that tax applies to home producers and well as importers? If you are suggesting any kind of import tax (i.e. protectionism) then you should read some history books. Protectionism sucks and a Free Market rules.

        • forthurst
          Posted October 19, 2011 at 4:34 pm | Permalink

          VAT can be set at variable rates.

          VAT is not an import tax.

          • forthurst
            Posted October 19, 2011 at 4:44 pm | Permalink

            There is reluctance to extend VAT because of the EUSSR tithe that applies, but setting different rates for different product groups depending on the likely UK labour content would make economic sense.

    • Posted October 19, 2011 at 2:34 pm | Permalink

      James, could you provide a link to or a summary of your analysis?

      Do we have suitable precedents for the current rises in commodity prices, money supply shocks and the particular threat from the Euro crisis?

    • Posted October 19, 2011 at 2:38 pm | Permalink

      James Reade, I disagree with most of your post. In particular I have found that, when it comes to economics, the simplest arguments turn out to be correct.

      • Jwoo
        Posted October 19, 2011 at 5:37 pm | Permalink

        Yes, absolutely.

    • Steve Cox
      Posted October 19, 2011 at 2:41 pm | Permalink

      You appear to be the one oversimplifying things. You’ve obviously never tried to run a small business. Given that they can only borrow, if at all, at rates that can only be described as usurious, how are they supposed to invest when they have no idea if the Bank really intends to honour its remit of low and stable inflation, or let hyperinflation blast away? It’s not possible, which is one reason why in spite of a pound at foolishly low levels we are seeing few benefits from the exchange rate. Even large corporations won’t invest when they have no idea what will happen to inflation. Then you oversimplify by removing the human aspect of inflation, which John is keenly aware of. Why should savers and those on fixed incomes have their nest eggs and retirement income wrecked for the benefit of buy-to-let landlords (putting it simply)? Osborne and Cameron keep on exhorting people to save for their retirement but nobody in their right mind would do so in the current environment. As John has said, we need to get back to a sensible and balanced situation of positive real interest rates and controlled inflation, before it all gets completely out of control, as it did in the 1970’s. It’s all well and good to ask for research into the relative effects of high interest rates versus high inflation, and I am sure that such research has already been done if you were really interested enough to search for it, but just ask yourself why every single economy in the world that has ever suffered double-digit inflation has, sooner or later, desperately tried to reduce it to much lower levels? Inflation may seem like a panacea in the short term (which appears to be Mervyn King’s view, if you believe Jeremy Warner in this morning’s Telegraph), but you always end up with the quandary of how much inflation is optimal for your purposes? And inevitably every Treasury and every Central Bank in the world has ended up getting it wrong and stoked inflation that has proved uncontrollable. Play with fire, which is what inflation is as it burns up the real value of money, and you will get burnt.

    • outsider
      Posted October 19, 2011 at 3:20 pm | Permalink

      Dear Mr Reade,
      Economic theory gets rewritten about once a generation on the basis of the latest experience and tends to deal with yesterday’s problem rather than today’s. Like generals, economists are usually fighting the last war.

      Lord Keynes’s General Theory was not published until 1936. He and a few associates, not all professional economists, were voices in the wilderness in UK’s long post 1926/29 recessions, when orthodox professional economics was driving down the wrong road (eg Bank Rate did not fall to 2 per cent until June 1932 having been 6 per cent six month earlier). There were more rewrites in the 1950s, 1970s and 1990s as one theory after another was shown to be inadequate.

      Macroeconomic models will soon have to be rewritten again. The policy now being pursued is derived from what seemed to work well after the bursting of the dot-com bubble in 2000-2001, but now in more extreme form. I believe it arose from experience after the Japanese crash of 1990.

      Most would now agree, however, that this policy (almost) inevitably led to the greater crash in 2007-09. It does not seem to be working this time, perhaps because circumstances are quite different, perhaps because people are reacting with knowledge of what went before.

      Why should non-professionals be prisoners of the old economic orthodoxy when they can see the results?

    • lifelogic
      Posted October 19, 2011 at 4:55 pm | Permalink

      Inflation caused by low interest rates and QE is a tax/theft of peoples past earning or cash. A tax on the responsible and a transfer of their cash to the government and some to borrowers on variable rates.

      A good way of indicating to people not to be responsible in future as it does not pay. Also it discourages investment in the UK as you have high tax and high inflation to contend with before any real returns. Surely encouraging this behaviour reduces growth – how could it not.

      Interest rates anyway are only low to existing borrowers and the BOE margins on new lending are huge.

    • James Reade
      Posted October 19, 2011 at 5:45 pm | Permalink

      List the “good economists” that agree with you. I’m intrigued.

      Why is inflation high? I believe we’ve already been through this. A 25% depreciation in the pound (that happened way before QE1), VAT rise, world commodity prices would be three strong candidates for what we’re seeing.

      Sure, the Bank could have raised rates to try and combat world prices, but would it have had any effect? Can you assert with 100% confidence that a rate rise would have led to an appreciation in the exchange rate? I won’t await your answer; the answer is no, it likely wouldn’t – so if you did have 100% confidence that would be wonderfully misplaced confidence. Why would people invest in an economy with no growth prospects (especially with the rate hike)? As mentioned in previous places, the exchange rate is akin to the share price of a country and reflects expectations about that country’s future “profitability”. The exchange rate doesn’t just reflect interest rate parity conditions.

      Hence, would the rate rise you believe would have solved all our problems have had any positive effect at all? It’s really quite hard to see why. For sure, your sacred savers would have benefitted, that tiny fraction of the population that you seem to bat for as opposed to the rest of your constituents – why aren’t you batting for those in your constituency who are paying mortgages and hence are getting some pleasant relief from the low interest rates, out of interest?

