The Bank of England reports on inflation- again


            Yesterday the latest Bank of England Inflation Report told us that they now expect inflation to stay  above target “for a while”. A “while” seems to mean until the second half of 2013.

             In february of this year the Bank told us “Inflation should continue to  fall sharply at the start of 2012…..inflation is likely to decline further thereafter….inflation is judged somewhat more likely to be below the target than above  it for a good part of the forecast period”.

              That’s quite a change of forecast, from optimism to pessimism. It follows, of course, the hard facts that inflation stayed higher for longer, and is rising again now.  The Bank clearly thinks it could rise further this winter as the energy price rises kick in.

                The Bank is also forecasting now that output “may shrink” in the fourth quarter of 2012, after the third quarter spurt in growth thanks to Olympic ticket sales and the as always unmentioned increase in public spending. Does the Bank not read the GDP figures and see public spending made the largest increase to the Quarter 3 growth  figures  or is there some conspiracy to suppress the truth about this? How did the Bank miss the further fall in output in Quarter 2?

                  In February the Bank was forecasting an increase in output this year, with an acceleration of growth thereafter. It is another big change in forecast this autumn.

                       The Bank confesses to being puzzled b y the continued improvements in the labour market with a million new jobs since 2010, and the poor performance of productivity. Why can’t the Bank appreciate that the sharp declines in output in financial services and banking, and in oil and gas, have of course hit productivity, as these are highly productive areas, with substantial value added per employee. The growth is occurring in more labour intensive areas of activity, with the obvious results on jobs and productivity.

                           It is worrying that the Bank so struggles to understand the modern UK economy. Its doctrine of unused capacity preventing inflation has shown strains, and the Bank has not yet found a new way of analysing and understanding the reality. Wages and prices in the traded private sector are under substantial competitive pressures to keep them down. There has been some relief from the devaluation, where manufacturers have often taken the benefit on margins rather than pushing for higher export volumes.  Public sector fees, charges and regulatory interventions in areas like  energy are pushing prices up.

                                  As the Bank say, “We face a rather unappealing combination of a subdued recovery, with inflation above target for a while.”  That is what you get from bank nationalisation, a failure to sort out damaged banks and  stressed provincial property markets, from a tax based strategy for cutting the deficit and from quantitative easing.

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  1. Gary
    Posted November 15, 2012 at 6:21 am | Permalink

    watch what they do, not what they say. They put their own pensions in inflation linked investments.

    The fiscal gap can only be closed with some sort of default and inflation. Invest accordingly.

    • zorro
      Posted November 15, 2012 at 1:47 pm | Permalink

      As mentioned, soft, slow inflationary default has been the order of the day delivered through ZIRP, QE no matter what else they may have claimed. Advice on investment strategy has already been implemented…….


  2. lifelogic
    Posted November 15, 2012 at 6:31 am | Permalink

    I agree 100% with all of the above.

    That is indeed what you get from bank nationalisation, a failure to sort out damaged banks, the stressed provincial property markets and a tax based strategy for cutting the deficit and from quantitative easing.

    This with an expensive energy policy, absurd over regulation, the EURO disaster mechanism and great confidence that Labour will be in power very shortly indeed – just to make matters even worse.

    • Disaffected
      Posted November 15, 2012 at 9:02 am | Permalink

      JR are you sure there has not been a manipulation of the inflation figures to reduce public spending next year? It seems odd that inflation has soared above its target by huge amounts for years then suddenly dips for September this year and then is predicted to rise again. Of course RPI is still going up and that is good for MPs pensions- when will MPs pensions change? BoE pensions also changed and benefit from the current economic situation. Rather odd.

      Is not also about time that you and your colleagues, particularly Mssrs Cameron, Clegg and Miliband sorted out the disgrace that is going on in relation to IPSA. It is almost rewinding the clock to ten years ago when the three main parties sided together to get rid of Elizabeth Filkin because she exposed greed, sharp practice and corruption. Four board members resign and a former politician appointed to select the new board members. Kelly report still sitting on the shelf- the report/inquiry we were told would clean up politics. Cameron, Clegg and Miliband all promised to act in that robust way when they pretend to be serious.

    • Single Acts
      Posted November 15, 2012 at 9:28 am | Permalink

      Yes indeed, bank forecasts that inflation will decline in the medium term future are as old as Methuselah. They lack any credibility having been wrong in forecast and hopeless in achieving actual targets.

      • zorro
        Posted November 15, 2012 at 1:41 pm | Permalink

        Well over 90% of the time, their forecasts have been off target. They might as well have thrown a dice or asked us….. It would have been far cheaper and more accurate…..


        • stred
          Posted November 16, 2012 at 6:01 am | Permalink

          If they had thrown a dice, it would have only been 50% off target. For 90% a special degree of incompetence or dishonesty is required.

          • zorro
            Posted November 16, 2012 at 3:37 pm | Permalink

            So either an incompetent dishonesty or a dishonest incompetency….take your pick.


  3. alan jutson
    Posted November 15, 2012 at 7:11 am | Permalink

    Not much to disagree with in your analysis today John.

    The Bank of England does not seem to understand that some of its own actions are causing some of the problems.

    Given that annuity rates continue to fall (part result of QE) and the value of pension pots are reducing, some people are never going to see a recovery(decent return) for their income if they retire, as they will be locked into a low return for the rest of their life.
    Perhaps that is why the BOE have arranged their own Pensions pots by protecting them with inflation linked clauses.

    Returns for savers in the form of interest, has been decimated by interest rate manipulation

    Government have allowed transport and fuel costs to rise above inflation, which increases inflation, which in turn allows greater rises year on year.

    Writing letters to the Chancellor each month seems so pointless, and a complete waste of paper in the circumstances.

    I wonder, does the Chancellor ever write back and say so what are you going to do about it then, if you cannot resolve it, then I will get someone who can.
    But then the same could be said of the Chancellor

    I would think the Chancellor now has enough letters from the Governor to paper the walls of his office, a historical and unique wallpaper design which should be preserved in place as a lesson for all future Chancellors of what happens when you lose control, because that is what has happened.

    • alan jutson
      Posted November 15, 2012 at 7:45 am | Permalink

      Is anyone going to do anything about Immigration?

      Yes I know its difficult given we are members of the EU, but whilst we still allow hundreds of thousands of people to come here and work , year after year, we are never going to make real progress into the real jobless figures, and this will eventually undermine Ian Duncan Smiths new Benefit proposals.

      Once again we have a Government which does not have control of its own policies in its own Country.

      Get ready for many more from Europe to come here, as it gets worse over there.
      Then wages will be under real pressure as never before in certain industries.

