A tale of two zones
Sometimes a picture is worth 1,000 words. Here's what's happened to inflation recently in Britain - and the eurozone.
Attending his first meeting with other European finance ministers today, George Osborne might reflect that inflation is yet another area where the view from the UK is rather different.
I've spoken before about UK inflation and its recent tendency to surprise on the upside. As the latest Bank of England Inflation Report admitted, inflation has been above the 2% target in "all but six of the past 30 months".
It may indeed be almost entirely due to temporary factors, which the Bank would be foolish to respond to. But as Mervyn King noted in his press conference releasing that report, it is not enough that this argument is right - it has to be seen to be right by investors, and by the public at large.
As I said in that earlier post, every percentage point rise in the cash value of our economy makes it a little easier for the government to bring down borrowing as a share of GDP.
Tax revenues go up, even if real growth has not - and fixed spending totals end up looking smaller, both in real terms and relative to the overall economy.
Of course, the reverse is also true. Low inflation is another reason why many eurozone governments have found it so hard to reduce their borrowing and debt.
So, it is a convenient coincidence for the UK that inflation is overshooting, just as government borrowing is at its peak. It is also not entirely unrelated - after all, our fiscal plight is one reason why the pound has fallen so sharply, and why prices of imported goods have gone up.
I know even the use of the word "coincidence" will send some of my regular correspondents rushing to their keyboards, outraged, once again at my naivete. In their view, this all part of the authorities' cunning plan to inflate away the debt.
To be clear: I don't think there is such a plan. Cunning or otherwise.
Mervyn King once again last week said last week that he thought inflation would fall back next year, which would imply that interest rates would stay low for a long time - even as growth starts to pick up.
Apparently, the majority of investors still think that's the most likely outcome. Money market rates didn't rise in response to today's inflation news.
However, it's not nothing that the older, RPI, measure of inflation is now at 5.3% - the highest in nearly 20 years.
Whatever the truth, sooner or later, the risk is that the City will decide that the Bank has gone soft on inflation after all.
~RS~q~RS~~RS~z~RS~12~RS~)
I'm 
© MMXI
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Inflation is not under control as our masters would have you believe.
Anyone working in the real economy knows this and can see that the figures we are provided with are, if anything, understated.
Low inflation is the justification for QE and the fiscal stimulus. It’s a lie.
Its happening now as we speak, a silent redistribution of wealth. You can’t undo inflation. Once it’s there, its effects compound year after year.
Half a per cent for savers. 5 per cent inflation.
That’s a big chunk of any cash assets being redistributed from savers and future pensioners to borrowers.
Not the borrowers who are forced to get loans from the banks at 8% 10& whatever..
No you guessed it. It’s the banks themselves who are the main beneficiaries. They can borrow from savers and make them pay for the privilege of doing so.
It’s even better than printing money.
Another legalised theft from the clueless middle classes.
Any sign of them getting angry yet?
The race to the bottom continues. Is it true the yanks have blocked IMF funds to Greece?
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From your last blog about UK inflation:
7. At 1:06pm on 20 Apr 2010, Mr T wrote:
"I imagine that the surpise isn't shared by the policy makers. This is an engineered theft. Inflation without wage inflation will impoverish the poor yet allow the asset rich to remain relatively well off.
This is the final act of intergenerational vandalism by a generation that can't admit that asset prices need to realign before any progress can be made.
Inflation is a problem for me. For 2 years I have enjoyed a pay freeze. Pray tell what the ecomic effects of continuing inflation will have on my ability to fuel the economy."
I agree with Mr T.
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"To be clear. I don't think there is such a plan. Cunning or otherwise."
I most definitely DO think there is such a plan.
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'As I said in that earlier post, every percentage point rise in the cash value of our economy makes it a little easier for the government to bring down borrowing as a share of GDP'
This is not the same as bringing down borrowing. £167 billion is still £167 billion. It still has to be borrowed, paid for and paid back.
And to assume that GDP will increase because of inflation is, IMO, an assumption too far.
And to be frank, if the petrol for your car and your supermarket bill has gone up and your pay hasn't increased fannying about with how the numbers are presented doesn't make anything easier.