      Reply My constituents want lower inflation, as rising prices are squeezing their living standards. A smaller devaluation would have controlled our inflaiton, closer to levels in Germany, France and the US. Mortgage rates are completely detached from base rate today, unless you have an old tracker mortgage.
      Why as a matter of interest do you wish to pursue a personalised attack on me all the time? Why do you not offer sensible analysis of the economic issues you claim to be inetrested in? You have not offered any explanation of why the pound fell, as an alternative to mine.

      • outsider
        Posted October 20, 2011 at 11:24 pm | Permalink

        Dear Mr Reade,

        John Taylor would certainly be one of the top economists who disagree with the current policy. If you check the papers presented at the Jackson Hole conference in 2010, you will find some pretty tart retorts from the mild-mannered Taylor to a paper (Monetary Policy after the Fall) by Charles Bean, former chief economist now deputy governor at the Bank, in which Bean promotes the current policy.

        Since the Taylor Rule is a key component of “The New Synthesis” in macroeconomics, as well as being at the heart of central banks’ policies during the successful years, I think that counts as a serious economist, don’t you?

        If you apply a simple Taylor Rule to the UK today, with plausible numbers for the “output gap”, I suggest that Bank Rate should be above 3 per cent, even allowing for the temporaray VAT effect.

    • Andrew
      Posted October 19, 2011 at 9:08 pm | Permalink

      Mr Reade, I realise you have only recently left university and started work as an academic economist, but before you start criticising Mr Redwood for his lack of insight into economics, you really should take one of your five academic papers off the internet…

      http://www.economics.ox.ac.uk/Research/wp/pdf/paper442.pdf

      John, to save you some time, in this work, the brilliant Mr Reade states in 2009 , and I quote,

      ‘We hence believe that the answer to the
      question of whether Sweden should join the euro that we posed in this article’s heading should be answered with an unqualifi ed yes”.

      Oh dear.

      In 2009, our visiting economics ‘expert’ thought the case for Sweden joining the Euro was overwhelming. To quote a surprisingly little published expert in economics (John has written more books on economics than you have written papers Mr Reade)

      it’s better to leave economics to those who know a little bit about how complex it is, and how simple arguments usually are wrong. (Reade, J. Invoking pseudo-scientific economic hubris and ignoring how it led the world over the edge . John Redwood Blog, 2011).

      That’s six publications you have now Mr Reade.

      • Andrew
        Posted October 19, 2011 at 9:23 pm | Permalink

        John, feel free to edit this post as you see fit in order to ensure you are able to post it.

  6. oldtimer
    Posted October 19, 2011 at 8:37 am | Permalink

    The high inflation of the 70s was a huge disincentive to new business investment. If UK inflation is higher than in competitor countries the effect is to raise the hurdle rate of return on which international businesses will make their judgement about new investment. Coupled with near zero growth, it is a deadly combination. On this reckoning alone, the UK comes near the bottom of the list of places to invest.

    The Government`s energy policy is a further disincentive because it is based on three false premises. The first is that we know what drives climate (Cameron thinks man-made CO2 drives climate – this is false); the second is that therefore we can control the climate by controlling man-made CO2 emissions (Cameron thinks so, an opinion refuted by the evidence); the third is that the metrology of climate science is good enough to make the calculations necessary to make these predictions (it is not, starting with the imperfections in the raw data and ending with the ever more complex attempts at ensemble computer predictions of future climate trends).

    Matt Ridley writes in the Spectator (also repeated on his own blog) of the opportunities offered by shale gas. In the USA he says gas prices are half European levels. The UK has substantial reserves of shale gas. Development of this potential would serve many useful and much needed purposes. It would cut energy prices for consumers and businesses alike; it would enable the removal of wasteful subsidies to alternative energy sources; it would raise tax revenues for the Exchequer; it would substitute for expensive imports therby improving the balance of trade; it would replace vulnerable, Middle East sources of supply with a secure UK source of supply. All of these developments are needed by the UK economy.

    Mr Ridley concludes:
    “To persist with a policy of pursuing subsidised renewable energy in the midst of a terrible recession, at a time when vast reserves of cheap low-carbon gas have suddenly become available is so perverse it borders on the insane. Nothing but bureaucratic inertia and vested interest can explain it.”

    To conclude, for those still worried about CO2 whether man-made or natural, I recommend Professor William Happer`s timely report, The Truth About Greenhouse Gases. It can be found here:
    http://www.thegwpf.org/images/stories/gwpf-reports/happer-the_truth_about_greenhouse_gases.pdf

  7. alan jutson
    Posted October 19, 2011 at 8:53 am | Permalink

    I see the Telegraph headlines this morning report in some detail on a Time “running out” on economy speech made by Sir Mervyn King last night.

    It would appear that he really does believe that the only way to stop the financial crisis leading to a meltdown soon, is for western governments in particular, to stop spending more than their income.

    I do hope he included all of the points he mentions in his latest letter to the Chancellor.

    It would seem like most contributors on this site, that he is encouraging drastic action now, not in a few months, not ina few years but now. Otherwise the pain will drastic when the brown stuff comes home to roost.

    Shame he has only made his views public now, and his past actions did not help the cause.

    Do you think he has at last seen the light at the end of a very dark tunnel, or is it a train coming the other way.

  8. Robert K
    Posted October 19, 2011 at 9:16 am | Permalink

    Like others on this site, I remember the nightmare of inflation in the 1970s. It would be better to have positive interest rates now to curb inflation rather than to let inflation get out of control and be forced into much higher interest rates in the future. We should also remember that inflation penalises the prudent saver and bails out the profligate borrower, none more so than the government.

  9. Nick
    Posted October 19, 2011 at 9:19 am | Permalink

    Here is a little chart that might interest people worried about prices

    http://www.lordsoftheblag.net/2011/10/more-rip-offs.html

    It shows how well the BoE has done at targeting prices, rather than inflation.

