The Governor explains why inflation may not be crucial.

Amidst the din and fury of party contest at conferences, and between the personal stories, dramas and celebrity reporting of the leaders, the Governor of the Bank of England made an important speech.

He both claimed that the era of Bank “independence” had seen a much better record on inflation than we enjoyed in the 1970s and 1980s, and that having an inflaiton target may destabilise the economy in other ways. It was an elaborate and clever defence of what he has done, as he contemplates retirement and the verdict of history.

He was both saying it was a kind of success, and saying that because he had to concentrate on inflation it led to the banking crisis and the disruption of the eocnomy we witnessed in recent years. There are problems with both these arguments.

Let us take the success first of all. He points out that in the period 1992-2012 inflation averaged 2.1%, compared to 8.7% in the previous 20 years. He does not compare our record with international comparators. Had he done so , he would have seen that several leading countries experienced much higher inflation in the earlier period, and lower in the later period. Several countries tried new methods of controlling inflation which worked better after 1992, and deserve some credit. The UK system was also much better than the ERM which it replaced and which the Governor supported.

However, the international climate has quite an impact on the UK which is a very open economy. The period 1992-2007 was a period of great growth in cheap exports from emerging market economies which helped keep inflation low.It was also the period of the introduction of the internet, which has revolutionised productivity in many industries and lowered costs and prices. I agree that during the first part of his 20 year period UK policy was successful in keeping inflaiton under control. He admits that inflation, which was under reasonable control from 1992 to 2007, at 1.8%, leapt up to a rather high 3.2% a year in the last five years. This was a time when inflation amongst our western competitiors was much lower. That was not such a success.

If we come to the failure, the boom and bust and the banking crash, the Governor prays in excuse the need to curb inflation. He implies that if he had been set different goals and targets things might have been different. I agree with him that the prime responsibility lays with the then Chancellor.As Head of the tripartite system he held the main reponsibility, and had the power to change the aims and direct the Bank and the FSA. However, I never recall the Governor saying to the government that his target was dangerous or might cause a large boom and bust.

He also rebukes his critics by saying we did not call clearly in 2005 or 2006 that we wanted higher rates. I do recall calling for the debts to be reined in, and recall both the Conservatives and Lib Dems in opposition highlighting the dangerous levels of bank gearing that were allowed to emerge. These could have been corrected by quantitative restriction or regulation on the banks at the time. I called for more cash and capital requirements, something we now have in abundance after the crisis.

The message of the Governor’s speech is that in future the Bank will take a softer line on inflation all the time output and growth are disappointing. They need to be careful. As we have seen in recent years it is possible for inflation to reach uncomfortably high levels without overheating in the economy. It also ceases to help recovery. The recent high inflation has hit real incomes and cut consumption expenditure as a result.

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49 Comments

  1. Nina Andreeva
    Posted October 14, 2012 at 5:26 am | Permalink

    John totally off topic but would you care to comment on Osborne’s “shares for serfdom” plan?

    As usual the SpAd who came up with this one really put some thought into it. Presumably if the shares come with no CGT liability, a payout would be liable (over a certain level like redundancy pay) to income tax with its far higher rates? Also who is going to value up shares from a private company? Finally who is going to sign up for shares in a company whose value are probably is falling if it has hit a situation that it needs to shed staff?

    Last week I drew your attention to an a recent “Economist” article on how is this US election cycle the emphasis is on winning by getting your core vote out. Labour are doing this now in Bristol with their mayoral candidate. The Chukka clone promises, for example, a living wage for all and an end to rip off landlords and bus companies. However nowhere does he say how he will pay for this and how it clashes with the £25 million cut that the new mayor will need to bring to the council’s budget. Meanwhile how is Georgie going get to get his core vote out with clunkers like the above policy and an unbendable commit to gay marriage?

    • Bazman
      Posted October 14, 2012 at 3:09 pm | Permalink

      Shares for serfdom. Ha!Ha!. How many rights do the managers of large companies loose when accepting share in the companies they work for? They just get more rights to shares. Ram it.

      • Richard
        Posted October 14, 2012 at 4:42 pm | Permalink

        I agree with you Bazman, this is a poorly thought out scheme.
        I’m all for employees having shares in the companies they work for, it energises a workforce and makes them feel part of any success and they then can gain by sharing in any profits created.
        Companies like John lewis and the Co-op show how it should be done.