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The retail price inflation gauge rose to 5.3pc from 4.4%, versus forecasts for a rise to 4.9%, the highest since July 1991.
So much for Gordon Brown's claim during the election that he had controlled inflation. The ONS statistics show that the RPI was consistently above the previously agreed RPI target of 2.5% from 2003 to the present time apart from the small deflationary blip in 2009. What a legacy the labour party has left to the people of Britain.
Meanwhile savers are unlikely to get more than 2.75% gross from savings. Another subtle hidden tax on the prudent in the UK.
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Funny how the people who think the government has secret plans are often the same ones who decry the government's incompetence...
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This comment was removed because the moderators found it broke the House Rules.
The question is not *whether* the Bank has 'gone soft' on inflation but *why* it has gone soft. With RPI inflation at 5.3% - the highest since July 1991 - that sets a mark for annual wage bargaining of around 5% to 6%. But interest rates are the lowest they have been for some time - so RPI inflation will be difficult to control by using interest rates. As soon as interest rates are increased, then RPI inflation will rise and there is a large risk that expectations will rise accordingly.
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Temporary or not, coincident or not, its hurting prudent savers and people on fixed incomes whilst rewarding the feckless (which includes the previous government) by inflating away their debts.
Spinnign the figures to make them seem benign does not detract from the truth, we are a net importing nation, our currency has devalued massivley and it has NOT helped our competitiveness.
Printing money has caused a significant chunk of this inflation, there is no other explanation as to why the BoE think it will subside in time.
if it is a temporary blip, its probably linked to the currency devaluation and the asset price bubble we have experience in the last 18 months in the UK.
Talk about catch 22.
Higher (but not rammpant) inflation suits the government and the feckless.
Lower (but not deflationary) inclation suits the prudent public.
Once again as with all recessions, sensible hard working savers bail out the government and the over-indebted public.
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An interesting picture!
I fear that the failure of the Bank of England to predict inflation accurately will be repeated by the Office for Budget Responsibility when they forecast economic growth and Government expenditure plans. This will enable both QUANGOs to assist the Government in repaying Government debt with devalued currency. This may be widely welcomed by other debtors and politicians but for those of us on fixed incomes it will erode our standard of living.
It's time to increase interest rates to quash inflation!
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One cannot inflate away one's debts unless incomes and profitability increase in line with inflation.
The problem is, however, that inflation erodes Britain's global export competitiveness, as UK based businesses experience rising input costs which:
(i) Reduce UK business profitability, which reduces the tax-take along with it; and/or
(ii) Increase the selling prices of British exports as UK based businesses try to maintain their profit margins, which unfortunatey then offsets the benenefit of the sterling depreciation.
Of course, UK businesses can overcome the problem by moving their operations to lower cost economies abroad. This will cause UK unemployment to rise. To counter this, UK workers could offer to take another cut in salary, but who wants a reduced salary when the cost of living is rising.
But then again, this inflation problem is only temporary......
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Stephanie
Has an outgoing government ever left the public finances in a more precarious position? I know you like to see the positive side but after todays news of Labours 'scorched earth' attitude towards the next administration you can hardly argue that anyone in authority over the past couple of years has been straight-foward.
I think a huge clearout of the UK financial regulation is needed and soon, too many skeletons in the cupboard and too many shady deals are coming to light.
And also, lets hope that a coalition can show that we will never need to see another ruinous Labour government, ever.
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Ms Flanders wrote:
'I know even the use of the word "coincidence" will send some of my regular correspondents rushing to their keyboards, outraged, once again at my naivete. In their view, this all part of the authorities' cunning plan to inflate away the debt'
There's nothing cunning about it Ms Flanders, nothing whatsoever. Particularly given the UK government is now buying its own debt. Which in reality is the only way out, given no one else really wants it, and we couldn't afford to service the debt, even if they did.
Mind you it looks like the ECB is going to have to do it in a big way to, given that the American Congress isn't at all happy with the IMF proposed bailout of Greece.