    It shows that initially it was OK, but now its let price rises rip.

    This YoY inflation figure is just

    “please please let me have another go”

    repeat ad nauseum.

    So if the BoE had met its targets, prices would be 7.29% lower than they are now.

    That’s the extent of their failure.

  10. Nick
    Posted October 19, 2011 at 9:20 am | Permalink

    Have you done a study into the relative effects of 5% inflation vs 5% interest rates in the current circumstances, to determine that it’s entirely inflation that’s holding us back

    ==========

    Yep, interest rates at 5% means lots more money for pensioners etc to spend.

    Not perhaps quite what you were implying, but never the less true.

    • James Reade
      Posted October 19, 2011 at 5:47 pm | Permalink

      What about the rest of us who aren’t pensioners? I’m pretty sure that pensioners are not the main driver of consumer spending quite yet…

  11. Electro-Kevin
    Posted October 19, 2011 at 9:42 am | Permalink

    Inflation may have been higher in the 70s but at least Mrs Thatcher had North Sea Oil and privatisations to work with.

    I think things are going to be tougher this time around.

    It may do us some good. Well let’s face it. The greatest moral, cultural, educational decline has just taken place after years of ‘boom’.

    There are, actually, worse issues facing us than the economy.

    Perhaps it’s just me being affected by my neighbours’ behaviour. Perhaps it’s the total lack of support from parents at the Scout Group I’m chairman of. Perhaps it’s the yobbery I see on my trains every night. Perhaps it’s just the litter and grafitti everywhere at that Bobbies now have to dress like Robo-Cop.

    Yeah. It’s all in my head. The British aren’t scumbags at all.

    • A different Simon
      Posted October 19, 2011 at 7:09 pm | Permalink

      I do not believe economic decline leads to moral,cultural and educational decline .

      I do however believe moral , cultural and educational decline leads to economic decline .

      You cannot separate one from the other .

      In order to get ourselves on the road to recovery we need some self respect and pride .

      The kid you ask to remove their feet from the seat infront of them on the train may never have had anyone explain to them about parasites from dog faeces getting transmitted to kids eyes .

      Gotta give kids the benefit of the doubt – they are the ones we are relying on paying for all this .

      As it stands the system is rigged against us and no matter how hard people work they are now consigned to a life of serfdom .

      The people at the top have taken so much there is nothing left for the folks at the bottom .

    • Stuart Fairney
      Posted October 19, 2011 at 10:16 pm | Permalink

      There are a great many things that could and should be privatised,viz; the hospitals, the schools, the BBC, local council services more or less en masse, the royal mint, the roads, a few pounds there I fancy.

  12. David Price
    Posted October 19, 2011 at 9:43 am | Permalink

    “Otherwise, it’s better to leave economics to those who know a little bit about how complex it is, and how simple arguments usually are wrong. Contrary to your belief, you don’t know better than them.”

    As someone who has contributed to the economy for more than 30 years, rather than just watched it, as far as I am concerned if they have any effect on the economy then the economists have failed dismally even by their own yardsticks.

    High inflation is destroying my pension and savings so I have had to limit what I spend significantly. I have to worry about the essentials (food, transport and energy) I will have to pay for in the future not just now which is why I save. But inflation means I can’t afford to use traditional savings approaches but must move to higher risk areas which means I am even less inclined to spend money in case of losses.

    If high inflation is such a benefit why did the BoE have a lower target which they have failed to keep. As far as I can see the only benefit of high inflation is to those in debt, particularly over-spending central and local governments, and to economists as it gives them something to watch and talk about.

    If economists are watchers then perhaps this explains why the economy isn’t growing – the Business Secretary is an economist by profession. Perhaps it is time to replace the watchers by doers.

    • James Reade
      Posted October 19, 2011 at 5:49 pm | Permalink

      I haven’t said high inflation is beneficial at any point.

      Nor have you at any point here convinced me that somehow economists are to blame for everything. Even if the Business Secretary is an economist by training, his utterences and bleatings since taking office betray he’s forgotten everything he ever learnt.

      The reason for this mess is not economists, but it’s the politicians who do whatever they wanted to do anyway, often using their favourite economist as a comfort blanket.

      • David Price
        Posted October 22, 2011 at 7:33 am | Permalink

        You have it the wrong way round, I am not claiming to be the expert in economics, merely giving a perspective of a net tax and export revenue contributor to the economy.

        I am not trying to convince you of anything, but as “the expert” you have not yet convinced me that you understand the situation and workable remedies more than our host and others.

        If you make the environment too unwelcoming, if you devalue the savings, investments and pensions of those who are net contributors you may find you have no economy left after they move themselves, their businesses and/or their wealth elsewhere.

  13. Jwoo
    Posted October 19, 2011 at 9:43 am | Permalink

    Apart from one self proclaimed expert who rubbishesd our host’s contribution, all the comments here (at this time of reading) have been broadly supportive of our hosts view. I imagine that is because it appears to be based on empirical observation and a good dose of common sense.

    In fact I would have thought it comes under the heading of ‘the obvious’.

    Heaven help us from the experts, who have never been wrong and are desperate to continue the myth that only they can understand simple common sense thinking, but first have to claim that it is much more complicated and too much so for the rest of us idiots to understand.

    Spare us, do. You have more in common with the Emperor’s new clothes than you are ever humble enough to see.

    • Electro-Kevin
      Posted October 19, 2011 at 4:30 pm | Permalink

      Actually I find it refreshing to see a different standpoint, Jwoo. We have to be prepared to be challenged and to accept when we’re proven wrong.

      Most of us come here because we share polarity and are inclined to visit someone to support them rather than go to another site to do battle. That’s our nature.

