Readers of this site will know that I have disagreed with the analysis and policy of the Bank of England ever since I set the blog up. I have watched them lurch from too easy to too tight and then back to super easy. Current policy was bound to produce high inflation by western world standards. The combination of printing money and setting official interest rates at 0.5% was bound to give us what we now have.
There are two official explanations for RPI inflation at 4.7% and CPI inflation at 3.3%. They tell us retrospectively that it is the result of the fall in the pound last year, and they tell us it is the result of rising world commodity prices. They point out that inflation may get worse before it gets better because the VAT rise kicks in in January. All of these items are said to be temporary or one-offs which we should not worry about. The world, they suggest, is really deflationary underneath.
That is not the world I see around us. Asia and Latin America are experiencing strong inflationary pressures. Indian inflation is around 8%, and the official figure of around 5% for China probably understates what is going on in the shops. High and rising inflation in the faster growing parts of the world create price increases within the world supply chain, and spills out into western markets through price increases for traded goods and components.
There is plenty of asset price inflation around, though the Bank usually turns a blind eye to that. Commodities, fine wines, art works, shares and even properties in the main centres are all on the rise. There is plenty of cash around in the hands of the successful global entrepreneurs, amongst the newly rich business classes in China and India, and in the hands of oil oligarchs. Gold and silver prices reflect investor wishes to hold an inflation hedge as well as conspicuous consumption in the jewellery shops.
The Bank holds to the view that because the UK economy lost a lot of output in the slump, there must be plenty of spare capacity around now. So, they argue, there cannot be price inflation as companies will wish to fill their factories and offices before they put prices up. This is the biggest misunderstanding they seem to have. Talk to almost any industrialist and he will tell you his company is having a good year. Final demand has picked up from the low levels of 2008-9, and there has been strong demand to restock.
During the slump in the UK manufacturing laid off a lot of labour and closed more factories. Companies did not have the cash to carry on spending on new mahcinery. There is much less spare capacity around than the Bank thinks. Businesses are held up for shortages of skilled labour, for lack of specialist materials and components, and for delays in the supply pipeline from Asia. Global businesses are affected by the inflationary pressures on the other side of the world. Many UK companies decided to take some or all of the benefit of lower sterling in form of higher margins rather than higher volumes, keeping prices up.
The government’s decision to switch public sector index linking to CPI from RPI has so far worked to cut the public sector cost increases, leaving those who will receive less feeling bad about it. A better solution for the government is to encourage the Bank to get inflation down to target or below. As I have often argued, given the public spending pattern set out for the five years of this Parliament, we cannot afford much inflation. If we could get to zero inflation in the public sector then we could preserve all valuable public services without cuts. It will not be possible to get public sector inflation down to zero and keep it there if general inflation is going to continue in the 3-5% range.
So what does the Bank have to do? It needs to reassure us all that there will be no more quantitative easing. US QEII seems to have gone straight into commodity and asset price inflation. China thinks the US policy is destabilising its efforts to curb its credit and inflationary pressures.
The Bank also needs to take heed of the rising interest rates for government bonds which the markets are now imposing. The official 0.5% rate is looking increasingly detached from market realities. No-one in the private sector can borrow for anything like 0.5%, and savers are increasingly angry that the returns on their money are so far below the inflation rate. Even the government now has to pay well over 0.5% for its money for any sensible time period. The monthly ceremony to settle the rate is no longer commanding the markets or informing lenders and borrowers how to price their transactions. It is time for a reality check in Threadneedle Street.
December 15, 2010
Why do you still believe an official interest rate is required or even relevant anymore? We don’t have an official price of milk or bread or petrol, why an official price of money?
Reply: Good question – as I point out this official prcie of money is having very little impact on the private sector. The authorities do seek to guide markets on how much the governemnt will pay to borrow – but sometimes the markets take them on and make them put the price up.
December 15, 2010
Stuart
Why an official interest rate.
Perhaps when the Bank of England fixes it, it helps all of the Banks to remain competitive with each other and is a guide.
Bit like OPEC with its oil price.
In effect it is like a cartel (illegal in most other forms of business) for all of its members.