      • APL
        Posted November 15, 2012 at 8:00 am | Permalink

        alan jutson: “Yes I know its difficult given we are members of the EU, ”

        Unfortunately Alan, membership of the EU isn’t a footnote, it is the primary impediment to our wish, among the population rather than the self serving Political class, to govern ourselves. That includes immigration.

        Although I guess if immigration continues apace, what constitutes ‘the population’ is up for dispute.

        • zorro
          Posted November 15, 2012 at 2:08 pm | Permalink

          I doubt if Cameron would have the stomach for a sensible immigration policy even if we were outside the EU no matter what he might say…..Didn’t he mention that he would refuse Greeks if the situation got worse? We shall see……The EU has plans to sponsor people trawling around the EU looking for jobs (in practice the UK)….and is looking to import more people putting pressure on wages…….

          MigrationWatch has outlined the population impacts of these policies in terms of people and extra cities needed. The government is letting in too many people who subsequently overstay or claim asylum, and is unable to remove enough people compared to those who do not abide by their conditions.


        • Electro-Kevin
          Posted November 15, 2012 at 5:41 pm | Permalink

          A country without borders is not a country. A nation without nationality is not a nation.

          If the Government can’t control something as fundamental and vital as this then what is the point in Government ?

          Going on recent precedent the next influx is going to impact massively on the morale of our people.

          This will happen under a Tory administration and will do grave damage to their reputation. Tory voters will not accept promises to deal with it in the next government.

          What will be left but to further disengage from mainstream politics.

          The best the Tories will be able to hope for is that their own voters don’t choose to punish them at the polls.

      • uanime5
        Posted November 15, 2012 at 6:41 pm | Permalink

        Don’t forget about all the people from outside the EU who work here via ICT.

      • Disaffected
        Posted November 15, 2012 at 7:49 pm | Permalink

        They never intended to reduce immigration. This is about culture change for the EU project to minimise differences in culture, customs, values and beliefs to make it easier to become one EU superstate. Clegg was all for it on the TV debates and his on screen rating dropped heavily when he made his bid, as it did when he Brown told him to get real over the defence of our country.
        The numbers are rising not dropping. More will follow next year when other eastern European countries become full members o the EU.

        Just remember this when voting at the local elections next year, the EU elections in 2014 and the general election after that.

      • A different Simon
        Posted November 16, 2012 at 11:43 am | Permalink

        Alan ,

        Is the BOE pension fund buying indexed linked investments ?

        Or have they arranged for notional investments to be made with guaranteed returns provided by the taxpayer ?

        There is no hope for the rest of us if the interests of MP’s , BOE , civil service and rest of public sector are no aligned with the interests of the rest of us .

        Really is time we were all put in the same boat .

        We’ve ended up with such a divided society .

        It’s not so much Conservative , Labour , Lib Dem , Ukip as Inner party , middle party and outsiders .

    • Denis Cooper
      Posted November 15, 2012 at 10:20 am | Permalink

      Yes, the Chancellor does write back to the Governor; but, no, the Chancellor never upbraids the Governor or suggests that the Bank needs to improve its economic models, so presumably the Chancellor is reasonably happy with what the Bank is doing but prefers to have the Bank take the blame.

      The Open Letters they exchange may be read here:

      • zorro
        Posted November 15, 2012 at 2:09 pm | Permalink

        Nothing but a pantomime……


      • alan jutson
        Posted November 15, 2012 at 5:34 pm | Permalink

        Thank you Dennis.

        Interesting that the Governor asks his own questions, (as if reading the Chancellors thoughts) and then answers them in his letters to the Chancellor.

        The Chancellor on the other hand seems to offer reasons as to why the Governor is right.

        Thus we seem to have a situation where the Governor seems to be in control of the Chancellor, similar to Mr Browns responses as well.

        What a strange way to carry on !

        Is this how Government actually attempts to work John ?

        The reason I ask is because I would have thought the Chancellor would be the one who called the shots !

        • Denis Cooper
          Posted November 16, 2012 at 11:05 am | Permalink

          Not on monetary policy; under the 1998 Act the part played by the Chancellor is to set the inflation target as the primary objective for the MPC, plus inform them of the government’s general economic policy which they should try to support but as a secondary objective always subject to the primary inflation objective.

          That’s unless the Chancellor gets Parliament to activate Section 19 on the Treasury’s reserve powers, after which he can give the Bank directions on monetary policy.

          It would have been more honest, and it would have been better for the reputation of the Bank, if Darling had done that and Osborne had continued it.

  4. Pete the Bike
    Posted November 15, 2012 at 7:21 am | Permalink

    Why are you surprised that the B of Es forecast is wrong Mr Redwood? It’s always wrong. It is propaganda and has the same relationship with reality as any other propaganda. The job of a central bank is to manage perceptions whilst they destroy the currency to allow government to borrow and spend their way to our bankruptcy. Merv has managed this spectacularly well. Sterling has plunged in value yet interest rates remain in a coma. That is how George manages to keep the whole ponzi scheme running. I bet he sends Merv and the boys a Christmas hamper.

    • zorro
      Posted November 15, 2012 at 2:12 pm | Permalink

      Indeed, as we have stated continuously on this blog over the last few years….


  5. Alan
    Posted November 15, 2012 at 7:38 am | Permalink

    Whilst devaluation must have helped our exporting businesses, it must also produce some inflation, since it puts up the price of our imports. It has also decreased the value of our savings, wages, and pensions compared to those of people in other countries. Devaluation is not in my view a cheap way of getting ourselves out of debt.

    • zorro
      Posted November 15, 2012 at 2:18 pm | Permalink

      Fortunately, there is still quite a lot of competition between companies in the market, particularly regarding a wide range of electronic/computing goods which can in themselves allow you to save money through access to Internet services/comparison sites…..I have saved £500 on three renewal quotes in the last two weeks.


      • stred
        Posted November 16, 2012 at 6:16 am | Permalink

        This year we have found that ‘customer loyalty’ increases for house and car insurance had doubled the automatic renewal quotes. Internet searches were time consuming but resulted in 50%+ reductions. It is particularly annoying, when cancelling, to be offered a ‘special’ reduction in the original quote from the company that tried to take the loyal customer to the cleaners. The managers of these companies must be of the lowest moral order and damage their reputation in the long run.