      Besides. I’ve found the levels of moderation on many Left wing sites oppressive.

    • James Reade
      Posted October 19, 2011 at 5:50 pm | Permalink

      I haven’t declared myself an expert at any point – please just go back and read what I write – do me that service. I know you right wingers have issues with doing that.

      I merely point out, using data, and using the arguments of those that actually study the economy and are far more intelligent and far more worth of the monicker expert than I will ever be, where John (our host) is patently wrong.

      If you took off the blue tinted spectacles, you would see this perfectly well. I await that enlightenment to take place for you.

      Reply: Once again you fail to set out your alternative explanation of events

  14. stred
    Posted October 19, 2011 at 9:45 am | Permalink

    Cameron/Huhne have blamed the energy companies for the result of their own folly and suggested everyone swaps suppliers. Of course, to do so is pointless as the myriad of deals and prices changes all the time. It is like getting a decent rate of interest from a phone company or bank. They sell you a deal and, some time later, juggle the offers and welch on existing customers to pay for a new sales drive.

    There is a small energy company which has a simple tarrif which also encourages frugal use of electricty. There is a single rate and a reasonable fixed charge per day. You can also choose to pay more if you want electricity from windmills, though this just means someone else uses more non-windmill power. It also allows them to keep their costs down. Unfortunately it is internet only.

    If only HMG would enforce the same tarrif as a base standard on the big 6, then we could change. I suspect that the 6 are plotting a predatory take over of my little supplier so the regulator should make sure this does not happen.

    • Bazman
      Posted October 19, 2011 at 8:49 pm | Permalink

      When your little supplier gets enough customers the prices will then rise.
      Used one like this before now do not. Like musical chairs really. Make sure you keep all your bills and meter readings. One supplier tried to bill me for £600. Paid nothing in the end. Billing for the same units twice. Racked up large debt as they would not increase direct debit. Changed suppliers and was told They would take the debt in one hit if I changed. When Told “No problem” The intonation in the voice was of that I had gave a wrong answer. It really is a scam.

  15. Samuel
    Posted October 19, 2011 at 9:52 am | Permalink

    The big factors that influence todays inflation figures are the errors in monetary policy that Labour undertook for the 13 years in office. Chiefly, these would be the lowering of interest rates, quantitative easing and so on and so forth

    • James Reade
      Posted October 19, 2011 at 5:51 pm | Permalink

      Er, Labour make monetary policy independent when they took office. You can’t blame them for that. I know you like blaming Labour for everything ill in the economy, but you can’t blame them here.

  16. javelin
    Posted October 19, 2011 at 10:07 am | Permalink

    Growth is a state of mind.

    The nation has to make sacrifices and save to invest not borrow to spend.

    The Government is still in the political rut of needing to pander to the voters – probably because of the pollsters. The Government needs to radically change its message, its position, its attitude and its policies. Going to a pollster and asking for tweaks to gain votes in marginals is not good for the country.

  17. waramess
    Posted October 19, 2011 at 10:07 am | Permalink

    Just a load of muddled thinking by a bunch of politicians (Treasury Manderins). Increase the money supply and depreciate the pound in order to reduce wages with the supposed result that an impoverished nation with a lower wage bill will be more able to compete in international markets.

    Well they have managed it all very well with no positive result and the negative effect that an impoverished nation will be unable to pay the taxes necessary to reduce the deficit.

    Inflation of course does slowly impoverish the nation but it hurts the poorest in society the most; those who cannot increase their diminished wages until well after the ravages of inflation have had their effect, so the Politicians (Manderins) have taken from the poorest, in order to test their flawed theory.

    It is not just inflation (so called) it is the entire muddled thinking that will cause the collapse and so long as this is all the work of the unelected then it will continue no matter which party is in power.

    They should learn that printing money and depreciating the pound is no answer to the problems that the UK faces. Small government, sound money, low taxes and a strong exchange rate is the way forward, but maybe not for the UK

  18. zorro
    Posted October 19, 2011 at 10:20 am | Permalink

    It’s good to see that Mr King and his acolytes are reading the blog. Inflation is a rather touchy subject for them and their singularly unsuccessful efforts at predicting or achieving their target rate…..

    Zorro

  19. Gavin
    Posted October 19, 2011 at 10:26 am | Permalink

    Hi John

    Your suggstions for controling supply side inflation then are?

    Reply : Ihave put forward prooposals for cheaper energy and cheaper transport.

  20. Gary
    Posted October 19, 2011 at 10:36 am | Permalink

    James Reade

    Your conclusions are correct for the premise , but your premise is incorrect. Sustainable growth is provided by savings used for loans, with the interest rate providing the throttle to IN TURN ration investment and savings on the one hand and consumption on the other. When you artificially keep rates low and you just print and only are concerned about the consumption side of the equation, you end up with misdirected investment, increased credit/debt and no savings. Does that sound familiar ? It should because it has destroyed the global economy.

    This is why you Keynesians saw nothing of this crisis coming and were, and still are, flummoxed by the failure of your prescriptions.

    Read an Austrian School economist lucidly explaining in 2000 the reasons why a crisis was coming :

    http://www.ntrs.com/library/econ_research/weekly/us/010330.html

    • James Reade
      Posted October 19, 2011 at 5:52 pm | Permalink

      Thanks for trying to penhole me as a Keynesian, in your black and white Keynesians vs Austrians view of the world. When I have a moment, I’ll respond in more detail. Just to let you know – I’m no Keynesian, I just don’t agree with right-wing “economics”.

      If you’re a fan of the Austrians, why do you even read a politician’s blog, out of interest? Not got as far as public choice?

  21. Javelin
    Posted October 19, 2011 at 10:36 am | Permalink

    (Reuters) – A leading British businessman is offering a 250,000 pound ($390,000) reward for economists who can come up with the best plan for countries to quit the European single currency zone.