The sooner we can perhaps get away from this fixing, the sooner we may have real competition in the market place, at the moment there is not a fag paper between all of the Banks on borrowing or lending rates, its a very comfortable place to be, with increased margins of 300% over what was considered the normal spread a few years ago.
It would seem that the Government is happy for the Bank of England to operate in the way it does, otherwise otherwise it would change the system.
December 15, 2010
Why an official interest rate ?
Because in this debt based fiat system you HAVE to have short rates lower than long rates, in the “borrow short, lend long” boondoggle. ie there must be some inflation built into the system or IOW the yield curve must be rising, and in order to try and ensure this you need to have control of at least the short end. Right now through derivatives, the central banks and their investment bank agents are to a certain extent able to control both ends. As always, when these rigging schemes break it causes huge upheaval.
How we could wish for a system where deflation was not a swear-word having to be fought at all costs, but a normal deleveraging from an oversupply situation , back to an equilibrium of ZERO inflation.
December 15, 2010
We are in desperate need for real competition in banking. The banks are getting away with huge margins and fees and it is holding back investment by smaller businesses (as is over regulation, taxation a lack of vision and the rest)
Base rates could go up if margins became sensible again. The banks are restoring their balance sheets at the direct expense of productive industry and peoples jobs.
December 16, 2010
More competition is certainly needed which is why the break up of the one-stop shop big banks must happen.
December 15, 2010
A good post.
December 15, 2010
Bank base rates at 1/2% are only relevant to people with old base linked loans. It is hard for small and medium businesses to get any new loans at all – even with good security and certainly not at sensible margins and fees. There is no real effective market competition in the banking sector at the moment. So the low official rates have a more limited impact than you might expect.
If they reduced pointless regulation, the absurd renewable energy agenda, waste directives, employment laws and much else this would all help to reduce costs and inflation but they won’t. If they opened up more real competition in the banking and energy sectors too costs and prices could also be reduced.
The currency would also have less weakness if the leaders were clearly heading in the right pro-business direction. Just abolishing the happiness index and perhaps inheritance tax would send the right message and make me happier straight away but Cameron won’t do that either.
Is it Nature or Nurture? Is the problem in his Genes or caused by his moneyed, etonian upbringing. Is it just the triumph of emotional feelings much loved by advertisers and PR people, religious priests and TV evangelists over logic over what actually works in the real world. Would you fly on a plane designed by advertisers, PR men and priests or would you prefer designed and made by engineers and physicists.
Or is it that you need to be a PR man appealing to emotion but with no sense of direction just to attain power in the first place. If so are we all doomed to crash or can even now the leopard change his spots and hire a man with a working compass?
December 15, 2010
1/2% rates are terrible for those who have spent their life saving and living within their means, and are now trying to live off their savings. You punish the prudent. But even worse than that, when we have a combination of consumers backing off and rates falling for most of the past 30 years, company balance sheets have been decimated. The present value of future obligations and income grow as rates fall(net present value of income/payment streams), but when income streams are also falling as consumers retract, only the liabilities are growing, and that is wiping capital (assets-liabilities)off company balance sheets.
These are the unintended consequences of what you get when the Central Bank quango fixes the rates, in a mostly futile attempt to keep the yield curve rising.
December 15, 2010
Excellent article, very informative and written with clarity. I do wonder at you statement that inflation is likely to be 3-5% for the foreseeable future. I argue that in real terms it is likely to be much higher… One year ago we had 15% VAT. Very soon we are to have 20% VAT, a change of 5% in just 53 weeks. Now I know VAT is simply a year on year measurement, but still, it is a hefty increase in a short period. Also wage increases are running at just over 2% [To October], that is below inflation. With more tightening ahead, the net result of this is to shrink people’s disposable income even further… I suspect inflation will be over 6% for the forseeable future, maybe I am being a doom merchant, I don’t know.
The piece I did not understand John, I wonder if you can help me.. If the interest rate payable to banks has less and less bearing on the BoE’s rate, which I accept it does, why would the 0.5% rate apply to savers? Surely there are plenty of savings accounts giving cutomers a much higher return? Doesn;t the logic follow that the 0.5% BoE has less bearing also on the savings rate? Perhaps I have misses something.
Thanks.