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With the pound being devalued by some 30% and the economy is running records debts and sluggish recovery despite all fiscal stimulus/quantitative easing mechanisms inflation is the only logic consequence. If that is not tackled immediatly it could get out of control as both public and private sectors will start demanding pay rises in line with inflation otherwise risk social unrest/strikes (BA is already suffering). I think interest rates need to rise soon to reflect actual market rates. Providing cheap money is not the answer to encourage spending or boost an already over-valued housing market. That is what got us into this trouble in the firt place. As a nation we need to encourage savers/savings not punish them and we also need to revive/boost our manufacturing industry. We need to open new markets outside Europe. The last we need is to allow inflation to go out of control or encouraging another falso boom that would inevitably lead to a worse bust in the future.
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CPI at over 3.5%, RPI at 5.3%! Its a joke...How long is temporary then? What does that mean exactly? I'm sure Mr King wasn't forecasting these levels of inflation last year when he was printing all that money, if I remember rightly he said it would be around 1% this year, how could he be so wrong then, and yet get away with it now simply by writing another letter? I can't get my head around why he still retains any credibility whatsoever. I wonder if he will still be quite so blasé about it when people start wanting 3.5% pay rises? I bet he'll soon start bleating about inflation then! Why should we all just sit like lemons while our wages buy less month on month, and our savings disappear in smoke before our eyes while the man at the top has such a dismal record of predicting what will happen?
I predict that inflation can go as high as it likes, nothing will tempt the MPC to raise interest rates, they are to afraid of falling house prices, so your wages, savings, lifestyle and everything else takes second place to the banks and the value of their mortgage book. Thanks Merv, nice one mate...
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Any UK buyer will tell you that there is a lot more inflationary pressure in the pipeline. I, for one, believe we are due for it - there is no sign we are willing to prick our own housing bubble and expose a load more debt, so something has to give.
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Further to my post no.11 above,
UK input prices have risen by an annual rate of 10.1% as this BBC report shows:
http://news.bbc.co.uk/1/hi/business/8611370.stm
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Yes and RPI at 5.3% which is more worrying givent that BoE interest rates are still historically very low.
Given that VAT is due to increase causing more inflation in the system, this is not welcome news. One suspects that the dark side of the sterling depreciation is now working its way into the system through imports - a fact that seems to have been overlooked by many commentators only stressing the positive.
Inflation has been consistently higher than forecasts by the previous discredited administration for some time who kept inserting the word 'surprise' in every news release. It would appear that stagflation is here.
Also good point by Mrs Bloggs (#3) above that £167 billion is still £167 billion deficit and the interest of course - but of course its actually £1 trillion and counting in actual debt outstanding.
Inflation never solves your debt problem (if that was the case debt would have been consigned to history by now) and inflation above 2% is never good........
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Blimey!
I haven't been rioting since the eighties. Brixton and Toxteth.
Ahh yes the good old days.
Still may create a demand for Police Riot Shields from the plastics industry and with a dearth of house building going up I am sure the brick manufacturers would be happy selling half bricks than no bricks at all. Oh no, we can't afford those...
Oh and I'd guess Police Riot Shields bear the logo 'made in china'.
Anyhow, at least now, FINALLY, it looks like this recession is at last going to find its feet and actually start to happen, rather than the 'phony' recession we've had for the last eighteen months pending this election.
Inflation has been nibbling away at all our incomes and expenditures coupled with pay freezes, and while those of us who are worrying about interest rate rises, our financial security is being stolen by inflation.
Once the bounty of inflation has had its way eroding our disposable income to nothing, then you can await the rise in interest rates to cap off the inflation.
We are looking down the barrel of a double barreled shot gun held by the £165 billion deficit. In balance you have two hands, one each for a half brick. This is all the middle class 'electorate' will muster against the political system and those there darned bankers.
Usually the middle class don't like to get their hands dirty.
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Dear God I give up, inlfation is always 'temporary' when its going up. When it's going down, usually due to computer games, the BoE throws the kitchen sink at it, 0.5% rates, QE, etc. We are sleepwalking into another financial disaster driven by recklessly low interest rates and another disastrous housing boom. Wake up, there is no good reason on earth left to keep rates at 0.5%.
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So the answer is to spend more now because your pound is currently worth more than it's going to be. Logic then dictates spend your savings on and indebt yourself as interest rates are lower than inflation. Sound logic dictates therefore that we need to borrow more. Whooppee! Flippant possibly but like many others here I believe the prudent ones will suffer.