    The one-off prize is sponsored by Simon Wolfson, chief executive of British high street clothing chain Next, and a prominent supporter of Britain’s ruling Conservative party who sits in the upper house of parliament.

    “This prize aims to incentivise the world’s brightest economic minds to help fill that policy void: their endeavors may well prevent Europe from descending into a financial chaos that would destroy savings, jobs, and social cohesion.”

    http://www.reuters.com/article/2011/10/19/us-eurozone-prize-idUSTRE79I1KY20111019

    • A different Simon
      Posted October 20, 2011 at 8:40 am | Permalink

      i) Firstly countries MUST listen to their people and find out what they want . This is a bit hard to do when they are denied referendums .

      Any other action lacks legitimacy .

      ii) Secondly people like Mr Wolfson should lead by example by stocking their shops with a higher proportion of goods produced in the UK / EU .

      iii) Mr Wolfson’s customers need to keep money in their own economy rather than sending it overseas .

  22. Jeremy Poynton
    Posted October 19, 2011 at 10:38 am | Permalink
    • Martyn
      Posted October 19, 2011 at 8:42 pm | Permalink

      I have just read your link and gloomily conclude that if the article is only 50% correct then as you so rightly say, we are in fact doomed.
      I suppose that we could always announce that we are replacing the £ with the Euro and ask the EU to add us to the basket cases needing rescue… All bloggers on this site should read your link to cheer themselves up…..

    • Steven Whitfield
      Posted October 19, 2011 at 10:25 pm | Permalink

      A report that backs up John Redwood’s view that the much over hyped ‘deficit reduction strategy’ is heavily dependent on over optomistic levels of economic growth.

      Unfortunatley the coalition refuse to recognise this and that they need to change direction and cut taxes and spending.

  23. Caterpillar
    Posted October 19, 2011 at 10:54 am | Permalink

    It seems that neither the BoE/MPC or the Chancellor will publicly explain their commitments to particular political / economic theories, over just the empirical data. Clearly economists still do not agree on origins of business cycles, among other things, but the empirical data regards developed countries and the UK economy may have some uncertainty in them (and debate about methodology) but do inidcate two things;

    (a) inflation above 2 or 3%, as with inflation below 1% reduces real GDP growth

    (b) In some countries, of which the UK is one, empirical data suggest that government crowds out private investment

    Now, I can appreciate that the BoE/Chancellor may recognise these points but argue against them. There is much research on growth-inflation thresholds, but the 2 or 3% threshold for developed country growth seems to be what it boils down to, so if the BoE/Chancellor wish to ignore this they ought to state why. Similarly, one can argue that just because there is some historical evidence for crowding-out for the UK and some other countries, it is not the case in all countries, so that perhaps the UK will change. Nonetheless this is how the UK has operated, so to not go for small state now would require extremely reliable theory and data to be presented by the BoE/Chancellor.

    (c) There is of course a problem with the BoE combining data and theory into reliable argumentation, it has a terrible record. Its forecast models of inflation and issued statements have been woeful and it would seem go uncorrected – there is apparently no learning mechanism.

    (d) Beyond the competence issue of the BoE being able to make an argument is the apparent integrity issue of members of the MPC. Here one has to be very careful because all one has to go on is what the newspapers publish. Nevertheless the impression given in the Guardian interview (27th March 2011) was that Mr Posen would be on his way if inflation wasn’t at 1.5% or less by mid 2012 (I may have misread the article and apologise if this is the case). Muliplying the June 2011 CPI by 1.015 gives a CPI of 121.19, the UK is now at a CPI of 120.9. With 9 months to go CPI is a hair breadth away from what one (I) would infer as a resignation number. Even (the lamentable) core inflation has not dropped – so, will the admission of error, change of world view and resignation happen when CPI clicks forward or will there be another round of excuses as to why the BoE/MPC economic understanding is correct and that the data does not actually reject the hypothesis?

    (e) And finally, the BoE/Chancellor seem to have put all their (our) eggs in the export basket. Not only has there been a devaluation in the currency, but now the Governor seems to be pleading for the exporting countries to buy some of our stuff … pretty please. With a complete focus in the export ‘solution’ the risks of inflation to internally driven growth have been ignored. The BoE/Chancellor need to be very clear on this; is there a lack of scenario analysis, is ‘rebalancing’ considered more important than growth, do they worry that artificially low currencies can reduce business improvements?

    It could be that I don’t understand and have not been listening well enough – but I have tried to do this. Since I do not understand / have not heard, then I suspect I am not alone and that the BoE and Chancellor must do much better for us masses to understand/hear.

  24. lojolondon
    Posted October 19, 2011 at 11:05 am | Permalink

    John,

    Please can we have a comment on the fact that the despicable Cameron, after all his promises on a referendum while in opposition, is instructing Tories to vote against a referendum on the subject of the EU today.

    Thanks.

    |Reply: He did not say that today in PMQs – let’s see what happens. So far 60 MPs have given written support to the motion. I have not yet myself been told by the whips that they would prefer me to vote against it.

    • APL
      Posted October 19, 2011 at 4:37 pm | Permalink

      JR: “So far 60 MPs have given written support to the motion. ”

      The motion ought to be amended to make provision for a five year referendum perhaps, coinciding with a General Election.

      Flippantly I will suggest the question ought to be.

      European Union quinquennial question: Have you all had enough yet?
      A. Yes
      B. No hit us again with more taxes and stupid regulation.

      Reply Such an amendment might not be a winner!

    • Paul H
      Posted October 19, 2011 at 4:57 pm | Permalink

      Slightly curious about your use of the word “prefer” – what does a three-line whip mean in practice, and are there one- and two-line whips?