Reply: You are right that some savings rates have detached from Base Rate. Howver, a return to mroe normal governent bond and interest rates would help savers, as savings products often are based on those instruments. National Savings might also return to the market with an attractive 2-5 year bond range.
December 15, 2010
J.R. You say “National Savings might also return to the market with an attractive 2-5 year bond range”
But with inflation at nearly 5% and tax rates up to 50% what is an attractive return on national savings – unless they are tax free you need about 10% just to keep your money worth the same or 14% to get a 2% actual real return and that assumes inflation goes no higher.
Any thoughts?
December 15, 2010
Still doesn’t explain the utilities and petrol scam and scam it is. What we see every day is the taking of a single thread from every person in this country by the rich and powerful. Next year all the people who where so for cuts and austerity are going to see the results in their own lives. For many it is always the farmer next door whist supporting Bill gates. There is already a debate as to the use of water cannons on British streets. I predict this government is in for one term and because they know this are determined to pursue a course of ideology instead of real policies.
You have to laugh at the political innocence of the students. Who will now might be future Labour supporters, but I wouldn’t bank on it.
December 15, 2010
There us one double stranded reason that the Bank of England does not raise interest rates. The strands work like an umbilical cord between the Government and the Bank.
The first strand is house prices and mortgages. So many people have over mortgaged and house prices will drop when interest rates rise. Disposable income will fall and the economy will shrink.
The second strand is that the Bank wants to keep it’s power, so must make political rather than economic decisions. It’s simply untrue that the Bank is independent because the Government can override them at anytime.
So we are left with the Governor trying to explain that there are different types of inflation and that they are only
able to control indigenous inflation and only supposed to be controlling wage inflation. So if they are only controlling indigenous wage inflation who is controlling price inflation. Surely the Government need to make ADDITIONAL interest rate decisions to curb asset inflation.
December 15, 2010
House prices will fall but disposable income will not; they will simply transfer from one sector of the economy too another. A fall in house prices will however make houses more attractive for first time buyers and that will be a great stimulus to the economy.
Likewise reposessions will result in more demand for rented accommodation.
The Bank of England have lost the plot and will just want to do the same as they did last time
December 15, 2010
Unfortunately Mr Redwood an easing off of QE or even a rise in interest rates is likely to have adverse effects on unemployment and growth.
I’m afraid your friend Mr Osborne has rather boxed that nice Mr King into a difficult situation – not quite stagflation.
December 15, 2010
A rise in interest rates will actually have a huge beneficial impact on growth, but Osborne can’t see it
December 15, 2010
On the contrary, it is the previous Labour government and Mervyn King that have boxed in George Osborne. Labour’s profligacy was facilitated by Mervyn King’s low short term interest rates over an extended period of time. Brown and King are both culpable for the heavily indebted position we now find ourselves in, both as a nation and on a personal level.
December 15, 2010
If we could get to zero inflation in the public sector then we could preserve all valuable public services without cuts
================
Rubbish.
The reason is simple. The government is spending 30% more than it takes in taxes. You need 30% cuts or a persistent 30% increase in efficiency. It’s not going to happen on the efficiency front, so its cuts.
Even with the cuts, you will still have grown the debt. Debts need servicing, so its cuts in services.
Or are you really going to screw things up and raise taxes? Oh, yes, you have.
Reply: Current plans allow for an increase in total cash spending
December 15, 2010
Not a proper answer to the question John and you know it!
December 15, 2010
Mr. Redwood, you could possibly add to your list that with house sales in decline the major lenders ie banks and building societies have little incentive to attract funds as they have very few folk wanting to borrow it. With the virtual end of interest only mortgages I doubt the market will be going back up any time soon regardless of what inflation does. As commented here inflation was being used by labour and is now being continued by the coalition to erode the wealth of the saving classes.
December 15, 2010
The Bank Rate simply serves to underpin the interest rate structure that allows the banks to make abnormal margins to try to rebuild their capital. That the rate is being maintained is no more than a signal that banks are still in deep trouble.
Today we read that it was Mervyn King, not “I saved the world” Brown, who realised and agitated for the extraordinary international measures in 2008. He has shown the restraint of his office in keeping silent about that – but also in refusing to acknowledge that the root of our present inflation lies in QE and sterling devaluation, and it will continue to do so for another year or so.