        There are some good schemes out there already which offer good tax breaks for employee and employer alike, but this isn’t one of them

  2. lifelogic
    Posted October 14, 2012 at 5:54 am | Permalink

    Anyone so foolish as to have supported the ERM was clearly not fit to be appointed as Governor nor indeed any job, where numeracy and thinking are required. The banks failure, to do anything to restrict lending during the huge over lending/gambling period before the crash, is unforgivable. Perhaps even worse, and very damaging, is current the over restrictions on lending now. Why is he not addressing the dreadful behaviour of the banks now?

    True the bank has had totally unsuitable PMs, Chancellors and governments since 1997 and the EU which has not helped, but the banks record is very poor. He has gone along with state sector, BBC, Government, Pro EU “think” which has been a clear (and avoidable) disaster for the country. No prospect of sound government until about 2o2o at best thanks to Cameron. When Tory leaders start quoting from silly, books of the left like “The Spirit Level”, appealing to irrational emotion, rather than what actually works, you have a big problem. When you are in coalition with the Libdems, thanks again to Cameron’s absurd lefty campaign, you have an even bigger one.

  3. alan jutson
    Posted October 14, 2012 at 7:06 am | Permalink

    Sounds like Mr King wants it always.

    If the Bank had be truely independent, then surely he would have been totally responsible for its targets and performance.

    If he did not like the tripartite system of regulation, then why did he not kick against it at every opportunity.

    If he did not like what the Chancellor was proposing as a policy, why did he not kick against it at every opportunity.

    The problem with having too many people involved with anything is that it enables anyone of them to say when it all goes pear shaped “not me gov it was the others”.

    Yes inflation has been kept reasonably low in recent years, but when wages and savings rates are near to zero, then it is the difference (the gap) between these rates which is important, as that is the rate at which your actual spending power and savings are being eroded.

    The fact that the low interest rates he talks about do not really exist for businesses, and only seems to help those with tracker mortgages, seems to have escaped his notice.

    How nice to have a selective memory.

    I have no idea as to how the Bank of England actually operates, how Mr King actually runs its business, or what remit he has been given, but I would have thought that its Governor should have been insisting at every opportunity that SOUND MONEY is the key to a successful economy, and the printing of FANTASY MONEY, and FANTASY LOANS loans to yourself, at FAKE INTEREST RATES was the last thing on earth any government should be doing.

    Doubless we will see Mr King loaded up with honours, as this seems the normal reward for a public servant who has remained in any senior position for a number of years, (no matter how they have performed) thus proving that even this recognition is now debased, almost as far as our currency.

    I have no idea who will eventually take the place of Mr King, all I can hope is that they are well qualified in the art of sound money management, do an honest job, and are prepared to stick to their principals, and speak their mind.

    • Disaffected
      Posted October 14, 2012 at 11:15 am | Permalink

      Spot on Alan. The BoE Governor should be criticised quite severely for his lack of confidence to speak up and out loud. He had a wishy washy approach to go along with the crowd not to upset the status quo. He should have gone, he will not suffer any consequences of the mess created, quite the opposite his pension was adjusted very nicely to suite the times.

  4. Single Acts
    Posted October 14, 2012 at 7:09 am | Permalink

    “it is possible for inflation to reach uncomfortably high levels without overheating in the economy. It also ceases to help recovery”

    Whilst inflation helps the reckless debtor and the asset owner and boosts GDP in nominal terms it worries me greatly that you see inflation as sometimes beneficial. Only those who benefit from printing a fiat currency can support this concept.

  5. andrew duffin
    Posted October 14, 2012 at 7:27 am | Permalink

    I am sure inflation is not crucial if your pension fund is invested – as the Governor’s is – in inflation-proofed bonds that are no longer available to anybody else.

    But ordinary people, for some odd reason, don’t like seeing their assets and savings devalued and their money made worthless, so that banks and their governors can continue in power and prosperity.

    • sm
      Posted October 14, 2012 at 2:32 pm | Permalink

      Precisely.

      If all the top public sector were subject to nominal £ paycaps on salary and pensions, you can bet price increases would be a big deal.

      I also wonder if the EU contribution are also protected in some way from competitive currency devalution.

    • Ted Greenhalgh
      Posted October 14, 2012 at 7:50 pm | Permalink

      100% agree but I think that I would have used stronger language. It is nothing short of downright cheek that someone on an inflation proof pension should advocate a rise in inflation.