      Reply: Yes, there are two line and one line whips. 2 lines used to be common, allowing you to pair with an MP who would otherwise vote the other way allowing both to be absent. This has for the time being been discontinued.The whips have increased their power by allowing “slips”, giving MPs permission not to be present on 3 line votes, instead of allowing free enterprise pairing on a 2. A 1 line whip is a request for you to be present, but you do not have to be if you have something better to do.
      A 3 line whip to require your presence is imposed prior to the week in question, when the business for the next week is known. How the whips advise you to vote during the period of a 3 line whip depends on the course of the business and on the government’s view, which may change during the proceedings. You do not finally know how they wish you to vote until the vote is called, and the whips then offer pager and oral guidance in the lobbies. The whips on the day may downgrade a 3 line whip to a one line, if they no longer see a threat in any votes coming up. For example, there might be a 3 line whip from 3.30pm to 10pm on a Monday if there is a Bill with amendments going through. You have to be ready to vote any time between 3.30pm and 10pm,depending on when amendments are reached and if hostile amendments (to your party’s position) are moved. If during the proceedings the Opposition then said it agreed with the Bill the whips might downgrade it from a 3 to a 1. If there is a day’s business where no serious votes are expected they will declare a one line whip for that day.
      At the moment the 3 line whip for Monday is a request to be present. On Monday they will finally decide what to say about how you should vote. There could, for example, be an amendment.

    • Jon Burgess
      Posted October 19, 2011 at 10:40 pm | Permalink

      I don’t think the whips’ll bother with you, Mr Redwood, as it is obvious that you will do what you want, not what you are told to do (and good luck to you, if only more of your colleagues would follow your example) .

      But it will be a different story for the new intake; those ambitious young career politicians who want to advance themselves under Camerons leadership. They’ll do what they’re told to do, otherwise isolation and oblivion awaits them.

      Like you said in a previous post, the eurosceptic cause is best advanced through voting conservative!

      I think Nigel Farage must be thinking all his Christmasses have come at once, and I look forward to him making the most of this opportunity.

      Reply: I will vote for the motion.
      The ambition argument is a strange one. If an ambitious young Conservative MP looks at the arithmetic, and the understandable relcutance to have reshuffles, the odds of becoming a Minister this Parliament are not good. Throw in the Leadership’s wish to have more women Ministers, and the fact that usually PMs have to take a few dissenters into the government, and the ambition argument does not look so hot for the average ambitious male MP.

  25. sm
    Posted October 19, 2011 at 11:18 am | Permalink

    Sir MK, is not worried about inflation versus other threats (mass bank insolvency) and severe credit contraction.

    Apparently,inflation and devaluation will avert or delay bank insolvency.

    Should we correlate those key decision makers who are protected from inflation and those interests who may potentially benefit from it? Perhaps start with the BOE/MPC.

    Solvency is the issue , when will we get a democratic leader who will follow this through against vested interests.

    £75bn could produce a lot of infrastructure, gridwork,bridges,nuclear plants indeed even wind power. Sir MK states banks are best to judge credit (recent history suggests otherwise) and it looks like funds will be funneled through existing banks channels. (what change is he hoping for?) The state needs to finance directly and put out to tender infrastructure projects, these projects when complete can then be sold on to a new national pension fund to hold directly. This would be a better home for mandatory pension contributions.

    We must lose the EU and pursue UK self sufficient import reducing policies as deficits cannot be resolved by purely printing money. We should pursue direct negotiations with countries whom we have a material deficit to mutually agree a medium term policy of balanced trade. No agreement would mean using all legal means under current tarriff rules that are used against us.

    If the German/French state only buys German/French – well its obvious.

    Again no direct mention of Fractional Reserve banking except in noting banks found they were undercapitalised! versus the obvious solution full reserve banking never mind the 20% in 2019.

    What happens if people lose faith in fiat paper and start to panic buy? The MPC will do what precisely? Raise interest rates harshly.

  26. Damien
    Posted October 19, 2011 at 11:21 am | Permalink

    In particular the formula for setting gas prices by linking them to oil prices is irrational given the rapidly increasing supply of LPG which ordinarily would lead to lower gas prices.

    In Germany they are beginning legal action over oil-index gas contracts and similarly with France.

    The EU is quoted as saying “The European Union executive “suspects exclusionary behaviour, such as market partitioning, obstacles to network access, barriers to supply diversification, as well as possible exploitative behaviour, such as excessive pricing.”

    Officials said they are also probing “anti-competitive behaviour to the detriment of upstream suppliers themselves”.
    http://www.eubusiness.com/news-eu/competition-energy.ci5

    We don’t know how many UK gas contracts are linked to the oil-price index but surely its time to find out the scale of the problem, when these contracts are about to expire and if anything can be done about this in the meantime.

  27. City Slicker
    Posted October 19, 2011 at 11:23 am | Permalink

    I have had 26 years in the city and have to say that John always provides a rational, consistent and in my view correct analysis, even if it is often ‘toned down’! The classic economists and the political and corporatist business establishment over the last 15-20 years have frankly been incompetent and led us into this valley of despair. One needs simple common sense, you can’t spend what you have not got, you need to think outside the box, control what one can control and allow natural corrections of excesses to be expunged, the creative destruction that people refer to a la the so called Austrian school of economics. Rather like Javelin, I have been forecasting that growth will disappoint for two years or so. As I have written on Conservative Home we need to cut regulation, cut business/employment taxes, cut government expenditure back to 2003 levels and face the inevitable slowdown in a constructive way and then capitalism can start to work again and we can return to a more sustainable growth path, the alternative is stagflation which I wrote about/forecast in late 2008 as being on the cards ! This will happen unless we grasp the nettle, if not, it will end in a depression of aweful proportions!