        • zorro
          Posted November 16, 2012 at 3:45 pm | Permalink

          They must work out that a percentage of people will just accept it without question because these providers state that they have sought the best price for you already! They take loyal customers for mugs. It is very important to use internet comparison sites to manage your insurance needs. You will save a lot of money and often get better service cover, and can manage your affairs online. I fear that providers are relying on milking older people who are not comfortable with computers…..As you say, not very commendable, and let’s hope that they get bad publicity…


  6. Leslie Singleton
    Posted November 15, 2012 at 7:50 am | Permalink

    All this angst about GDP when it doesn’t move much and in any event is an artificial construct of stuff all mixed up–in particular public spending whose inclusion I have never quite understood (If they tax and spend more – eg in aid to India – is that really an increase??). How did the world manage till relatively recently without measuring it at all or at least not focusing much on it? Economists need something to talk about I suppose.

    • zorro
      Posted November 15, 2012 at 2:21 pm | Permalink

      Indeed, progress continues through improved goods and services no matter what GDP says……


  7. Leslie Singleton
    Posted November 15, 2012 at 8:28 am | Permalink

    I may have this wrong because it seems so basic and so ridiculous but is it really true that if we reduce our aid to India (as we are going to) that lowers GDP?

  8. Brian Tomkinson
    Posted November 15, 2012 at 8:35 am | Permalink

    This government has a policy of taxation and inflation to deal with the deficit and the debt. In that respect they are achieving their aims with King’s assistance. Unfortunately, they are addicted to spending and so need even more taxes to pay for their profligacy. Frankly, it is becoming increasingly difficult to believe anything that we are told by either the government or the BoE.

  9. oldtimer
    Posted November 15, 2012 at 9:05 am | Permalink

    It looks as though the Bank of England is working with a faulty or broken model of how the economy works; other forecasters in the City and elsewhere have been more accurate in their predictions of growth and inflation. More and more people are beginning to notice. Faulty forecasting models seem to be the tool of choice for modern governments. They are very handy for pushing policies and decisions you want to implement. I am sure others here can think of plenty of examples.

  10. James Reade
    Posted November 15, 2012 at 9:19 am | Permalink

    I have to admit, I find Simon Wren-Lewis much more convincing on the state of the UK economy, and the supposed absence of austerity that you allege, John.

    He makes a number of points in response to another US-based economist who makes a point not dissimilar to what you suggest – a lack of austerity in reality.

    However, Wren-Lewis looks to the cyclically adjusted deficit, which has reduced in size considerably despite essentially no growth for the last 2.5 years, and argues it’s a much better indicator.

    He also looks at the components of govt spending, notably consumption, investment and employment, and while consumption hasn’t changed too much, investment has dramatically.

    Finally he counters your consistent point about the contribution of govt spending to growth each quarter. Have you looked at what this is, historically? I.e., is it always as much as this, or is it less? Govt spending will always increase if the share of govt in the economy is to remain constant (at x%), and if the norm is, as Wren-Lewis suggests, 2%, then that’s the appropriate counter-factual to compare to – what would be happening right now if govt was contributing at its normal level? Not comparing to if govt was contributing 0%.

    As said, I find Wren-Lewis much more convincing. The other thing about him is that, as an economist rather than a politician, he isn’t afraid to say that the economy is a complicated beast, with millions of people making billions of decision. Of course, the difference is that Wren-Lewis attempts then to make sense of that complicated beast and understand what’s going on – citing and using numbers frequently to help explain what he asserts. That’s a contrast to your style John. You appear to have a fixed (believed) understanding of the economy and continue to assert that despite plenty of evidence to the contrary.

    Reply: I use facts and figures to make my case. You at last concede that the public sector has been adding to output as conventionally measured, which undermines the idea of drastic cuts. I have always said the government has lived with the cut in capital spending – indeed it was cut substantially by the outgoing Labour government. The Coalition government has abated the cuts modestly. Now the Coalition is trying through the £50bn National Infrastructre Plan and fund trying to offset those inherited cuts.You and your adviser need to answer why the large stimulus injected last autumn when the government increased all public sector pensions and benefits by 5.2% did not lead to growth.

    • Lindsay McDougall
      Posted November 15, 2012 at 11:57 am | Permalink

      But the whole problem is that CURRENT public expenditure is far too high. You have given a list of possible cuts in various blogs – many of them related to the EU and to Foreign Aid – and I have added a freeze on public sector salaries, state pensions, unemployment and other benefits until the deficit is sufficiently reduced. It’s not as if the task is unachievable; the political will isn’t there. You really need to be banging on the Prime Minister’s door, and preferably take the Chancellor with you.

      • James Reade
        Posted November 16, 2012 at 2:05 pm | Permalink

        What makes you think such an action is (a) necessary, and (b) helpful?

        Can you substantiate these points with some solid evidence? What I mean is, either some economic theory that states unequivocally that growth will be higher with a smaller government after a trenchant period of austerity, or perhaps some empirical evidence?

        Without that, really why should we engage in such a dramatic policy?

        • Lindsay McDougall
          Posted November 16, 2012 at 5:12 pm | Permalink

          If we don’t reduce the public sector annual deficit, total public sector debt will continue to rise and so will the annual interest bill on that debt. These interest payments are money flushed down the toilet and will be at the expense of genuine public expenditure.

          At some point, when total public sector debt becomes too high in relation to GDP, the markets will lose confidence in us and the interest rate on government borrowing will jump from under 2% to the sort of rates that Spain is paying.

          Avoidance of this dreadful outcome is a must. If you don’t go in for the sort of drastic cuts on public expenditure that I advocate, you have go in for tax increases (which ones – your call?) which don’t work so well.

          That’s why my dramatic policy is essential. I have never claimed that it would create growth in the short term. Avoiding a banker’s ramp is reason enough.

          • James Reade
            Posted November 19, 2012 at 7:45 pm | Permalink

            Why is it that without dramatic action, such an apocalypse will happen?

            The current level of debt to GDP is considerably under 100%, and once a recovery is finally under way (something that won’t be helped by dramatic cuts like those you propose), it will start to fall.

            You’ll be aware that after WWII the level of debt to GDP was over 250%, and while it may be the case that that was a war-time accrued level of debt, it remains it was debt accrued that needed repaying, and it was repaid.

            None of this, of course, is to deny that if the deficit was to run at 12% indefinitely, eventually we would arrive at hyperinflation and a rather disastrous situation. But that simply won’t happen, regardless of which government is in office.

    • Leslie Singleton
      Posted November 15, 2012 at 12:45 pm | Permalink

      My eagle eye has spotted another use by you, John, of “convention(ally)”. I suspect that you will say that you have no choice but to measure GDP in the same way as others but to my mind “conventional” measurement seems a bit defensive and smacks of something like “possibly not very meaningful but it’s the best we can do”. This would be all very well if people (this is not aimed at you) didn’t get excited as they do about variations down to a tenth of a percent, which does seem odd given the GDP revisions and margin of error, not to mention as I say the mere conventionality of the definition. In the everyday world changes stated to be a mere one tenth of one percent would be regarded as negligible, but when it comes to the (arguable fuzzy) GDP, big decisions get made.