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The trouble is BoE has no idea about inflation expaectations, just as they have been clueless about the economy.If printing money were the solution, then there would not be poverty in the world.
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None of this matters. As long as house prices don't fall, the BOE and the Government will be happy. The price of petrol, food, travel can go to the moon.
I repeat nothing else matters, just the housing market.
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The bankers created the Gordian Knot so that no matter what they can have increases in the costs of money even though there is much more available and there has been less demand. Although the sheets might indicate that inflation would follow the supply and demand curve we are talking about bankers and governments and normal financial terms all have different meanings. What is good for banks is first and after all it is the public that will pay for it all in taxes and higher charges so there are no incentives for honesty in the process. Some should consider the citizen in all of this, the ones paying the bills. No increase in fixed incomes, higher interest rates and inflation and they scratch their heads and wonder why people aren't buying. The banks and the governments have no sense of the average citizen except as someone to be shaken down to cover mistakes and abuse as long as possible. Karl Marx is smiling in his grave.
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For what it's worth, two years ago my wife and I used to spend about £50 each week at the supermarket. These days we buy more special offers and BOGOFs, but still manage to spend about £70 each week.
Lies.
Damn lies.
Government statistics.
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Can't we sleep easier though knowing that the fiscal stimulus worked so well? As Brown & Darling kept telling us....
Oh, that's right we are only at the point in the cycle where they were spending the hundreds of billions they borrowed... not quite half way through.... so how did they know?
Rather like my wife and I losing our jobs and taking out a huge loan to maintain our standard of living, maybe a few new suits and a nice car so we don’t look to down when we turn up for our job interviews. Its fine if we get new jobs soon and can repay our loan.... if we don’t we are in the same position as when we lost our jobs PLUS a huge loan
So Stephanie... was it just a huge loan to put off the inevitable until after the election?
After all Brown was the leader that drove the stimulus around the world.... Greece, Spain, Portugal..... They’re all singing his praise
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The above graph is a mirror image of this graph:
http://news.bbc.co.uk/news/business/market_data/currency/11/158240/twelve_month.stm
...now I wonder why... [yawn]
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muggwhump wrote:
"I'm sure Mr King wasn't forecasting these levels of inflation last year when he was printing all that money, if I remember rightly he said it would be around 1% this year, how could he be so wrong then"
Because he doesn't know what he is talking about and history has shown that he never did.
I assume this is why he is greasing up to the Tories, if they look at his record the only conclusion it is possible to draw is that he is not fit to be in the job he is in.
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Also, input costs will rise anyway because of the change in the way steel and other raw materials will be priced. At the moment prices are fixed for large consumers annually. This will change and raw materials are expected to at least double in cost.
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Let us be real: The Bank of England and its Governor are WRONG. They consistently make excuses for not doing what they should be doing. They dissemble for the benefit of the City. They don't give a hoot about the people.
This would be nothing, if they were also not making things worse for the Nation and the economy. They have connived with the fiddling of the figures. Even now they deliberately leave out house price inflation - that major destructive force in the economy. They are destroying us!
When the history is written of the Bank this will be its darkest, most cynically insane, hour when it robbed the prudent for the sake of the profligate - some way to run a Bank and a Nation.
The destructive force of ever inflating house prices will destroy all of British business. Already our public and private debts are so large that interest rates cannot be increased to appropriate levels (as they are being in for example Australia). The policies of the Bank are THE CAUSE of many of our problems. Mervyn King is the CAUSE.
I repeat fro the umpteenth time that all successful and stable , economies in history have provide a fair return on capital and a reasonable cost to borrowers. The Bank's historians know this - but the 200 economists at the Bank obviously don't - if they did and had backbones they world have resigned long ago.
Consider this those of you who think that ever increasing debts are an acceptable and successful long term way to run an economy. Workers are paid by employers at a level which allows them to live. They need to live reasonably near their employment for obvious reasons. So house prices go up and up then even at these absurdly low levels of interest rates sooner or later - sooner, most probably, pay has to rise - this is the absolute idiocy of allowing ever inflating house prices (from levels already twice what is rational for the economy to remain internationally competative)!!!!!