  28. Ferdinand
    Posted October 19, 2011 at 12:05 pm | Permalink

    If money supply stays the same then statutory forcing up of prices does not create inflation but simply reduces the number of transactions.

  29. frank salmon
    Posted October 19, 2011 at 12:55 pm | Permalink

    It is wrong to mix up the inflation of the 70s with the inflation of today. The inflation of the 70s went hand in hand with wage rises. Strip out the VAT rise, the devaluation of the £, external increases in the price of food and fuel etc, and underlying inflation is fairly low. We simply have to accept we are 10-20% poorer than we thought we were in the Brown years. whether this comes against a backdrop of low and non-endemic inflation or not. We do need to restore the market for money, but that necessary 10-20% fall in real incomes will become all the more apparent and will almost certainly lead to riots. Do you really want to press that button?
    On energy I agree completely. Hhune has a cheek to increase our bills and then scream about how the energy companies are ripping us off.

    • Stuart Fairney
      Posted October 19, 2011 at 10:26 pm | Permalink

      And the sad thing is there is no alternative. Messrs Huhne and Cameron are really just continuing the policy of the former energy secretary.

  30. Iain Gill
    Posted October 19, 2011 at 1:18 pm | Permalink

    other key things also undermine growth

    off the top of my head

    1 giving this countries leading intellectual property away to competitor nations for them to undercut us

    2 imposing expensive pollution regime which does nothing to help world pollution as the production just moves to countries with worse pollution standards

    3 making it cheaper to import tens of thousands of indian nationals than it is to hire british staff

  31. uanime5
    Posted October 19, 2011 at 1:19 pm | Permalink

    John according to the Independent and Telegraph the Conservative MPs have called for a vote on whether there should be a referendum on the EU, which will be held next week. Any idea on how MPs are planning to vote on this?

    http://www.independent.co.uk/news/uk/politics/tory-rebellion-on-europe-fuelled-by-proposed-boundary-changes-2372573.html

    http://www.telegraph.co.uk/news/newstopics/eureferendum/8835447/Conservatives-ordered-to-vote-against-EU-referendum.html

    Reply: I trust most MPs will vote on this. So far 60 of us have signed the motion to show our support.

  32. Gordon
    Posted October 19, 2011 at 1:25 pm | Permalink

    James Reade,
    Mr. Redwood’s credentials are readily available if you care to check, but I have saved you the trouble
    “From 1974 to 1977, he was an investment analyst at Robert Fleming & Co. From 1977 to 1978, he was a Bank Clerk at N M Rothschild & Sons, becoming a Manager in 1978, Assistant Director in 1979 and a Director of the Overseas Division from 1980 to 1983. From 1986 to 1987, he was Overseas Corporate Finance Director and Head of International (non-UK) Privatisation.
    He gets my vote on this!
    Gordon

    Reply Thanks. I have also beena Visiting Professor at a couple of Business Schools, and elctured and written books on various economic topics.

    • Richard
      Posted October 19, 2011 at 5:00 pm | Permalink

      …all of which may be true, a good CV no doubt.

      You’re hired !

      John Major was a bank clerk as well , wasn’t he ?

      You would have though he would have made JR chancellor , would you not ?

      Its all about opinions , but which was is the money going ?

  33. LJH
    Posted October 19, 2011 at 1:32 pm | Permalink

    Shale gas is a cheaper solution to our energy needs than tax payer subsidised bird-and-bat-chopping windmills which any way need backup and are at their most useless when the weather is coldest. It is time to drop the rainbows-and-unicorn green approach which penalises all of us for some very dubious science. The serious way to grow an economy is to supply it with cheap reliable energy.

    • Damien
      Posted October 19, 2011 at 4:57 pm | Permalink

      Ireland has a geology and expansive landmass relative to population along with two pipelines connecting the UK and so would provide a more viable source of gas for the UK.
      In 2009 Ireland imported 93% of its gas from the UK however the Corrib Gas Field operated by Shell is expected to be operational in just over a years time. This will mean that Irish demand for gas from the UK will decrease by 73%.
      Ireland also has a successful system of energy regulation that makes it attractive for companies to invest in further exploration. LANGCO (Australia) have just secured exploration licenses for the North West Carboniferous Basin around Lough Allen. As these and other fields produce more gas they will be able to provide cheap gas to the UK.

  34. Posted October 19, 2011 at 1:53 pm | Permalink

    Good work John.

    I wish so often that we (my family) could afford for my husband to commit some time to working on the inventions required to make ITER work. But life just keeps coming at us and we work 24/7 just to cover the bills and care for our kids. He was head-hunted for interview to be the chief engineer there but couldn’t go as we couldn’t manage the logistics to let him at the time. I feel really guilty as he has this incredible ability and gift which is needed there and we haven’t been able to spare him to contribute.

    Rising energy costs are a big problem and we need to be paying attention to the future possibilities such as fusion.

    • APL
      Posted October 19, 2011 at 4:40 pm | Permalink

      Rebecca Hanson: “Rising energy costs are a big problem and we need to be paying attention to the future possibilities such as fusion.”

      Rising energy costs are a direct result of the feed in tariff sponsored by the silly nincompoop Huhne.

  35. uanime5
    Posted October 19, 2011 at 2:27 pm | Permalink

    The best way to make banks give a fair rate to savers is to create a law saying them have to or create a law giving the bank of England the power to set the minimum rate for savers.

  36. Posted October 19, 2011 at 2:34 pm | Permalink

    I think we should look at the factors which keep inflation high. Apart from the structural effect of the VAT rise and creating money from thin air, we also have the inflationary effect of the eu’s protectionist drive to harmonize specifications on products and its obsession with costly regulations. I believe this is a long-standing contributor to our inflation rate.