  6. Steve Cox
    Posted October 14, 2012 at 7:35 am | Permalink

    A good piece, John, thanks. I found this piece by the BBC on Adair Turner’s recent speech a scary read:

    http://www.bbc.co.uk/news/business-19917480

    Although this was widely reported, the scary bit is where the BBC’s business editor, Robert Peston, reads between the lines of the speech – and I have no reason to doubt that he is misreading matters:

    He called for “a willingness to employ still more innovative and unconventional policies”.
    He did not expand on this, but it is understood he believes the Bank of England should consider telling the Treasury it never has to repay some of the £375bn of government debts the Bank acquired through quantitative easing, BBC business editor Robert Peston says.

    So Adair Turner is already saying in veiled terms that if he becomes Governor then the door will be open to monetising the government’s debts with all the resulting inflationary misery and currency debasement that will imply. I wonder if King is also smoothing the path to monetisation, something which we opponents of QE have warned from the start would be the end-result of the money printing process.

    • Denis Cooper
      Posted October 14, 2012 at 10:25 am | Permalink

      By rights Adair Turner should have just disqualified himself from becoming the next Governor, in my view, and if MPs have any say in the appointment then I hope they’ll agree with that.

      As I see it the government’s debts have already been monetised to the extent of roughly £366 billion, because the new money that the Bank created and used to buy those gilts from investors has already been put into circulation.

      Passing from the Bank to the Treasury via the gilts market, then on to all those who have received payments direct from the government, and then on again to all those who’ve accepted it in payment for goods and services, and then on again and again as it circulates around the economy.

      Because in this modern age the new money is in electronic form rather than in the form of printed banknotes it was no longer possible for an astute OAP to notice that the proportion of crisp new banknotes in his pension payments suddenly went up in early 2009, and he won’t have realised that about a quarter of the automatic credit to his bank account was new money created by the Bank.

      So surely the question is not whether the government debt should be monetised, because it already has, but whether that extra money should be allowed to remain in circulation or it should be recovered through taxation and returned to the Bank.

      • Nick
        Posted October 14, 2012 at 4:32 pm | Permalink

        Repeat after me.

        Debt is not borrowing.

        Pensions are debts.

        Pensions have been hidden off the books.

        MPs have no intentions of telling you how much they owe you.

        MPs have no intentions of paying your pensions when you paid in advance.

        [Except if they want to be elected they will tell that odd white lie. ]

  7. Pete the Bike
    Posted October 14, 2012 at 8:37 am | Permalink

    Merv has done an excellent job with regard to his real role as opposed to the public stated one. His real job is to devalue the currency at a rate that will allow the government ponzi scheme to continue and not collapse under the weight of it’s debt interest. Whilst doing that he must placate the financial markets and make the tax serfs believe that they are not having their wealth stolen by inflation. The last requirement is the only one that he’s failing somewhat as people are starting to cotton on to the massive theft involved in unlimited government spending allowed by paper currency. Apart from that Merv – good job.

    • Nick
      Posted October 14, 2012 at 4:33 pm | Permalink

      Think about it for a second.

      Why has 345 billion been invested in Gilts?

      Why was government borrowing at 350 bn over the same period?

      The answer is that no one is prepared to lend to the government unless forced too.

      Pensioners (annuitants), banks (Vince and his capital requirements), and insurance companies.

      No one is lending to them willingly.

  8. JimF
    Posted October 14, 2012 at 9:04 am | Permalink

    In 2005-6 King was walking a tightrope between higher rates to cool the housing market and lower rates to help industry. In the event he went for too low rates to cool the housing market with a currency which was being held at too high a level to help industrial investment.
    Other measures could have been taken- lower business rates or employment taxes to help industry and replace them with property-related taxes, but Brown/Mandelson wouldn’t have gone for that. After all, who needed industrial investment when Freddy was conjuring up billions out of thin air at RBS and the boys at Lehmans were growing business like topsy.
    In the end the blame has to laid at the door of politicians, who in turn take their cue from their perception of the plebs. Twas ever thus.

  9. Gary
    Posted October 14, 2012 at 9:22 am | Permalink

    The problem with measuring the amount of monetary inflation by measuring the effects on prices of this inflation , is that the contents of the sample basket of goods is lacking and is politically motivated.

    The effects of Monetary Inflation has been rampant in Gilts and hence in govt growth, but this is not measured and is not deemed to have an impact on consumers. But monetary inflation does have an effect, it causes rates to be held artificially low, and falling, thus decimating capital and savings, while at the same time having a huge private sector opportunity cost as govt grows.