I won't go on as the economically innumerate and blind(apologies the visually otherly endowed) on this blog will never understand and those who understand don't need re telling!
Mervin King is continuing to destroy the economy!
Get interest rates up NOW Mervyn or resign.
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Inflation was bound to be up.
If you look at US data you can see that the basket that covers energy was up 18% or thereabouts year on year to April 14th
Brent crude is up 25% year on year
Dollar prices
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Stephanie, this recent UK inflation hike has nulled out any gain from savings; we are all losing out, even those offshorers in whatever currency aren't doing any better. WHy take more risks in a 5 yr account with an unknown future ? Must be mad. The euphoria for saving has gone out the window when the state ramps up the cost of living and where's the incentive ? I suppose the last place is topping-up a private or state pension. Options for the average person has run out, and quite bewildered in knowing what to do and what options are available. Nodoubt F S Advisors will cash in on the unfortunate.
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Stephanie wrote : "As the latest Bank of England Inflation Report admitted, inflation has been above the 2% target in "all but six of the past 30 months".
I'm no financial genius, but I do understand what my job's main focus should be. If the remit of the BoE Governor is to keep inflation to 2%, at what point, having failed on their target in all but 20% of the time do we get someone else in who can actually deal with the problem ?
It's all very well having to write a letter each time we breach the target, but how is the current bunch keeping their jobs when they fail in their only apparent directive.
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#5 "Funny how the people who think the government has secret plans are often the same ones who decry the government's incompetence..."
Exactly... 'they' are very far from being incompetent... I don't think they're talking about the Government, well at least not the British Government.
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Doubtless we'll once again have all the doom-mongers bleating for interest rate rises. But CPI inflation for the last 4 months has been 3.5%, 3.0%, 3.4% and 3.7%. That means that it's increased by a really massive ONE FIFTH OF ONE PERCENT during that time. Whoopee Doo. And that's taken place while VAT has gone up, petrol has gone up and various taxes have gone up. All these measures would have forced CPI inflation up no matter what base rate was.
As for RPI inflation, well if banks and building societies refrained from ripping off mortgage payers and stopped charging them 6% above base rate, then that would soon come down too.
Serious observers who read the BOE quarterly inflation reports, as opposed to sensationalist journalists who are constantly trying to stir up trouble, see no real problems regarding today's figure. And in any case, the last few sentences in George Osborne's reply letter to Mervyn King tell the real story : pretty soon there will be so many deflationary spending cuts that there will be no need to raise interest rates any time soon.
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There is a much more simple reason why one cannot now inflate one's way out of debt: it is practically impossible.
As I have reiterated before, the effects of QE were not noticeable, and the aversion to risk and private debt simply makes it impossible for the money supply to increase.
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You know Mrs Flanders, what this country needs (other than a shed load of money), is someone in the mainstream media to explain (for the benefit of those who don’t understand) that the UK Government owns the Bank of England.
And when the Bank of England creates money from nothing to buy UK Government debt it is simply the Government creating money and giving it to itself, to satisfy its spending requirements.
And then we need that same person to explain that if you increase the amount of money in any given system you will create inflation, i.e. more money and the same amount of things, makes those things rise in cost.
Because if someone in the mainstream media did this, then people will likely understand the true implications of what’s going on at the moment.
Do you know anybody who would do that?
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The inflation higher than 5% is indeed a dangerous development: In the background of your comparison stands the fact that the fundamental economic data of the Euro zone are still better than the UK and even US data - despite the Greek irritations. The UK´s deficit is too high, the urgent needed cuts stand against the generating of growth - a difficult act of balace!
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When is the BoE / Government going to stop this pretence that it sets interest rates on the basis of a target level of inflation. Were that the case reats would and should be higher now... They would not need to look at growth and house prices and debt levels etc. Stop misleading us BoE and tell us your REAL remit for setting rates.
The pound is going to remain weak, inflation is going to continue up. The calculations can be done on a fag packet. Will the new government act? We are waiting with baited breath...
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Interesting stuff inflation. It depends on your spending patterns and your ability to change habits. However I don't believe the Euro figures. My experience in France over the last two to three years is that inflation is much higher than your graphs, Stephanie. Even allowing for the depreciation of Sterling, many basic items are much more expensive than here and the constant moan from the French is rising prices. Anyway, anyone who lived and worked through the madcap 70's would have drooled at 5% inflation.