    • James Reade
      Posted November 15, 2012 at 1:55 pm | Permalink

      I’ve always simply asked one question of you John, never doubting that public spending will go up in troubled economic times. I’ve asked you to take the cycle into account. Please don’t misrepresent me. Wren-Lewis does, you don’t.

      And also, Wren-Lewis was never my adviser. I’m not totally sure what you’re trying to establish my making that statement? I don’t think I’ve ever said a word to the chap in person. All I said was he’s a lot more convincing than you.

      Why didn’t one stimulatory action amidst a wave of non-stimulatory actions work? How do you know it didn’t, exactly? Have you re-run the economy with and without that stimulus? You never actually establish the right counter-factual to make the kinds of strong assertions you make.

      Reply: I do take the cycle into account. The structural deficit is probably larger than the last OBR estimate, as work now implies a lower output gap than the official figures have suggested. The productive capacity of the economy has been badly impaired by the crisis of 2007-10, and some private forecasters think the official figures should reflect this by adjusting down their views of the output gap and therefore riaisng their view of the structural deficit. How big do you think the output gap is?
      I called Wren Lewis your adviser because you cited him favourably and said you were influenced by him.

      • James Reade
        Posted November 16, 2012 at 2:09 pm | Permalink

        Well I’m glad to hear you’re taking the cycle into account. You certainly don’t each time you post about how public spending has gone up while we’re at the bottom of the cycle.

        How big is the output gap? I have absolutely no idea – it’s a latent concept, and your idea about how big it is will be likely just as wildly out as any I suggest. I’m happier trusting the OBR now it’s detached from govt to give a good idea (although I’m yet to see any review of the forecast quality of the OBR since it’s been detached – that would be interesting) of what it is, along with other institutions that employ economists to delve into this.

        I suspect my actual PhD advisor would be much stronger than Wren-Lewis in criticising current govt policy, actually…

        Reply: The OBR forecasts have been very poor, as the regular revisions show. I suspect they will revise down their view of the output gap, which is already quite small. Much of the deficit is structural. We are not at the bottom of the cycle, as we have just bounced by 1%.

        • Lindsay McDougall
          Posted November 16, 2012 at 5:44 pm | Permalink

          What is this cycle and what is its periodicity? How, at any particular moment, do we recognise where we are in the cycle? Has anybody done any multivariate Fourier series analysis? Perhaps the cycle doesn’t exist.

          • James Reade
            Posted November 19, 2012 at 7:46 pm | Permalink

            Yes, it may not exist, but chances are it does. It certainly is not regular in terms of periodicity, nor amplitude, and hence many attempts to measure it can be confounded by this. However, just because something is difficult to get a handle on, doesn’t mean it doesn’t exist.

        • James Reade
          Posted November 19, 2012 at 7:54 pm | Permalink

          Are they any better then than the forecasts of the previous incarnation of the OBR?

    • zorro
      Posted November 15, 2012 at 2:32 pm | Permalink

      Reply to reply – It made no difference because it would have been used on basic consumer spending, and would not have been invested efficiently in productive industry….


      • sm
        Posted November 16, 2012 at 12:29 am | Permalink

        Or just offset other rising costs, gas, electricity,petrol, transport fares,food, rent etc which ensured those with economic power or leverage used it.

      • James Reade
        Posted November 16, 2012 at 2:12 pm | Permalink

        So something produced in the public sector shouldn’t count towards GDP?

        At which point do we stop counting it? When govt starts subsidising something, or when it takes a stake in a company, or when it 100% owns the company and hence produces? Where would you draw the line?

        Output is output, regardless of what sector it is produced in. It has value, and some kind of process will be used to determine its eventual use. Just because that process isn’t the market, doesn’t mean that the object produced has no value. Did hospitals stopped producing output once they became nationalised?

        • Lindsay McDougall
          Posted November 16, 2012 at 5:51 pm | Permalink

          How do you measure hospital output when services are provided free at the point of consumption, apart from prescription charges and hospital car parking charges?

          • James Reade
            Posted November 19, 2012 at 7:48 pm | Permalink

            One way people have tried to is via QALYs historically. It’s hard work to do so for sure, but again that doesn’t mean we shouldn’t bother. The conventional GDP method is to measure the value of the output via the cost of input, which of course is far, far, from an ideal method but on the other hand it does give a handle.

        • zorro
          Posted November 16, 2012 at 6:53 pm | Permalink

          Most of the benefit increases will have sustained supermarket profits….i.e.sustaining some output but hardly being invested to increase output or help exports, in fact probably drawing in more imports….


          • James Reade
            Posted November 19, 2012 at 7:49 pm | Permalink

            So you begrudge certain British companies from earning profits then as a result of benefits paid? Would you rather we simply stopped all benefit payments?

          • zorro
            Posted November 20, 2012 at 5:31 pm | Permalink

            James, I’ve not said that. I’m talking about the increases in benefits when others are suffering falling incomes too. Those food companies will not go out of business but perhaps money giving in extra benefits might be put to more effective uses in creating jobs or investment in businesses…..


    • NotKrugman
      Posted November 15, 2012 at 2:41 pm | Permalink

      The use of cyclically adjusted primary balances at the present time makes me uneasy – even Wren-Lewis has admiited this somewhere (I think). Their calculation involves the extrapolation of an ‘output gap’ from historical data. It seems pretty clear after five years that the economic landscape has changed following the substantial change in international banking post-2008. The output gaps provided by various experts – which greatly reduce deficits – may consequently be a case of ‘whistling Dixie’.

      • James Reade
        Posted November 16, 2012 at 2:14 pm | Permalink

        The important thing then is to make sure that the output gaps we’re using bear some resemblance to reality, and clearly a more respected institution will, one presumes, produce a better estimate of the output gap.

        I fully agree with you – but the bottom line is some adjustment must be made, if not least to avoid people pointing out the obvious in a recession – government deficits get larger but that needn’t be a problem in the midst of the recession.

  11. Derek Emery
    Posted November 15, 2012 at 9:27 am | Permalink

    GDP is meaningless measure since all spending regardless of purpose increases GDP. The UK could build magnificent gold encrusted and diamond studded palaces on a 10 mile square throughout the UK which will increase GDP but is not a wise investment from the point of getting any increase in productivity from the “investment.” That’s one difference between political and private sector thinking. The private sector needs to invest to create growth of profits and efficient spending whereas government does not.

    The BOE and much of the civil service can hardly be seen as organizations of forward thinkers who question the validity of models used for planning or as a source of new ways to tackle problems. They are largely rule-ridden administrators.