    There is no way to prevent the insidious destruction caused by monetary inflation. That the govt and central bank chooses to rig the yardstick and effectively ignore it, does not make it go away. We are yet to fully reap the whirlwind.

  10. Brian Tomkinson
    Posted October 14, 2012 at 9:27 am | Permalink

    Inflation may not be critical to King after ensuring his pension is protected from its destructive effects but it is potentially devastating to the majority of us.

  11. Denis Cooper
    Posted October 14, 2012 at 9:50 am | Permalink

    The text of the speech, “Twenty years of inflation targeting”, is here:

    http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech606.pdf

    His twenty years starting on October 9th 1992, when “the newspapers reported that for the first time monetary policy in Britain would be based on an explicit target for inflation”.

    “It was an exciting time; we were reconstructing British monetary policy after the trauma of forced exit from the ERM. In those days, of course, the Chancellor set monetary policy and the Bank of England played only a behind the scenes role. But the role of the Bank was about to change – first with the Inflation Report in February 1993, which gave the Bank its own public voice, and then with independence for the Bank and the creation of the Monetary Policy Committee (MPC) in 1997.”

    To be perfectly clear and in the interests of fairness, Mervyn King was not the Governor at that time; he had joined the Bank as chief economist in 1991, became Deputy Governor in 1997 and only became Governor in July 2003.

    2003 was also the time when Brown changed the inflation target he gave to the MPC from one expressed in terms of RPI-X to one expressed in terms of CPI, which is actually the EU’s HICP.

    And to be fair to a man who is often vilified over matters for which he had no or only partial or unclear responsibility, King did quietly question the wisdom of that change in this speech in January 2004:

    http://www.bankofengland.co.uk/publications/Documents/speeches/2004/speech211.pdf

    In his latest speech King also refers back to a speech he gave in October 2003, which is here

    http://www.bankofengland.co.uk/publications/Documents/speeches/2003/speech204.pdf

    in which he warned that the coming decade might not be as “nice”, “non-inflationary consistently expansionary” as the previous decade, while admitting “but the point didn’t get home”.

    Personally I don’t see King urging a softer line on inflation in this speech, on the contrary in his conclusions he says:

    “What I have tried to show tonight is that the case for price stability is as strong today as it was twenty years ago – both in theory and in practice. The clarity and simplicity of the inflation target helps to anchor inflation expectations on the target. We forget the lessons of the 1970s and 1980s at our peril. In the end, the essence of central banking is to maintain confidence in, and the value of, paper money.”

    • zorro
      Posted October 14, 2012 at 3:53 pm | Permalink

      On the basis of the last sentence they are failing abysmally as so many are fleeing to land, precious metals, and other commodities…..

      zorro

  12. oldtimer
    Posted October 14, 2012 at 10:01 am | Permalink

    This indeed sounds like a self serving speech. To compare the recent past with the 1970s/80s is like comparing apples with oranges. In the 1970s there were fundamental changes, not least the US abandoning gold convertivbility (c1971), the introduction of floating rates (1974), the oil price shocks of 1974 and 1980-82. There were huge realignmnets bewteen the major trading currencies as a consequence. It is true that the UK made a much worse job of controlling its inflation (driven in part by a devaluing £) than its main international competitors. That much remains true today. Indeed inflation and devaluation remain the principal tools used by by those in charge to muddle through.

    There were plenty of people concerned about rising debt levels in the early to mid 2000s. In fact I advised my own family to take precautionary steps in reducing their personal debts to levels they could live with.

    The politicians in charge seem totally incapable of getting people to understand that the country must learn to live within its means. It is especially worrying that candidates for the post of Governer, like Lord Adair, seems so ready and willing to support their squanderbug tendencies.

  13. Simon
    Posted October 14, 2012 at 10:14 am | Permalink

    So what could the BoE have done about inflation? Raised interest rates which would have had the effect of… Slowing the economy.

    Not using QE? Which would have… Not recapitalized the banks, constraining their lending even more.

    As what inflation we had was never wage based – we never had too much money chasing too few products, it was never likely to run away into hyperinflation. No we had inflation caused by VAT increases, commodity bubbles, riding oil prices, etc.

    • Nick
      Posted October 14, 2012 at 4:35 pm | Permalink

      Raising interest rates means inflation is controlled.