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FrankSz (aka Oblivion)
Let's meet half-way: lenders agree to write off half the debt if borrowers agree to half the austerity measures. It will get the unpleasantness over with much quicker.
World trade could then resume with a more balanced outlook: comparative advantage would make everyone richer.
Mercantilism is a zero sum game.
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This is the kind of issue that breeds acute suspicion of politicians and the Bank of England. Plan or not, no chancellor or treasury individual will do other than smile at the prospect of inflating away the debt.
How it affects me (and I'm increasingly angry I can assure you) is that working people who bother to save for the future are again the losers. Not only do I receive almost no interest on my savings but their value sinks as inflation rises. At the current rate my savings will buy about 5% less in a year's time, assuming the RPI is constant.
But it won't be constant. The B of E was warned (in the evva-popula court of public opinion) that QE would lead to inflation. Now it's happened and the Bank is doing nothing to tame it. I'm ready to bet it will soon be in double figures as it was in the 1980s before the B of E finally gets off its butt to do something about it.
As #1, DevilsintheDetail wrote:
Low inflation is the justification for QE and the fiscal stimulus. It’s a lie.
Its happening now as we speak, a silent redistribution of wealth. You can’t undo inflation. Once it’s there, its effects compound year after year.
Half a per cent for savers. 5 per cent inflation.
That’s a big chunk of any cash assets being redistributed from savers and future pensioners to borrowers.
Not the borrowers who are forced to get loans from the banks at 8% 10& whatever..
No you guessed it. It’s the banks themselves who are the main beneficiaries. They can borrow from savers and make them pay for the privilege of doing so.
It’s even better than printing money.
Another legalised theft from the clueless middle classes.
Is it any wonder those people on benefits are perfectly happy with their lot. They aren't robbed.
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Healthytoes says he has had a pay freeze for two years. I've had a pension freeze for thirteen years since G.B. abolished Advanced Corporation Tax which allowed pension funds to claim back tax on dividends. You can imagine what my little pension is now worth. Whilst I don't think there is a dastardly plan to micro manage inflation I do think we are in one almighty mess.
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20. At 6:27pm on 18 May 2010, Si_555 wrote:
Dear God I give up, inlfation is always 'temporary' when its going up. When it's going down, usually due to computer games, the BoE throws the kitchen sink at it, 0.5% rates, QE, etc. We are sleepwalking into another financial disaster driven by recklessly low interest rates and another disastrous housing boom. Wake up, there is no good reason on earth left to keep rates at 0.5%.
Utterly true. It's the stuff that bubbles are made of. You can see it now: these low interest rates hope to promote even more borrowing. Fine - but with something like mortgages, wait until the rate goes up as it inevitably must and as ever it'll be too late to bring anything under control. The recent history of the B of E shows that it always raises interest rates far too late. During Brown's time as Chancellor it was necessary to fuel his credit boom. So, yes, you see the next bubble in the making.
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#35 : "Serious observers who read the BOE quarterly inflation reports, as opposed to sensationalist journalists who are constantly trying to stir up trouble, see no real problems regarding today's figure. And in any case, the last few sentences in George Osborne's reply letter to Mervyn King tell the real story : pretty soon there will be so many deflationary spending cuts that there will be no need to raise interest rates any time soon."
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Who are these "Serious Observers" of whom you speak ?
The deflationary impact of Osbourne's cuts may well reduce the internal velocity of money and also its availability, but a weak pound when we import so much oil, food and manufactured goods will more than offset it.
Interest rates must rise when you import more than you export, just to keep the value of the pound effective. Sure, you can buy a British made item at a decreasing price, but not anything imported. And the fundamental fact is that we don't produce anything.
As an example, look at all the Rape Seed being grown round the South of England. You can pass 40 miles+ of it from the M25 to Cambridge. It looks great, but when it's worth nothing due to weak money, you'll only get "half a bag of spuds" for it and you have a problem. You cannot eat it, and that is what we are growing. If we were growing food then we may be OK with your deflationary ideas, but we aren't we import food with an ever weakening pound.