    The BOE is always optimistic. I have always assumed that is because any government in power wants the most optimistic outlook to make itself look good. Would the BOE be allowed to come up with more realistic projections?

    You can’t help wondering how good the analysts are in the BOE. They will be more rounds of QE in the future which will further trash pensions and unearned income. Analysts in the US found that after a lag QE both raised commodity prices and reduced economic growth. Can the UK economy be so different that the same principles do not apply to the UK You wonder if in the UK anybody has even bothered to ask the question and analyze the real effects of QE on the UK economy to find out the real effects.

    • James Reade
      Posted November 16, 2012 at 2:17 pm | Permalink

      You wonder, do you? You might want to do a little bit of searching, and you might find a whole range of papers on QE in the UK and the US, multiple conferences around Europe and in the US and wider on the issue.

      See, for example, plenty of hits on Microsoft Academic Search for “quantitative easing”:

      GDP may have dramatic faults to it, but any alternative will have equally as many faults to it…

      • Lindsay McDougall
        Posted November 16, 2012 at 5:36 pm | Permalink

        Please explain to me why QE in the UK (together with an ultra-low base rate) has led to higher than target inflation and near zero real GDP growth. All the empirical evidence is that it is a quack remedy that doesn’t work – so get rid of it.

        • James Reade
          Posted November 19, 2012 at 7:52 pm | Permalink

          No, actually, all the evidence is not that it’s failed. I’d encourage you to head back again to the link to MAS above.

          Inflation will be a result of (essentially) printing money, but only if people are spending it, and all the signs are that they aren’t spending it particularly quickly.

          It’s also worth pointing that while inflation is above target, it’s within the target range.

  12. Acorn
    Posted November 15, 2012 at 9:47 am | Permalink

    You certainly have a struggle finding the “cuts” in the stats. What little there has been, was paid for with VAT increases. Those that follow modern money and the brill’ staff reports from the US FED, will be aware that Sales Taxes (VAT), are the last taxes you should put up during a recession. They strongly, negatively, affect Household and Corporate spending power as consumers and investors.

    The above sources have good evidence that at the time of the “zero bound” central bank set interest rates, government spending has a much higher multiplier affect on the demand side of the economy. The theory is much disputed but ranges from £1 of government spending yields £1 to £3 of private sector spending. As long as the government spending does not substitute for spending the private sector was already doing on its own. This is “fiscal policy”; government spending and taxing.

    “Monetary policy”; central bank interest rates; money issuing, and liquid for illiquid asset swapping (QE), has in my mind,proved that it does not create aggregate demand across the economy, it only fortifies insolvent commercial banks. The BoE has a balance sheet at £414 billion. It has created new money to buy bonds and other financial assets and we are now looking at a triple dip recession!!! Who will buy back that stuff from the BoE this century?

    By tradition among politicians and the mainstream financial commentators, Fiscal policy (deficit spending of a currency you issue yourself), is a left wing construct. Monetary policy (interest rates based inflation control; QE) is a right wing construct. Not sure if George has worked this out yet; Merv is a lost cause.

    Be thankful that our host and his mates, kept us out of the Euro and using what is someone else’s currency that you can’t print so you have to borrow; or set an interest rate for. Mind you, if we go into a triple dip via actual austerity deficit cutting, it might be a good idea to think about the level we would peg the Pound Sterling to the Euro. 😉 . ……………………. Discuss.

  13. Neil Craig
    Posted November 15, 2012 at 10:49 am | Permalink

    So if we go into negative growththis winter that wil be a “triple dip recession”. Lets just acknowledge that that the bank and the government have been lying for years about trying to come out of recessione real soon now.

    There is nio slightest question that we would be out of recession and into fast growth any time the main parties wanted it, simply by following the economic policies UKIP promote & that every one of them knows it.

  14. Wilko
    Posted November 15, 2012 at 10:52 am | Permalink

    Demand drives inflation. Most people control their own choices.

  15. Vanessa
    Posted November 15, 2012 at 11:17 am | Permalink

    The Bank has been politicised like everything else in this country. Our institutions which we used to trust and believe were there for our benefit are now hollowed out and there only in name. The Governor is as incompetent as all of you in government (except a very few) and only do their job to fill their own pockets. Inflation decreases the humungous borrowing and so the Bank is happy for it to go up. No pathetic little letter to the chancellor is punishmnet for getting it so wrong. Where is the accountability and responsibility for the British economy? Everything is run on an EU model. Dishonesty and corruption is endemic in every system now so the people are hung out to dry and “who cares”?

  16. Lindsay McDougall
    Posted November 15, 2012 at 11:48 am | Permalink

    “………………….unused capacity preventing inflation……………………..” I told you that neo-Keynesianism was bunkum. Inflation is a monetary phenomenon. It’s only when the unused capacity gets used that we may see a change. There’s a couple of considerations here: (1) How easy is it to ‘un-mothball’ the unused capacity? (2) Is anybody taking into account the fact that average private household debt is still at a high level relative to average household income and is slowly being unwound? Is the demand there?

    • Lindsay McDougall
      Posted November 15, 2012 at 5:45 pm | Permalink

      Further to this, if we want to know why the BoE forecasts both inflation and GDP growth wrongly, the two are related. The BoE puts into circulation a certain amount of additional money (or convertible equivalent) intended to cover a forecast increase in goods and services. If the increase in goods and services (of which GDP growth is one indicator) turns out less than forecast, then inflation will be more than forecast.

  17. Bob
    Posted November 15, 2012 at 12:11 pm | Permalink

    Reduce wasteful spending (like the Abu Qatada’s maintenance costs), reduce tax and watch the economy take off.

    You can’t tax and borrow your way to prosperity, quite the opposite is true.

    • Edward
      Posted November 16, 2012 at 9:26 am | Permalink

      Bob, you have summed it up perfectly in one short sentence:-

      “you can’t tax and borrow your way to prosperity, quite the opposite is true”

  18. A different Simon
    Posted November 15, 2012 at 12:52 pm | Permalink

    25 years ago the cost of making provision for your old age was not included in inflation figures because most people had occupational pension schemes and making extra provision was not an item of expenditure .

    Nowadays almost all occupational pension schemes have closed so shouldn’t there be an item in the basket for “making provision for your old age” ?

    The bare minimum for making provision for your old age would be saving £6,000 a year for life i.e. £500/month absolute bare minimum .

    How about a time series dataset on the ONS site which includes the cost of making provision for your old age ?

    Why won’t you and your friends dare to grasp the private sector pensions nettle John ?