      That raises Sterling making imports cheaper so you don’t get the commodity problem.

      It gives more money to savers such as pensioners, so they spend more.

  14. outsider
    Posted October 14, 2012 at 11:17 am | Permalink

    Dear Mr Redwood,

    I fear that Sir Mervyn has learnt nothing from the critical errors made back in 2003, when the MPC mistakenly cut Bank Rate on the back of “disappointing” GDP figures that turned out to be false, after Gordon Brown had upped the assumed trend growth rate to 2.8 per cent on the back of immigration.

    Nor has it really learnt from the oft-repeated mistake of assuming that surges in oil prices are temporary, which is built into its obsolete economic model

    No-one really has any idea what spare capacity is today, let alone our trend growth rate. Thanks to the massive loss of corporate infrastructure, I would guess that the UK’s sustainable trend growth is no more than 1.8 per cent. In the absence of any reliable signposts, the inflation target is the only solid one.

    There is certainly still room for some cyclical recovery but, as you say, that has been held back by inflation hitting real incomes. As a result, the Bank has painted itself into a corner where it thinks it dare not raise interest rates for fear of hitting spending even more through higher mortgage rates, falsely in my view.

    As Keynes said 80 years ago, policymakers are prisoners of a defunct economic theory, in this case the Bernanke monetary theory and the consensus assumption that an economy can be stimulated by monetary policy alone.

    If the next Governor is a mainstream economist or an Establishment administrator such as Lords O’Donnell or Turner, he/she will almost certainly be a prisoner of this obsolete theoretical nonsense.

  15. StevenL
    Posted October 14, 2012 at 11:32 am | Permalink

    When Mervyn King says ‘inflation’ I presume he means ‘my irrelevant CPI target’. As I seem to remember that the money supply was growing at 15% or so a year during the boom and house prices by a similar amount. Did Mervyn King have a big, leverage long house prices / short sterling position on? I think we should be told.

    • Denis Cooper
      Posted October 14, 2012 at 4:26 pm | Permalink

      But in fairness that “irrelevant CPI target” is not of King’s devising.

      It was set by Brown to supersede his original RPI-X target, and it has since been adopted by Osborne.

      That’s how it works under the Bank of England Act 1998.

  16. Lindsay McDougall
    Posted October 14, 2012 at 11:58 am | Permalink

    The Governor should have acknowledged that the wrong inflation target was used throughout the period of loose monetary policy from 2001 to 2007. The inflation index used for targetting should have included house prices (not mortgage interest payments) and perhaps other property and asset prices. House prices rocketed during this period. The Governor himself expressed concern about rising house prices and the inflation index being targetted but, because he FAILED TO RESIGN, Gordon Brown took no notice.

    Loose money, now manifest in low interest rates and QE, only stimulates economic growth for about one year. After that, the inflation generated dampens demand and stagflation sets in. What has happened to economic growth is what you would expect to happen. The Governor has been responsible for this.

    All in all, the Governor should not retire full of years and honour. He should have been sacked years ago.

    • zorro
      Posted October 14, 2012 at 3:59 pm | Permalink

      Indeed the critical mistakes were made in those crunch years. Once Labour abandoned their Tory inspired public spending targets after two years and started to spread their largesse, it was always going downhill…..with Gordon’ ‘Golden Rule’ and the terrible loosening of monetary policy following 9/11 and the dot com crash. Then the silly house price increases, liar loans, financial instruments galore…..We have been poorly governed for too long to remember.

      zorro

  17. Bernard Juby
    Posted October 14, 2012 at 12:27 pm | Permalink

    Ah!But he doesn’t explain why watering the milk or beer is a criminal offence and yet “watering” the money supply by so-called Quantitive Easing isn’t.

  18. acorn
    Posted October 14, 2012 at 2:29 pm | Permalink

    I have read that using NGDP as a monetary target instead of inflation (Nominal GDP), at about 5 %. That is, say, 3% inflation plus 2% real growth. As the UK is prone to inflation for some reason I have never understood, such a policy could be a bit tricky. Perhaps Merv wants to go out in a blaze of glory.

  19. zorro
    Posted October 14, 2012 at 4:07 pm | Permalink

    I suspect that he is preparing the ground for his successor and the slow inflationary which has always been their policy. Weak democratic governments always end up printing with consequent inflation as they lack the resolve and political support to do anything else.