The idea that the economy responds to exchange rates in the same manner as it did when it was dominated by manufacturing should surely be laid to rest. Our supply chain is dominated by imported goods, not semi manufactures. Our exports depend on services, which can be priced instantaneously to maintain their cost in foreign currency (or indeed, priced in foreign currency when sold abroad).
Meantime, the banks have their heads in the clouds. Mortgage repossessions have fallen back to levels last seen at the height of the property boom in 2007. That is akin to a cancer patient refusing treatment for the disease.
December 15, 2010
What are “services”?
December 15, 2010
Good question I think by “services” they mean issuing parking tickets collecting council tax and stopping anyone modifying their house without paying the appropriate “fees” first.
Things that “service” the state in its need for your cash.
December 16, 2010
From the Pink Book in 2008 we exported £20.9bn in freight and transport, £19.6bn in travel, £4.6bn in Communications, £1.1 in Construction (essentially architectural and engineering design), £8bn in Insurance, £52.8bn in Financial Services, £7bn in Computers and Information, £7.4bn in Royalties and Licence Fees, £44.7bn in “Other”, £2.1bn in Personal, Cultural and Recreational, and £2.1bn in Government Services (does that include telling the Emir of Kuwait how to rule??).
December 15, 2010
I’ve had good year-on-year pay rises for over a decade and yet have felt nothing but financial squeeze. High inflation has been with us for a long while and has been hidden or recategorised through outsourcing, downgrading of products or clever use of RPI/CPI.
The Bank is keen to keep interest rates low but when the wage demands start coming in (as they will soon enough) they are going to have to apply the brakes. A reality check is coming on New Labour’s wasted years and Bank of England mismanagement. But who will get the blame ?
December 15, 2010
If not an official or announced interest rate then at what rate will the Bank of England lend to the commercial banks? That is all it is, fundamentally.
The BoE rate gets used as a proxy for an officially approved minimal risk short term interest rate but that interpretation is one liked by politicians who think they can run the economy.
There have often been times when the BoE rate was widely at variance with the rate anyone would lend to HMG (BoE) even on a short term basis.
The reason BoE minimum lending rate is so low is to facilitate the recapitalisation of the banks through enhanced margins. When combined with a gusher of new money in the economy the result can only be inflation.
I look forward to late night meetings at Number 10 or 11, accompanied by the modern trades union leaders’ equivalent of beer and sandwiches. There they will earnestly debate with Ministers how to stop inflation: is it caused by excessive wage demands or by scandalous price rises by capitalists. And is the currency crisis caused by gnomes or the ECB and when will the time be right to join the Euro as a “solution” to the “problem”
December 15, 2010
“If not an official or announced interest rate then at what rate will the Bank of England lend to the commercial banks? That is all it is, fundamentally.”
And therein is the nub of the problem. And the answer is contained in re-arranging the words in the question in the converse : “If there was no central bank and the fractional reserve debt pyramiding of money from the central bank via the commercial banks, there would be no need for anyone except the market to set all rates”
December 15, 2010
The present situation reminds me of the mid-seventies, when, if my memory serves me correctly, inflation went up to over 20% for a while. I can envisage this happening again if the government does not take strong, prompt action. Why don’t politicians and economists (and indeed many other professions) learn from the past? Possibly they are all far too arrogant!
December 15, 2010
Because they all believe that it will be different this time and it never is.
Reading this blog and numerous others it is obvious that the economy is like the weather; unpredictable as a result of the incredible number of feedbacks. Just leave it alone. Do not rescue banks or any other business that gets into trouble.
December 15, 2010
No, they are being very sensible. They cannot meet their commitments, many of which are from the brooding Genius from Scotland. They need money fast and invisibly – so they print a lot more.
December 15, 2010
I remember these times well. Once inflation hit 17% I took all my savings out of the Bank (£1000 sterling) and spent a week shopping at the Supermarket. I filled my car every day with non perishable goods, mainly tinned peas, beans etc and saved them all in our spare room. I bought enough for about two years normal usage. After the aniversary of my main purchases, I checked all the prices again. The £1000 sterling, that I had spent on tinned food etc would now be £1260 pounds to buy the equivalent food. . In other words “Food Inflation” was running at some 26% at Supermarket prices. There was nowhere to invest £1000 and make 26% interest elsewhere so easily and at very low risk. We all need to keep eating!!