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How long is 'temporary'?
Everything is temporary if you wait long enough!
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The official inflation rate is 3.7% . But if you look at the food prices inflaton, they are much more than the official figure. This is due to rise in cost of import prices , thanks to the devalued pound which inturn is due to wrong monetary policies such as Low interest rate and QE.
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A massive fraud is being perpetrated on the prudent classes. Inflation doesn't matter to the 'benefit' classes because they can expect index linked rises. Inflation doesn't matter to the wealthy because they can afford to pay more. Those of us in the middle are going to suffer an almighty squeeze, from inflation and rising taxes. When the pips squeak, and they will, what is going to happen?
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30. At 7:24pm on 18 May 2010, John_from_Hendon wrote:
Let us be real: The Bank of England and its Governor are WRONG. They consistently make excuses for not doing what they should be doing. They dissemble for the benefit of the City. They don't give a hoot about the people.
Come on JFH you have a part share in the BOE. The BOE are doing what they think is best, namely keeping the public sector funded via QE.
I don't think that anyone who fully understood what's going on would actually want them to stop instantly.
What this country needs is someone to tell the truth and explain how QE is currently part funding the Government, which by the way is the health service, the police, and just about everything else government wise.
I wonder if the truth really does set you free.
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Buy assets that will appreciate in value, cash savings and pensions are being stripped from you as we speak with high inflation, its nothing new, been going on for thousands of years. 20 years time Premiership wages will be peanuts and the shred may have to come out of retirement.
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#41 MrTweedy
If lenders agreed to reduce the debt burden as you seem to suggest (writing off half the debt would be useless if they quadrupled the interest rate), then the debtors could agree to double the austerity measures, not half, and still be wealthier.
Debt burden is a demotivator. The optimism of a growth period is the motivation to happier and more exciting rewards. Debt burden is the daily millstone trudge of keeping the bulldogs away from your rear.
As for international trade, that's the next problem. The dollar and oil underpinnings have to go. In terms of energy and technology, there is more than enough for everyone and their grandchildren. The rest is a question of management.
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The moderators pulled my post for some reason, so I'll try again.
Next stop: Stagflation.
Then I included a link to an excellent paper by Edward S Knoteck II (from May 2006, published by the Federal Reserve Bank of Kansas City, Economics Research Department) in which he addressed, in some detail, the issues now faced by the UK.
For all the pontificating, the issues facing the people of the UK right here, and right now, are actually really pretty grim indeed.
What a mess.
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A fellow Microsoft Excel 2003 user is piling into NS&I index linked certificates as fast as he can. I can spot those default colours a mile off.
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By the way. If you want to reduce your dependence on oil, by which you mean the oil industry, why don't you just synthesise the stuff from captured CO2 and sunlight?
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There HAVE been very unusual factors in the past two or three month, which could well be causing further unwelcome pressures
The ash issues spiked food prices, and oil has been hurting us, with the sterling falling so much against the dollar as well
Stagflation is possible, and a rise in VAT will hurt inflation further
Those on here who don't like Mervyn King, or 0.50% interest rates are in their element, able to moan away, all day, every day
The reality is that we are in unchartered waters, and nothing experienced previously comes anywhere close
Gordon Brown discouraged savers by his actions, and we are starting to hear already of the scorched earth reality, with senior civil servants asking for letters of direction, as they felt the spending was absurd
When the full truth comes out, Brown is going to look like the economic terrorist he was
In my opinion, raising interest rates will not have any impact whatsoever on inflation IN THE CURRENT CLIMATE
The coming spending cuts and tax rises will remove money from the economy, and people are hardly going to start saving if they get a further 1% or 2% on their money
Many are reducing their mortgage whilst they can
The economy is in absolutely no danger of over heating, quite the opposite
Due to the pain felt in the private sector, and the fact that 1 million people are working part time as they cannot get full time work, with unemployment at it's highest level for 16 years, and rising, raising interest rates would be suicidal
It really would tip us over the edge, into the abyss
Yes, there is a view that says raise them, although if they would not reduce inflation, then why bother?