  19. David John Wilson
    Posted November 15, 2012 at 1:26 pm | Permalink

    “There has been some relief from the devaluation, where manufacturers have often taken the benefit on margins rather than pushing for higher export volumes.”

    This is the most worrying part of your article. It is imperative that the country increases export volumes and reduces import volumes if we are to survive. With incomes stagnant or falling these are the main means by which we can improve employment levels and the country’s economic position. We need to see urgent government action in this area not just by promotion jaunts by MPs etc. but by some positive action that helps the financial position of companies that export and financially discourages imports.

  20. Glenn Vaughan
    Posted November 15, 2012 at 1:34 pm | Permalink

    Has there been a more inept and useless Governor of the Bank of England than the present incumbent?

    What are the odds that he will be succeeded by the equally talented Lord Patten?

  21. Ben Kelly
    Posted November 15, 2012 at 1:39 pm | Permalink

    Inflation has been supported this year by increasing benefits by more than wage increases, this way demand in the economy of essentials has at least remained flat and possibly increased. Sainsburys and Tesco have supported their brand match programmes by increasing the prices on their own brand products which hits the lowest paid highest. A tin of Basics pineapple has gone up from 22p to 30p in the year while Del Monte has remained the same price. That is real inflation of 33% in our shopping baskets. I suspect that the increase of benefits was designed to aid the recovery but has once again hit the workers hard.

    Demand will drop in the coming year as the phased removal of Child Benefit from high earners (£50K as year in London is not high or even particularly comfortable) will impact on their spending power and reduce demand.

    This ill thought out sop to the Liberals to allow them to squeeze the “affluent” (family home in London starts at rental of £1,500 per month so not really affluent) hits single earning families hardest while allowing two earner families with similar household income levels to continue to receive two tax free allowances ,no 40% rate, and child benefit.

    To counter this ridiculously unfair policy the coalition really should reintroduce the married/civil union couple’s allowance, then demand may not drop significantly in the New Year and the recovery may struggle along while inflation finds its own level.

    • uanime5
      Posted November 15, 2012 at 6:49 pm | Permalink

      Since when has cutting benefits been a sop for the Liberals. Cutting child benefit is for the Conservatives who complain about the welfare bill.

      • Ben Kelly
        Posted November 16, 2012 at 8:00 am | Permalink

        It is a Sop to the liberals because it is aimed at those with “the broadest shoulders” and not at all recipients.

        Greater immediate savings would be delivered by removing the child payments from the offspring of those on leave to remain visas (or 2 year temporary settlement visas) and the spawn of Eastern Europeans who seem to be entitled to dip into our pockets for all manner of “essentials” in their adopted residence. They did choose to make their way here so if there is hardship I feel it is not really incumbent on taxpayers in the UK (of which our Eastern European visitors are some) to assist.

        Incidentally in my family we have a child of a leave to remain visa holder for whom child benefit is not claimed on principle before you berate my views.

        I would further advocate CB only to be paid on the first two children (not retrospectively but introduced for all children born nine months hence).

  22. D K McGregor
    Posted November 15, 2012 at 3:39 pm | Permalink

    Apply for the job , John . We’ll all back you , it would be a nice change to have a competent in post.

  23. C WHITE
    Posted November 15, 2012 at 3:47 pm | Permalink

    The Bank deliberately brought about a depreciation of Sterling to try to produce export-led growth. Unfortunately the price inflation of imported goods squeezed consumer incomes.
    David Smith of the Sunday Times has compared our economy unfavourably with Sweden’s because they export on the basis of product quality like the Germans. Also they had the good fortune to have their banking crisis in the early 1990s and thus could resolve it in a much more benign environment.
    He does not make this point but they learned their lessons and kept them learnt. Most humans seem to forget about any mistakes made more than a decade ago and thus are condemned to repeat them. Political leaders are normally bright enough to grasp the lessons but then they have their own agendas like a boom to secure re-election and leaving the next government and the citizenry to pick up up the pieces.

  24. Kenneth
    Posted November 15, 2012 at 4:55 pm | Permalink

    We need to cut taxes urgently coupled with a reduction in public sector spending.

    This is obvious and is becoming more imperative by the day.

    • uanime5
      Posted November 15, 2012 at 6:53 pm | Permalink

      Just a few problems with your plan.

      If you cut taxes this will reduce the amount of money the Government receives and forces them to borrow more.

      Public sector cuts usually result in job or benefit cuts, both of which result in people with less money to spend in the economy.

      If anything we need more taxes so the Government doesn’t need to borrow so much. As the poor have very little money I’d recommend taxing the wealthy more, specifically the people and companies who dodge almost all of their taxes.

      • Edward
        Posted November 15, 2012 at 11:53 pm | Permalink

        unamaine5, what cranky economic views you hold
        Increasing rthe ates of taxes is currently producing reduced reciepts so you are wrong again.

        Public sector cuts have led to similar increases in jobs in the private sector so you are wrong again.

        High rates of taxes do little to encourage the rich to come and set up businesses and create jobs and growth as France’s new President is finding out, so wrong again.

        • uanime5
          Posted November 16, 2012 at 8:17 pm | Permalink

          Which taxes have been increased and how much have their revenues been reduced? The fact that you couldn’t name any examples indicated that your claim is something you just made up.

          Hundreds of thousands of public sector cuts were meant to create millions of private sector jobs, in reality barely the same number of jobs were created and unemployment rose because there was more competition for jobs. So cutting public sector jobs isn’t good for the economy.

          Finally you don’t need the wealthy to come to the UK to set up a company or create jobs. Also when is the exodus of the French wealthy meant to occur?

          • Edward
            Posted November 16, 2012 at 10:36 pm | Permalink

            Para One
            Look it up youself and get back to us. I’m not your unpaid economic researcher. Start with Capital Gains Tax receipts and then move on to revenues from fuel duty and even tobacco duty.
            There has been plenty of articles on this site talking about the need to set optimum rates to maximise revenues as you know only too well.
            Para 2 Jobs lost in the public sector have, as you admit been replaced by jobs created in the private sector which is all I have ever heard said as an objective. I do not know where your claim that “hundreds of thousands…were meant to create millions of private sector jobs comes from.
            I presume you just made that up.
            Para 3 “you dont need the wealthy to come to the UK to set up a company or create jobs” which has to be one of the most stupid remarks ever made on this site.
            Try telling that those who work at Jaguar Land Rover or for Apple or for Marriotts Hotels group.

      • Richard1
        Posted November 16, 2012 at 8:02 am | Permalink

        Tax already accounts for > 38% of GDP. No government in the UK has ever succeeded in raising more – not in WW2, not in the 1970s when Labour had a marginal tax rate of 98%. We are at tax saturation. We’re also borrowing too much. So spending needs to be cut – so we can finance public spending by taxation. That’s the only way to long term prosperity.