December 15, 2010
If prices are rising due to American Q.E and rising commodity prices; increasing interest rates will not be effective in controlling them.
Higher interest rates will simply increase the costs for industry and households, making the situation worse, not better. If the pound increases in value as a result of higher inflation, exports take a hit too.
When our economy was an island, interest rates were effective in controlling inflation, but I cannot see how interest rates can control global inflation caused by global commodity prices. Industry would have to reduce wages to control its prices.
Higher interest rates look to me like pain without gain.
Or am I wrong?
December 15, 2010
Or there is another take on this, at least in the USA. The Treasury Inflation Protected Securities(TIPS), traded in the largest market in the world, the bond market, does not yet agree with govt data. It still shows that we have deleveraging.
http://stockcharts.com/c-sc/sc?s=TIP&p=D&b=5&g=0&i=p45336717014&r=7573
The overt or covet continuation of QE1…n, is another sign of deleveraging. If there was an oversupply of money(the defn of inflation), then there would be no need for QE.
To the extent that we are all linked and everything now is a derivative of the dollar, and most debt is dollar denominated, there is a possibility that the periphery will experience devaluation , while the dollar is being bought. It does not mean that in aggregate, money in the form of credit, is NOT being destroyed and that we have inflation.
This is what happens when quangos set(mis-set) the base price of money , and try to determine the supply. You end up with a confusing mish-mash of signals that causes misallocation and amplication. I would tend to believe the bond market.
December 15, 2010
TIPS chart(try this) :
http://stockcharts.com/h-sc/ui?s=TIP&p=D&b=5&g=0&id=p45336717014
December 15, 2010
I blogged much the same yesterday! So, obviously, I agree. I also agree with Stuart Fairney – its time to get central banks out of interest rates and let markets (with fair competition) set them.
December 15, 2010
There is still a fundamental misunderstanding as to what ‘inflation’ really is. Inflation is a function of money, not prices. Price rises are a result of inflation not its cause. That is the artificial increase in the quantity of money (QE in this case, plus FRB) reduces the value of money, and prices of goods and services expressed in that money, rise. It is therefore entirely predictable that prices will rise now.
If the price of a good or service rise where there is sound money new entrepreneurs will be attracted to the apparently high returns available, invest accordingly, increase the supply, increase competition and prices will fall back towards some variable norm. And th reverse will happen where there is over-supply. the ‘market’ is self correcting.
Therefore targetting interest rates on CPI/RPI is never going to work. You have to start with sound money, which we don’t have and have not had since 1997. (We also must reform FRB
In regards to business investment the things that are holding up supply side reforms are high taxes and regulation. I would expand my business now, were my taxes much much lower and 99% of regulation done away with.
Sooner or later we are going to have tolook at all this in this way. Alternatively we will become ever more totalitarian.
December 15, 2010
This concept of ‘spare capacity’ is rooted in the economic past. Years ago, yes, there were shed loads of factories, and in a recession there literally was spare capacity to make more stuff than could be sold. So when the recession ended there was plenty of supply to keep prices down available. But Manufacturing is an increasingly small part of the economy. And it has suffered from terrible import competition over the last 20 years. So it never had the boom that the rest of the economy had. Manufacturers had to run tight ships, with no excesses, to maintain competitiveness. Make to order, just in time delivery etc etc.
Whereas in the rest of the economy, the housing, service and financial sectors, the boom went mad. Load of new shopping malls, Banks lending money left right and centre for houses, and consumption. New houses being built all over the place. When this sort of thing comes to an end the excess capacity is not physical its mental. If there used to be 4 hair salons in your town and now there are 2 because 2 have gone bust, is there a spare capacity of 2 salons? Theoretically yes, but who in their right mind would open up a new one when 2 have just gone bust?
Much of the ‘capacity’ that the BoE thinks is out there is gone, in the form of business men and women who have had their fingers burnt and aren’t going to step back into the marketplace anytime soon. Those who remain now have the chance to raise prices. And are doing so.
