Inflate and devalue?

The bank’s judgement today was more about output than inflation. There was no public recognition that the UK’s inflation rate has been high compared to most other countries over the last year, and no convincing explanation of why another £50 billion of quantitative easing was thought necessary or how it might work.

The Governor rightly stressed the bad fiscal position and the need to take corrective action. The government will dooubtless ignore this good advice. In the meantime, the pound after its recent rally against the dollar has fallen back a bit. There is no sign of deflation at the petrol pumps.

The latest unemployment figures bring home the evidence that our economy has become uncompetitive and is suffering badly from the boom/bust policies that have been followed since 2003.


  1. Martin
    August 12, 2009

    John – inflation is high because of the sterling devaluation and public sector costs. Add to this an under performing economy because of planning delays and transport under investment.

    Public sector workers see the recession as something in the papers. Concepts such as “pay freeze” are regarded as the ultimate swear word in the public sector.

  2. Sebastian Weetabix
    August 12, 2009

    Speaking as someone who is from the manufacturing sector & depends on exporting goods to make a living, I think GBP remains overvalued. A rate down at £1=$1.35 or so would make our exports more competitive & bring in some much needed forex.

  3. pipesmoker
    August 12, 2009

    Enoch Powell had the answer Margaret Thatcher implemented it.

    History must repeat itself if the Tories get back in?

    A dose of Powellian economics is the way forward?

  4. Michael
    August 12, 2009

    Deflation won’t help pay off those debts which are not denominated in pounds. So, if this is where we are going, we are in for a rough ride.

    1. Stuart Fairney
      August 12, 2009

      Sovereign debt is of course denominated in pounds. This is the substantive debt and the catalyst for devaluation. Peter Schiff makes some interesting points about the dollar, they can equally apply to Sterling.

  5. Demetrius
    August 12, 2009

    Two days ago I did an open letter to the Governor. Alas, it seems he has not read it. Perhaps there was too much economics and too little spin for his taste.

  6. Mike Stallard
    August 12, 2009

    I think your last post said it all. Labour does not seem to be able to tell the difference between spending and value.
    Out here in the Styx, it is very frustrating to see how much we are all being kept in the dark and watching, on TV, the assumption rapidly gaining ground that cutting “investments” will have no real effect on either the pound or the economy.
    What has surprised me, since it is the Unions that have taken over from the House of Lords as the main source of Labour’s income, is that there have not been a lot more strikes and that there has not been a lot more inflation.
    Maybe that is just round the corner, waiting for “the winter of discontent”.
    How are we doing against the Yen? Or the Yuan?

    1. Sally C.
      August 12, 2009

      We may well see more public sector strikes over the next few months but they won’t want to rock the boat too much. They will not want to destabilize the hand that feeds them. It will be different when the Conservatives win the next election. That is when the public sector unions will have nothing to lose. I hope it won’t be as bad as I fear it could be.

  7. Stuart Fairney
    August 12, 2009

    I think MK knows we are in a deep hole and the way out is to devalue like Harold Wilson did all those years ago. This will effectively tax any holders of Sterling and make the nation poorer, but paying back such an enormous debt seem seems out of the question so it is a de facto default.

  8. Josh
    August 12, 2009

    I’d have thought a monetarist solution would have been to your liking. Milton Friedman said that the Great Depression could have been avoided with a more proactive monetary policy (the Fed let money supply contract by 1/3). Monetary growth and velocity has fallen off a cliff since the crisis, and the output gap is quite large, so there is no danger of inflation.

  9. Brian Tomkinson
    August 12, 2009

    What examples of deflation are there apart from a contrived RPI figure which is meaningless if you don’t have a certain type of mortgage? I can’t see any. I remain convinced that the strategy is to stoke up inflation by printing money and thereby financing government profligacy, encourage the devaluation of the pound adding further to inflation and hope that they can succeed in inflating away the colossal government debt.

  10. Robert K, Oxford
    August 13, 2009

    Always remember that there are three forms of taxation: direct/indirect; borrowing; and inflation. NuLab has proved an enthusaistic exponent about all three. QE, or queasing as I prefer to call it, has great inflationary significance. Stagflation is the likely outcome.

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