        • uanime5
          Posted November 16, 2012 at 8:19 pm | Permalink

          Given that many European countries are able to obtain a higher percentage of their GDP through taxes the problem is more likely to be poor tax collection, rather than tax saturation. Especially when some large companies aren’t paying any corporation tax.

  25. Nationalist
    Posted November 15, 2012 at 5:29 pm | Permalink

    I find Sir Merv’s bland report that he has failed to control inflation and intends to carry on failing down right insulting. If the Chancellor were a normal boss he would long ago have replied something to the effect of: your continued failure is unacceptable. you have 3 months to achieve the target or you’re out.

    • Brian Tomkinson
      Posted November 15, 2012 at 6:06 pm | Permalink

      The problem is that Osborne wants inflation and King is delivering it for him.

    • uanime5
      Posted November 15, 2012 at 6:54 pm | Permalink

      You do realise that there’s little Merv can do to control inflation.

      • Edward
        Posted November 15, 2012 at 11:41 pm | Permalink

        Unamie5, “you do realise there is little Merv can do to control inflation”
        One of your more ridiculous comments.
        The Bof E can adjust money supply , set interest rates, and do many other things to affect the economy and therefore the rate of inflation.

        • uanime5
          Posted November 16, 2012 at 8:21 pm | Permalink

          Can any of these things be done to reduce inflation without damaging the economy? If not then there’s no much the B of E can do.

          • Edward
            Posted November 16, 2012 at 10:39 pm | Permalink

            “Without damaging the economy”.. well that mainly happens when there is inflation.

            Perhaps you weren’t around at the time when inflation was the number one problem for the UK economy.

      • zorro
        Posted November 16, 2012 at 7:07 pm | Permalink

        OK, can we give him a P45 then?….I had been led to believe that one of his core objectives was to get inflation to 2% or lower….LOL

        I do love uanime5’s irony…’You do realise that there’s little Merv can do to control inflation’…..hahahahaha


    • Andrew Johnson
      Posted November 15, 2012 at 7:37 pm | Permalink

      I am not particularly interested in what the Governor of the Bank of England has to forecast about the economy. Why? Despite the many millions spent on computer financial models , every B of E forecast for the economy has been inaccurate, the Bank is struggling with the new economics and so he’s not worth paying much attention to.
      The only question I want someone to ask him on national TV is why he has failed to keep inflation within the bounds set by government. That after all has been the only objective set for him and his team in the past decade or so. He hasn’t offered to resign, so obviously feels that the Bank’s failure isn’t down to him.
      His job puts him on an untouchable, unsackable pedestal and he knows it.
      I think his whole tenure has been a dismal failure as regards inflation targets, failure to speak out about the foolish financial policies pursued by the Labour government and latterly his inflationary QE policy. I believe this lethal combination has done real long term damage to Britain’s economy. He has also regularly talked down the British economy.
      I for one will be very glad when he retires from his Governorship with his gold plated inflation proof pension and the honours heaped on him by a grateful State.

  26. Caterpillar
    Posted November 15, 2012 at 5:33 pm | Permalink

    As I’ve said before you don’t need to be an econometrician skilled in Chow tests or whatever to test fits of the data – Excel and a couple of dummies does the job.

    December 2003 to December 2007 – average inflation rate 2.24%
    Jan 2008 to present – average inflation rate 3.34%

    It would be more transparent if a graph of the actual CPI index were plotted (rather then the annual change) together with a fit before and after Jan 2008. It seems clear that the UK has had nearly 5 years of ignoring the target.

    [Do I have the wrong numbers? I just cannot see how this has gone on for so long, I hope I am wrong with the simple math.]

  27. uanime5
    Posted November 15, 2012 at 6:55 pm | Permalink

    Given that the Government was predicting high levels of GDP growth every year after they were elected it seems that the bank of England uses the Government figures until reality shows that they’re wildly optimistic, at which point they’re downgraded again and again.

    I’d also say that the million jobs haven’t helped because they’ve largely been short term or part time, rather than permanent jobs. This would explain why unemployment remains high despite so many jobs being created.

    • Lindsay McDougall
      Posted November 16, 2012 at 5:20 pm | Permalink

      Don’t sneer at short term or part time jobs; at least they bring some money into the households concerned. We don’t want to be like those continental countries who have only permanent jobs with entrenched ‘rights’ and high unemployment rates.

  28. Iain Gill
    Posted November 15, 2012 at 8:05 pm | Permalink

    so blair has failed in his middle east peace envoy job just the same as he failed in his prime minister job….

    hopefully somebody will spot this

  29. Jon
    Posted November 15, 2012 at 8:57 pm | Permalink

    What a very sensible statement on why productivity had reduced whilst labour employment had increased.

    With ever more fierce global competition I don’t see growth ever being much, its our expenditure that needs addressing.

  30. bluedog
    Posted November 15, 2012 at 9:13 pm | Permalink

    My O My, ‘inflation will be above target for some time’.

    Actually it’s below target, which is the maximum possible rate necessary to erode the UK’s horrific debt while simultaneously increasing tax revenues by way of fiscal drag, and all the while not spooking the holders of Gilts as they are fleeced.

    Quite how the BofE can continue to issue such statements while keep a straight face is the only mystery in a well-rehearsed process.

  31. Richard1
    Posted November 15, 2012 at 10:05 pm | Permalink

    What is your view on this latest (disguised) £35bn QE wheeze?

    • Denis Cooper
      Posted November 16, 2012 at 11:13 am | Permalink

      The can has been kicked down the road through £375 billion of QE, but it has been gradually rolling back through interest payments on the gilts held by the APF, and this is a small £35 billion kick to correct that.

      • zorro
        Posted November 16, 2012 at 7:09 pm | Permalink

        There will be a few more kicks down the road….don’t worry about that!


      • Mark
        Posted November 17, 2012 at 4:34 pm | Permalink

        This is not true. The BEAPFF has spent its £375bn acquiring gilts that were worth £398bn at Friday’s closing prices on a clean basis (i.e. excluding accrued interest it has a capital profit of £23bn on a mark to market basis). In addition, it has received coupon income that it has simply parked in an account at the Bank of England (it might equally have chosen say RBS but for the risk of default). The coupon income is part of the government’s interest bill that is paid for by taxes or borrowing in just the same way as say welfare spending. That income is now running at £14.5bn p.a., though obviously was lower as the level of QE built up. It is the cumulative coupon income that is being transferred to the Treasury, still leaving the Bank with a cushion of capital gain.