December 15, 2010
Good points, but as others have pointed out.
Low base rates are primarily to recapitalize the banks via higher margins by the back door. It is a subsidy of the raw material. Note inflation reduces the real net liabilities of a heavily indebted concern.
How long for the banks to recapitalize?and can it come before major inflation?
or cynically how long can the bankers/elite enrich themselves by the backdoor until it is closed. The forced parasitical subsidy must end, otherwise the host will suffer.
The banks should be barred from distributions until they are self standing. All bonuses, pay increases above CPI, dividends etc should be deferred until this time.
Any bonuses paid should be taxed in a way that discourages, perhaps with penal rates with a sunset clause.
Banks without limited liability should be allowed to setup with a minimum regulation. I have heard of a couple.
Some interesting wikileaks on who has been utilising bank support, and what was said publicly.
Whats the bet we will go 36 months at 0.5%, all 3 year loans would have been reset then?
Given property is a special asset class maybe we should relook at this.
If interest rates rise its likely house prices will fall. Should we not consider tax relief on larger real losses and tax gains and apply them at marginal rates income rates. That may slow bubbles on the way up and down.
Would this not be better than stamp duty at very low levels and high rates which further distort movement. Also your council tax should be capped at a % of your total gross income.
Cant understand why housing authorities,corporation should not be allowed to buy houses of those under threat of repossession at market price and rent them back at market rate with secure tenure subject to the new caps. The previous owner being allowed to rebuy at purchase price paid by authority plus a small premium in the future.
Most of inflation is in essentials you cant avoid or substitute? Thats why banks/others are placing speculative money in commodities. Another reason investment banks should be treated differently. Ireland has shown what can be done and must be done, unfortunately its survival instinct.
December 15, 2010
Mr. Redwood
You say Many UK companies decided to take some or all of the benefit of lower sterling in form of higher margins rather than higher volumes. Yes that is correct, I closed my business two years ago for lack of margin. The Blair Brown years constantly increase our overheads and there was nothing I could do. I had to become more efficient year on year to stay in profit, in the end I had to shut the door and make all my staff redundant before I lost my shirt. The likes of Tesco, Asda and other big companies are continually driving prices down to the supplier and Governments over the years have continually increasing fixed cost to business, and this is the result, only profits turn into investment and growth. What business needs urgently is to get the EU regulations off its back, and the Cameron Government needs to get on with cutting red tape, I see no progress, on either the former or the later. The Country is busted and you are giving the Irish billions to save the Irish banks, The Irish economy is to small to ever pay us back. We need that money to support our Countries business; not the EU or the Irish. You could have used the money to cut our corporation tax down to under 20% that would then maybe get me to start up again, but not in this climate. Governments don’t make any money? So stop printing it and devaluing mine. Mr. Cameron and Mr. Osborne are both well behind the curve when it comes to UK business needs, the increased payments to the …… EU and the Ireland bailout could have been put to better use. A day reckoning surly comes, and it’s called inflation, it leads to higher interest rates and less growth. Invest in UK PLC, not on your life until the new kids on the block wake up to the reality.
December 15, 2010
I agree, rather depressing, but why indeed bother to run a business in the UK with the current lot in charge and the alternative at the next election likely to be even worse.
December 15, 2010
Quote “Businesses are held up for shortages of skilled labour” .
John , could you please provide examples of as many jobs as possible where there is a skills shortage in the UK ?
December 16, 2010
“could you please provide examples of as many jobs as possible where there is a skills shortage in the UK ?”
Politicians.
December 17, 2010
Don’t suppose we are going to get an answer on this one .
How politicians can tell multinationals “yes” they can bring cheap foreign labour in , “yes” the taxpayer will educate their children and provide their extended family healthcare and “yes” the taxpayer will subsidise it all by ensuring they pay no tax and nothing towards the unemployment benefits of the British worker being displaced I don’t know .
Rather puts the lie to the principle that they work for us .