    He has a selective memory about his figures for the 1970/80s but then we are talking about on of the co-signatories of a letter to Margaret Thatcher in 1981….He knows full well that we were in a benign inflationary environment worldwide from the mid 1990s for the reasons John mentions, but he also must know that comparative to others we have not been world leaders with regards to the vital economic statistics. I would have respected him more if he had resigned when confronted once too often with the effects of Brown’s lunatic economic policies. Most importantly, John’s last paragraph is most prescient. Once economic credibility or reputation for fiscal prudence is lost, events can overwhelm you very quickly. Ask John’s former boss…..

    zorro

    • zorro
      Posted October 14, 2012 at 4:08 pm | Permalink

      slow inflationary default

  20. Jon
    Posted October 14, 2012 at 4:31 pm | Permalink

    Many politicians and vested interest groups periodically claim to have found the new elixir. Its monetary or its inflationary or its leveraging. It reminds me of management consultancy firms that find a new buzz word. What really lies behind these things is nothing new but just sound principles and balance, leaping from one extreme to another is not the answer.

    I can remember about mid last decade the news occasionally interviewing people in a high street, Many complained about the huge volume of credit cards being shoved through their letter box, their children being able to borrow unlimited amounts, lots more people driving round in new expensive cars. The person in the street would say where is it all going to end.

    Some people may have known more than others but it was certainly the case that a large number of ordinary people knew it couldn’t last and something was going to happen long before it did. Brown and company may claim to be ignorant and stupid as there defence in this regard but I think they just lied and ignored their occupational responsibility.

    That said I do worry a bit about the likes of Sir Adair Turner taking over.

  21. Bert Young
    Posted October 14, 2012 at 4:55 pm | Permalink

    No matter how the Bank of England asserts that it can and does act independently , the truth is it is a tool of the Chancellor and will follow whatever direction it is given . It will never publicly announce a position and view diametrically opposed to that of the Government . Ridiculously low interest rates do nothing to bring the borrowing irresponsible public to heel or force a much more stringent spending policy on the Government . Debts never should be written off . If we want to show the World that we can be trusted , we must pay our way and honour our debts . Mervyn King has done the job he was given to do within the constraints of his office .

    • Denis Cooper
      Posted October 14, 2012 at 6:04 pm | Permalink

      The law, namely the Bank of England Act 1998, asserts that the Bank of England must act independently on monetary policy and that the Treasury has no power to give it directions on monetary policy, unless Parliament agrees to a temporary suspension of that independence under Section 19 on the Treasury’s reserve powers:

      http://www.legislation.gov.uk/ukpga/1998/11/section/19

      Which leads me to wonder why two successive Chancellors have sent letters to authorise the Bank to create new money and use it to buy up gilts, without having first invoked that Section 19, and yet these apparently ultra vires actions go unquestioned in the Parliament which passed the Act.

      Reply: Parliament has established that the creation of extra money is a matter where the Chancellor – and therefore Parliament – needs to consent, and the Bank agrees. There is no law stopping the Bank seeking the consent of the Chancellor n or stopping the Chancellor expressing his view.

      • Acorn
        Posted October 15, 2012 at 6:59 am | Permalink

        Dennis, the law is what ever the government of the day says it is. Then you end up with the likes of the ECJ; ICJ; ECHR etc etc.

      • Denis Cooper
        Posted October 15, 2012 at 7:49 am | Permalink

        Exactly where has Parliament established that, JR?

        As I’ve said before, I’m not clear about the precise legal basis on which the Chancellors have been authorising the creation of extra money, and I’d like to know; and as far as I know MPs have never been asked for their consent as expressed in the form of a vote on a motion, even though the creation of such large sums of new money is akin to taxation.

        Reply: It was established when first done that the Bank wanted and received Chancellor consent for the action – and wanted a Treasury guarantee in case the gilts it bought fell in value. The Chancellor has felt it necessary to make statements to the Commons to keep them informed. It could be put to the vote if the Opposition wished to oppoe it, but of course so far no opposition has wished to oppose it by voting against.

        • Denis Cooper
          Posted October 15, 2012 at 7:05 pm | Permalink

          This is already becoming shrouded in the mists of time.

          But when I look at Darling’s original Commons statement of January 19th 2009:
          http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090119/debtext/90119-0004.htm

          I don’t see him offering any clarification on the legal basis for his actions, and nor do I see any MP asking for any clarification.