        Under the indemnity given by the Treasury to the Bank, the Treasury is liable for any losses that BEAPFF incurs, but it also entitled to any profits it makes. Somewhere deep in the Treasury’s accounts should be that profit/loss item (perhaps JR could ask a PQ to confirm that they haven’t forgotten to include it, and where it is included).

        All that has happened is that part of what was an amount owing to the Treasury has actually been paid over to them. The consequence is that instead of earning a derisory rate of interest in a current account at the BoE, the money can be used to reduce the amount of borrowing required to fund the deficit, on which interest would be somewhat higher. It’s similar to withdrawing funds from your savings account to reduce a credit card balance. In the same way, the “rainy day fund” has been reduced. This trick can only be played while there is a surplus at the BEAPFF.

        It is probably not a coincidence that next March, there is some £34.5bn of 4.5% Treasury Gilt 2013 due for redemption. Trying to sell £35bn of gilts in the market to replace them might not be quite so easy absent QE purchases.

        At no stage does the coupon income contribute to reducing the amount of QE. That only happens when either gilts are sold to the market at large, or they are redeemed and other gilts to the value of the original purchase cost are not bought in their place by the BEAPFF.

        Of course, if gilts prices decline, or as more of the current portfolio is held to redemption at a loss against original acquisition cost, the fund will move into an overall loss, which the Treasury would ultimately have to fund. However, in the early stages of QE, when gilts prices fell under Brown/Darling before recovering on the hope the next government might sort out the deficit, the portfolio suffered losses that were simply accounted by the BEAPFF as an amount due from the Treasury, and treated much as ordinary Trade Debtors/Creditors might be in a business.

        Overall, if the gilts are held to maturity, they will only net £326.7bn in redemptions, leaving a loss against acquisition cost of £48.3bn to be covered eventually. Four years of coupon income would cover it.

        Using the modified duration data from the DMO, we can estimate that a 1% increase in yields across the board would lead to a £29.7bn reduction in the value of the gilts. That would of course be sufficient to more than wipe out the current mark to market capital profit, and shows the extent to which the Treasury is now exposed to interest rates via QE. Normally in the past, the exposure might be only on say refinancing £50bn of maturing gilts, plus a budget deficit of £20bn. Now it’s on the whole £375bn portfolio as well as a gross funding requirement of £150bn p.a. or more.

  32. Steve Cox
    Posted November 16, 2012 at 4:38 am | Permalink

    Q: Which one of the nationalised banks is easily most to blame for the current financial mess that we are in?

    A: The Bank of England, of course.

    Time for another privatisation perhaps? The government may need a lender of last resort, and a very dodgy institution to print money so that it can keep on overspending, but do we? Maybe we should read Ron Paul’s book about ending the Fed and think about how it can be applied to the BoE. Because personally I am getting nightmares about the prospect of the next Governor having an 8 year term, far more powers than the current incumbent has, and nobody will be able to remove him other than for medical or criminal reasons. It sounds like madness to me.

    • Denis Cooper
      Posted November 16, 2012 at 11:08 am | Permalink

      I don’t know how you’ve arrived at that answer, given that the Bank of England was no longer responsible for the prudential supervision of the commercial banks which failed, Brown having transferred that role to the new FSA.

  33. Lindsay McDougall
    Posted November 16, 2012 at 7:55 pm | Permalink


    Has anybody noticed that the BBC has reported as NEWS the fact that the value of the government’s shares in Lloyds and RBS has halved from £66 billion to £33 billion since it bought them. This information was posted by me on this very blog site a couple of months ago, and I used only sources that were readily available on the Internet.

    It gets worse. The BBC wheeled out some banking “expert” who said the hurried purchase of Lloyds and RBS shares without doing proper due diligence was both necessary and inevitable. She then went on to say that these banking shares had to be retained by the government because it would be years before they recovered their value. Both of these statements are lies, absolute WHOPPERS in fact.

    John Redwood’s solution of putting administrators into Lloyds and RBS and doing due diligence before any shares were sold was workable; it would also have ensured that shareholders and not taxpayers took the full hit. Turning to the present, we do not know if Lloyds and RBS shares are going to recover their original value, particularly since RBS is still making losses. It’s best to sell now and inject some dynamsm into the banking sector.

    Like many people, I’m hopping mad that my taxes help to finance the broadcasting of this claptrap. There is a message for the BBC – reform or die.

    • APL
      Posted November 17, 2012 at 8:36 pm | Permalink

      Lindsay McDougall: “Turning to the present, we do not know if Lloyds and RBS shares are going to recover their original value, particularly since RBS is still making losses.”

      Lindsay, I think we probably do know.

      Both RBS and BOS (as was) built market share on the basis of an expanding economy, what most people didn’t realize at the time, was the expanding economy was exclusively expanding credit.

      We have reached peak credit, the credit bubble, the biggest in the history of the world is now deflating, and as RBS and BOS were valued at the peak of the credit boom, their stock price will be unlikely to recover.

      That Genius Gordon Brown managed two extraordinary things during his tenure, sold gold at the low point in the market, and bought bank shares at the top of the market.

      He really was an idiot.

      But he is still raking it in for his non appearances in the Commons.

  34. David Langley
    Posted November 17, 2012 at 11:01 am | Permalink

    I always thought the banks main aims were usury and making money out of other peoples money. The riches of the country provided banks with capital to earn more interest so of course they have a vested interest in us doing well. Creating wealth however entails risk and banks as we know should be and are risk averse. Millions of pounds are spent annually on devising algorithms to enable profitable and risk free lending. Hence credit cards credit limits are usually more than most can afford but will increase interest payments and if fraud free only a small and containable risk. If you are a small business however and dare to ask for a loan at reasonable interest rates, you could be refused. Ask for a credit card with a similar credit limit no problem. A card bears over 20% a loan may be 8%, what does your banker want you to have. Easy money leads to inflation, too much money chasing too few goods, prices go up so credit limits go up. Its easy to see where the problem is ask your local bank manager, OH sorry, you have not got one, he would probably deny you a credit card in the old days and put you on a budget account immediately.

  35. zorro
    Posted November 18, 2012 at 8:00 pm | Permalink

    ‘In february of this year the Bank told us “Inflation should continue to fall sharply at the start of 2012…..inflation is likely to decline further thereafter….inflation is judged somewhat more likely to be below the target than above it for a good part of the forecast period”.’

    John, I seem to recall that you were of the same opinion at that time and some time before as the VAT increases were no longer feeding through…..


    Reply I was certainly not of the veiw that we were in for a good part of the forecast period below target. I did correctly forecast coming down from the 5.2% peak, but the decline is now over.

  • 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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