December 15, 2010
It’s a desperate attempt by the One World Exploitation System to keep asset prices up, so that their totally busted asset base need not be exposed to view. Banks in the US and elsewhere are heavily indebted, with many of their supposed assets now low grade paper. By artificially boosting prices they can keep their true positions hidden, yet now they are all facing court actions from the people they defrauded, and possibly Wikileaks exposure of their methods.
As the liquidity game ends, and asset prices contract sharply, the true picture will emerge.
December 15, 2010
We have been unable to comment further on the ESSEX VOTERS VOICE research on voter’s views of the PM’s performance after 6 months as it was commissioned and financed by a specific client. As we indicated from the headlines we saw it was unflattering in the main and accused Mr Cameron of lacking bottle even though he is held in much higher regard than his predecessor. (Ok. who wouldn’t be we hear?)
Much of DC’s perceived weakness centres around his and the Foreign Secretaty’s non-performance in standing up to the EU. We think The Slog’s entry today gets it right:
”William Vague is the Tory in dilatory, without doubt. From the day he took office, this chap has more or less pretended that the EU isn’t there. Cameron’s dismissal of the European issue is based 30% on the manic desire to avoid a split, but 70% on the cynicism of an oily PR man: he has seen the research, and while it shows that over half of us want out of the EU, it also shows that – for now at least – the issue is well down the voter priority list. As for Osborne, he appears to have gone native in Brussels: while pledging direct support to Ireland, he was quick to cooperate with the Brussels team when bailout became inevitable. How the three lions have become lambs to the slaughter.
What none of the three (gentlemen-ed) may have yet thought through is not only how the EU and our attitude to it should be the biggest game in town – but also just how nasty things are going to get next year.”
December 15, 2010
Spot on – Vague has been a disaster having nominated Climate Change as our No 1 international priority.
(personal ref left out ed)Perhaps he will return to his Showbiz career in the next reshuffle in a new double act, this time with Ken Clarke?
December 15, 2010
Inflation is an easy way to reduce debt load. Think back to taking out a mortgage and after a few years of inflation how the debt gradually got smaller in proportion to income. So they want inflation to rise. Of course this is short termism, but as this parliment will only last five years then it doesn’t matter. (Most lib dem supporters will probably switch to labour, next time round).
December 15, 2010
In favour of inflation:
1. We owe a lot of pounds, if they are worth less, then we owe a lot less.
2. The government is broke, but increasing its expenditure. If there is inflation, this will mean that things could come right somehow (don’t ask me how) and they will be able to meet their immediate demands.
Against inflation: lots of unpleasant “baby boomers” who have greedily snatched from our children lose their life savings. Serves us right!
Those who forget their history (1922 Germany, 2000 Zimbabwe and Turkey, 1990 Russia) are condemned to repeat it. And it will not be nice.
December 15, 2010
I wouldn’t put too much stock into history – ‘I told you so’ (i.e. being right beforehand) isn’t sound politics. Far better to stumble blindly forwards and hope for the best.
December 15, 2010
Why the obsession with making these failed institutions work? Why do people bang on about reforming the EU when it is obvious that this is impossible? Why do we keep discussing ways of improving how governments control interest rates when they have already convincingly demonstrated that it is beyond them?
They only way to achieve real change is to get rid of these institutions. Asking them to change themselves is just asking for more of the same.
The Bank should lose its monopoly of providing money. The banking acts should repealed and if Tesco or anybody else wants to create their own money why should they not be allowed? Why should we all be forced to buy daily necessities using govt debt instruments even when such paper is rapidly becomming devalued and unstable? If private banks were allowed to provide their own money, there would be no inflation as they would recognise that their profitability depended upon it. The only disadvantage would be that the government wouldn’t find it so easy to borrow money that it itself had created from nothing, lending it to the banks at 0.5% and then buying it back at 3% plus, in the process transferring wealth from the poor to the rich via ever greater taxation and stoking the fires of (Anger-ed) of which the student riots are a harbinger… oh hang on, that’s an advantage.
December 15, 2010
WSJ: LONDON—The U.K. Financial Services Authority will ask Royal Bank of Scotland Group PLC for permission to publish a report on its 18-month investigation into the bank and the events that led to its near collapse, the agency’s chairman said Wednesday after a political outcry over the report’s secrecy. Where are you on publishing this report JR?