    I hope John abstains in the forthcoming vote on the eu referendum. There is no point in defying the whip for a pointless gesture, especially a 3-way referendum where the vote to stay in could be bolstered by the other 2 votes (out & renegotiate) cancelling each other out (if I have understood it correctly).

    Reply: I will vote for the motion. I suspect that should we get suc ha referendum the renegotiate option would win easily, requiring the governemnt then to do a better deal.

    • City Slicker
      Posted October 19, 2011 at 3:39 pm | Permalink

      John , good man !

  37. Conrad Jones (Cheam)
    Posted October 19, 2011 at 3:00 pm | Permalink

    The Bank of England’s employers – namely us (as it is supposedly Nationalised) has to go along with the pretence that everything will work out in the future – approximately two years into the future when inflation is laughingly expected to be 2%. They say this a lot don’t they? Every month they say this. They’ve been saying it for the last … well … forever. And they’ve been wrong – 97% of the time. That means that they’ve got it SPOT ON – 3% of the time. Not Bad.

    http://www.marketoracle.co.uk/Article31032.html

    Has the Bank of England lost control of the Ship but they simply don’t want to scare the passengers? Inflation fast approaching THREE TIMES their target figure of 2%.

    “The government’s search for a stronger growth policy” – is this Growth Policy Inifinte – when do we need to start looking for other Planets inorder to strip out their resources too? Isn’t this GROWTH obsession to do with revolving credit due to the PONZI scheme of Fractional Reserve Banking?

  38. Thomas Ec
    Posted October 19, 2011 at 3:28 pm | Permalink

    Personally, I don’t really think it is monetary policy that is to blame. The bargain was always that monetary policy would be lax, but that fiscal policy would reduce aggregate demand (i.e. the government would actually make cuts in real terms).

    It seems to me that would be the best way out of this current situation. We are too close to a hyperinflation spiral. We need to cut the deficit. That is one of the most important things in the lifetime of this parliament.

    • Conrad Jones (Cheam)
      Posted October 19, 2011 at 5:07 pm | Permalink

      There might be a problem with sutting the deficit. If the Government reduces it’s borrowing – the money supply shrinks.

      The private sector is then expected to inrease it’s borrowing, thereby increasing it’s debt.

      If everyone starts paying off their debts, our money supply reduces.

      The BoE has already demonstrated how we can create our own debt free money – which it then hands over to the Banks in exchange for Government Debt. If we’ve bought £200 Billion of National Debt, why isn’t this reduces the National Debt burden?

  39. Michael Read
    Posted October 19, 2011 at 3:40 pm | Permalink

    Come off it. Inflation is stealth taxation, to quote Milton Friedman. The government, including the previous one, is consciously using it as a matter of policy to cut debt. We are being robbed.

  40. Brian Tomkinson
    Posted October 19, 2011 at 6:25 pm | Permalink

    John,
    My view strengthens daily that Cameron looks like the present day Chamberlain in our economic war and you Churchill, but, sadly, still in the wilderness. I know you won’t give up and one day soon your time may come.

  41. Bob
    Posted October 19, 2011 at 8:10 pm | Permalink

    The government have joined the looters!

  42. Bob
    Posted October 19, 2011 at 8:16 pm | Permalink

    Quote from Order-Order.com
    “June 2nd, 2011
    The Bank of England’s Great Inflation Swindle
    Whilst Mervyn King’s Bank of England scaremongers about a deflation bogeyman his pension bets on the exact opposite – buying inflation protected securities on an amazing scale. Guido has discovered that Mervyn King’s pension is 94.7%* invested in index-linked, inflation protected securities, up from an already remarkably high 88.2% the year before.”

    • sm
      Posted October 20, 2011 at 1:11 pm | Permalink

      Actions speak louder than words.
      Its enough to make you revisit the word cynical.
      More digging from the top down (thats natural) will probably reveal much much more public sector largesse.

    • Conrad Jones (Cheam)
      Posted October 20, 2011 at 1:33 pm | Permalink

      That’s because Mervyn King is a smart man.

      Anybody who is saving cash in a 2% savings account (before tax) ought to have their head examined.

      We should all do what Mervyn King is doing. He doesn’t trust the Banks either.
      http://www.guardian.co.uk/business/2011/mar/05/mervyn-king-bankers-bonuses

      “I am too. I agree with Mervyn King today that the job of making our banks safe and responsible is not yet complete.”

      Mervyn King is right – but what an understatement.

      “accused high-street lenders of taking a short-term view to “simply maximise profits next week”. And he asked: “Why do banks in general want to pay bonuses? It’s because they live in a ‘too big to fail’ world in which the state will bail them out on the downside.””

      Mervyn King is not the problem – it’s the infrastructure. Mervyn King wasn’t around in 1694 – when the BoE and FRB were fully implemented. It’s not Mervyn King’s fault. It’s our fault for electing people who either don’t care or are ignorant about what money is and who creates it. Perhaps he is trying to correct the system from the inside but the forces are just too great.

      Just because he’s not throwing his own pension down the toilet doesn’t mean he’s bad. We’ve all got to learn to have a bit more financial savvy about what’s going on and who’s really in charge.

      A Government created money solution is required. Why is it not obvious to more people?

  43. Posted October 20, 2011 at 11:37 am | Permalink

    Quite. In the great inflation that followed the 1972 budget, one year of 5% GDP growth was followed by 3 years of zero growth. The 1989 inflation was less pronounced but one year of just under 5% GDP growth was followed by 3 years of low growth.

  44. BobE
    Posted October 20, 2011 at 11:42 am | Permalink

    I drove past Didcot Power Station recently and there was no steam clouds. That is the first time I have seen that. Has Didcot been shut down?
    (For those don’t know, Didcot is a very large coal fired power station in South Oxfordshire)

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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