          However what he announced then was a scheme for the Treasury to provide money to the Bank which it could use to buy “high-quality private sector assets, such as corporate bonds, commercial paper and syndicated loans”, and

          “When purchasing those assets, the Bank of England will ensure that the total amount of money in the economy does not increase”.

          And he corrected George Osborne when the latter suggested that this was “printing money”, saying:

          “Under the scheme that we are proposing, there would be no increase in the amount of money going into the economy, because for any additional money that the Bank of England puts in through normal market operations, an equivalent sum will be taken out, so that it will not affect the quantity of money in the economy.”

          At that stage he could have argued that he was not interfering with the independence of the Bank of England on monetary policy; but when he adumbrated the development which would follow only five weeks later, with the Bank creating large sums of new money to purchase gilts:

          “I did say, however, that by having this mechanism it is possible that if, at some point in the future, we wanted to use it for monetary purposes, it could be so used, but that is not what we are doing at the moment. I shall repeat to the House what I said this morning: if that policy changes, I shall tell the House.”

          by his own admission that development was clearly a matter of monetary policy, which had been made the exclusive operational preserve of the Bank by the 1998 Act, and in my view Darling did overstep the bounds of his legal authority by agreeing to it without first asking Parliament to suspend the independence of the Bank through Section 19 on the Treasury’s reserve powers.

  22. Ian Hills
    Posted October 14, 2012 at 8:14 pm | Permalink

    It’s easy to guess why King was knighted in the Queen’s new year honours. For services to irresponsible chancellors.

  23. Mike Stallard
    Posted October 14, 2012 at 8:24 pm | Permalink

    The fish rots from the head. The EU, that castle of lies, is spreading its baleful influence. Now our government is lying and covering up the truth in just the same way as your masters are. Weimar – here we come!

  24. Conrad Jones (Cheam)
    Posted October 15, 2012 at 1:04 am | Permalink

    “He was both saying it was a kind of success, and saying that because he had to concentrate on inflation it led to the banking crisis and the disruption of the eocnomy we witnessed in recent years. There are problems with both these arguments”

    Concentrate on inflation? Does that include Housing Costs?

    Correct me if I’m wrong, but isn’t Inflation calculated differently to the way it was calculated in the 1970s? If calculated using the 1970s methodology, would not inflation be closer to 9% ? So Mr King believes that it’s been a big success pretending that Inflation is under control. If you can’t fix an overheating engine, rig the gauge. Or, if you can’t sell a high mileage car, clock the odometer.

    Energy and Food Costs are going up well above 2%. Unemployment is rising and the number of permanent Jobs is falling, being replaced by short term contract jobs. The Global Financial System is on life support and he regards that as a success.

    What is the Weather like on Mr King’s planet?

    Granted, things are better here than in the EURO single currency area, but that’s the difference between a Nation with some control over it’s currency against Countries that have given that freedom away.

  25. Conrad Jones (Cheam)
    Posted October 15, 2012 at 1:26 am | Permalink

    “It was also the period of the introduction of the internet, which has revolutionised productivity in many industries and lowered costs and prices.”

    Interesting point. So if technology is increasing efficiency and lowering costs, why can we no longer afford to pay the Tuition Fees for undergraduates?

    With the introduction of High Tech IT Systems, an office of thirty staff (say at a distribution centre) is reduced down to two, becasue instead of going around counting boxes using paper written lists and sticky tape, they now use RF Barcode Readers and WLAN Servers with Databases accessed by Desktop PCs and updated by WLAN RF Guns. The process is dramatically speeded up – great for the Company, but twenty eight people are now looking for something else to do. So a few of them decide to further their education because they don’t want to be the ones to lose their Jobs next time around.

    Then the Government ramps up Tuition fees after removing University Grants, because they knew that all this technology was going to increase the numbers of people interested in improving their employment prospects, because Firms needed less people.

    Problem with Government policy is it appears to be short term gains, at the expense of long term investment. Any Government does not benefit from long term investment, they only benefit from short term improvements to Employment Figures, Inflation, Government Defecits, National Debt and GDP. Quick Perceived Improvements required for the next elections.

    Labour surfed it’s way on a ripper wave of debt. That wave came crashing down on Gordon Brown – who helped create it, then the Conservatives take over and they believe that the answer to the debt problem is to reduce the deficit.

    The paradox of saving is that it reduces saving due to the reduction in spending, which leads to less Jobs, and less spending resulting in less savings in the Economy as a whole because there are less people employed.