As we are about to do some “vendor financing” for Ireland and its insolvent banks. What do you think the chances are of Ireland ever paying back that loan?
December 15, 2010
According to George Osborne today, if Ireland pays back it’s loan then, with fees and interest, we stand to make £440 million.
http://www.telegraph.co.uk/finance/economics/8203925/Ireland-loan-wont-add-to-UK-deficit-says-Osborne.html
Let’s see, 5.9% of £3.25bn is roughly £200 million, let’s say £20 million in fees. By the Chancellor’s calculations he reckons Ireland will pay it back in 3 years, or a billion or so a year, plus interest (according to my 5 second mental calculation).
Maybe we should have loaned them the whole £80 bn, not only would it have kept the EU out of it but think of how much money we could make! If we loaned money to all the EU states we could pay off our own debt! Come on George, get the cheque book out!
I know that politics is all about spin nowadays but come on! Treat the public with a little respect. This is absolute rubbish he’s talking. If Ireland are going to be in a position to pay Britain back £1bn a year, and pay back all the other EU lenders proportionally (80 / 3.25 = ~£25bn a year they’ll be paying back!) , they’re economy is going to have to be growing at double figures a year for the foreseeable future.
Reply: It’s a 7.5 year loan
December 15, 2010
When imports were deflationary the bank was happy to inflate to offset it, now its inflationary it simply ignores it and hopes it goes away.
The Bank of England policy is to transfer wealth from savers to debtors in order to dig debtors out of a hole. It always happens this way and its why when people come to their senses they will demand much higher rates of interest to offset the risk. The last 30 years have seen declining rates the next 30 will see them rising.
December 15, 2010
In my work I am seeing rising upstream input prices and the rises are largely holding. I think a lot of this will come out at the retail end in January/February, masked by the VAT rise.
Hold on to your hats…and any gold and silver!
December 16, 2010
I see no harm in the Bank of England raising base rate by 0.5% every couple of months and monitoring what happens, until the rate reaches 3% or thereabouts.
If the Bank is to continue to set base rate by targeting inflation, four things must happen:
(1) The Bank must correct the bias in its economic forecasting model; recent Inflation Reports have forecast higher GDP growth than the OBR and have underpredicted inflation. The Chancellor should get the OBR to audit the Bank’s model.
(2) The Bank should be told that it is not its job to make fiscal judgements or “prevent a recession”. That is the Chancellor’s job.
(3) The right inflation measure should be used for targetting. RPI includes mortgage payments and house prices. That is better than the CPI which excludes housing costs. However, RPI excluding VAT is best. VAT is a tax, not part of the underlying price trend. Whilst VAT is part of inflation as experienced by the public, a VAT rise has the effect of dampening demand.
(4) If the inflation target is to be anything but 0%, the Chancellor should explain why in detail. The fact that 2.5% or so has been endorsed by Macmillan and Blair, those woolly minded paragons of the “Third Way”, is insufficient.
December 17, 2010
I can see how inflation has been used as a mechanism by which standards of living are maintained during a sustained period of falling economic output – but doesn’t it reach a point (especially after QE) where the global money lenders realise that they are being diddled and demand (effectively) that our interest rates are put up ?
December 18, 2010
We have inflation because both the Government and the Bank of England benefit from inflating the money supply. Can Governments function without this means of raising Taxes. It’s been operated like this ever since 1694, so you are right not to be “surprised”.
As savings rates are largely below the CPI inflation rate (even though CPI figure of inflation does not take into account Mortgage and other housing costs), is it Government policy to encourage savers to remove their cash funds from Banks and Building Societies?
Will this cause a massive deflation as the Reserve levels of Banks diminish?
Everytime someone withdraws £10, 000 from their Bank, that Bank will lose the ability to lend out £90,000. Therefore, £100,000 is then lost from the system, assuming they do not place this money back into another account.
This will no doubt be the perfect opportunity for the Bank of England to argue for more QE. There were newspaper reports hinting that the Bank is leaving that option open for quite some time.
I received a letter from my building society saying that they were reducing the interest rate on my account down from 2.85% to 1.75%. The real terms saving rate is therefore 1.75% – 3.3% = negative 1.55%.