    Reply: Because the state has offered so many free entitlements it can no longer collect enough in tax to pay for them all.

    • Conrad Jones (Cheam)
      Posted October 15, 2012 at 12:05 pm | Permalink

      I basically agree with you, handing money to the wrong people for the wrong reasons is wrecking the economy. (You already know what I think about Bank Lending so I won’t mention again here -I haven’t changed my view).

      Does the Government require to collect Tax before it can pay for things?

      The UK Government (unlike Spain, Portugal, Ireland, Greece and Italy) is an Issuer of Currency and not a User of Currency.

      There is a danger here that we could slip into a way of thinking that precludes the use of Government Issued Currency except for the purposes of bailing out Banks when it should have gone directly into the Economy.

      Housing Benefits, Bank Bailouts and unemployment benefits are bad policies leading to Inflated Asset Bubbles, Moral Hazzard and long term state dependence.

      What do you believe the Governments of the last forty years could have done (knowing what we know now) to avoid the current Financial fragility of the Global Economy?

      There’s two different types of Investment:
      1. Existing Assets
      2. Production & Employment

      Which one do you think the Government has mainly allowed over the last forty years and who has benefited?

  26. Willy Wireworm
    Posted October 15, 2012 at 3:27 am | Permalink

    I blame Alan Greenspan. G Brown saw how he lowered the interest rate post 9/11 with no inflationary effect and said ‘I want some of that’. So there was no change to the BoE’s remit, understandably.

  27. Gary
    Posted October 15, 2012 at 10:41 am | Permalink

    If you want an idea of the desperation of the situation and why they are talking about starting the helicopters, read this

    http://www.cobdencentre.org/2012/10/money-printing-is-the-only-thing-keeping-the-system-afloat/

    • Conrad Jones (Cheam)
      Posted October 15, 2012 at 1:04 pm | Permalink

      Trouble is, those Helicopters only ever fly over the City of London or Wall Street.

      The Cobden Centre “For honest money and social progress” is an Excellent Website, with contributing Authors such as Steve Baker MP, Mark Ganier MP and Douglas Carswell MP amongst many other contributions to the “Honest Money” debate.

      “The Cobden Centre has been established to promote social progress through honest money, free trade and peace. We endorse Richard Cobden’s view that: Peace will come to earth when the people have more to do with each other and governments less.”

      This doesn’t preclude Governments from their responsibility to regulate and issue the currency, but it does suggest that Government policy is upside down, regulating businesses, bailing out businesses while allowing private business to issue the currency. Inflation occurred because Private Banks issue loans (creating new bank deposits) and this digital money has mainly gone into Asset price Bubbles and not productive enterprise.

      We’ve been encouraged to believe in a “Money for Nothing” society, buy a House and watch your investment grow. We’ve been encouraged to take part in a Ponzi scheme which is now falling apart.

      • Conrad Jones (Cheam)
        Posted October 15, 2012 at 1:41 pm | Permalink

        PONZI SCHEME:

        “A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation.”

        “The Ponzi scheme usually entices new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent. Perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going.[1]”

  28. Gary
    Posted October 15, 2012 at 11:39 am | Permalink

    “The period 1992-2007 was a period of great growth in cheap exports from emerging market economies which helped keep inflation low”

    As stated by Vince Cable a few years ago and Theresa May last week, the open doors immigration policy also helped keep wage inflation low. The UK effectively hit full employment in 2002. Low interests rates continued to create demand which would probably have led to higher wage inflation and eventually higher interest rates. Instead, the economy grew for another 5-6 years with the help of cheap credit and growing debt without leading to out of control wage inflation. The number of native born workers stayed about the same but an extra 1.5 million foreign born workers entered the economy. I suppose some bright sparks in the Treasuary thought they had found a magical solution.

    We have had a decade of no real wage growth for the majority of people, and wages taking a smaller percentage of GDP.

    I was watching the BBC’s “Master’s of Money” series and the episode on Marx. How surprised I was to find some parts of Marx’s theories and the “industrial reserve army of labour” sounding rational.

  29. David Langley
    Posted October 15, 2012 at 1:25 pm | Permalink

    So while he is writing his “Mea Culpa” speech for posterity, he failed to mention the beano his banking mates were having buying and selling American Collateralised debt obligations to each other. So we all got stuffed when the reality set in that we had allowed our banks to become the holders of a vast amount of bad debts from the yanks.

  • About John Redwood


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

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