Unless your entire knowledge base is joining the dots in a book talking about previous depressions
This is entirely new, and the circumstances are unique
We will be lucky to see 1% growth in 2010, so raising interest rates for me is a no no, no no no
The person who made the comment about the rising interest rates in Australia is missing the point
In Australia, employment is rising, not unemployment, they are on the up
In the 5 months to Jan2010, just under 200,000 jobs were added, which is relatively way more, with Australia being a smaller country
The unemployment rate is just over 5%, whereas it is way higher in the UK and the EU
I concur entirely that it looks horrible, and that RPI in particular is ugly, yet raising interest rates will make it worse
It will not create any upside, and the downside would be a further pressure, when we have cuts and tax rises to come
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PLEASE READ THIS!
With a backdrop of bankers looting the EU’s Treasuries (via a bailout that rivals George Bush’s TARP) let us consider one of the most significant Dem-Con appointments (and a non-appointment) to the British cabinet.
That of someone who until now was invisible: David Laws the new Chief Secretary to the Treasury.
His Wikipedia profile (updated on the day of his elevation, and before he had taken up his ministerial responsibilities) depicts him as the man that speaks for his party on matters relating to kiddie-winkies and families and, no doubt, motherhood and apple pie. He is also commended for his conciliatory role in negotiating the Scottish Parliament coalition.
No mention here of his real background.
For, according to ePolitix, David Laws was once Vice President of JP Morgan and Co and based in the United States, before becoming Managing Director of Barclays de Zoete Wedd in 1992.
Now, in my book the most obvious candidate for the job of Chancellor, or Chief Secretary to the Treasury, was surely Vince Cable, a man credited for his prescience in predicting the financial crisis, respected for his ongoing analysis of that crisis and regarded as a “scourge of City ‘fat cats’.”
Why was he shunted across to the toothless Department of Business, Innovation and Skills? And why was a man who until now has had absolutely no record of speaking out on the financial crisis, elevated to a powerful post at the Treasury?
Could it be that Vince Cable is unacceptable to the City? That he was likely to threaten the oligarchical role of the British banking community, and their grip on the UK Treasury?
Evidently so. What else can explain the Financial Times’s headline (under a picture of David Laws and the Old Etonian) “Coalition softens stance on banks” (FT 13 May 2010). And the comment that “proposals for banking reform announced by the new coalition government appear to take a much more measured approach to the task of reshaping Britain’s bloated banking sector”.
So be afeared.
While most economists recognise (as does the FT’s Martin Wolf) that “the source of the government debt…. is the past profligacy of large segments of the private sector, and in particular the financial sector.” (FT 12 May 2010) yesterday’s Dem-Con coalition statement argued to the contrary. Government debt, according to our new political masters, is the result of “Labour’s financial crisis’ – with the City of London blanked out.
This framing of the debate is deliberate, and Labour was profoundly unwise, and irresponsible, for allowing it to pass unchallenged during the election campaign.
Because this devious framing of the causes of the financial crisis was at the heart of the Conservative election campaign strategy. And even while the Tories hid George Osborne away in a cupboard for the full duration of the election campaign, the framing of the issue remained central to their strategy. The role of the City of London was completely ignored, and the entire financial crisis laid at the door of the government, and the innocents dependent on, and working for, the public sector.
It was the most dishonourable and deceitful sleight of hand in modern British politics, I would contend. And sadly, both Labour and too many of the British public bought into this framing of the debate.
So the ground is now laid. Bankers are preparing to move from looting Treasuries in the US and EU – to once again looting the British Treasury. And as Michael Hudson argues, to shift the burden of taxation from property and finance – back on to Labour.
Less public money spent on welfare and jobs, means more money for bank bailouts.
Labour’s claims for jobs, for healthcare and pensions will be subordinated to claims by the banks “to get fully paid on hundreds of billions of dollars of recklessly bad loans… reduced to junk status.”
With a totally inexperienced and economically inept Old Etonian in charge: with David Laws playing the role of decoy in this proposed Great Bank Robbery, and aided and abetted by subservient economists, the Treasury remains within the firm grip of Britain’s most powerful oligarchy.
What is at stake is not just ‘savage cuts’ inflicted on the innocent and the vulnerable, shocking though such an injustice will be.
What is at stake is nothing less than Britain’s democracy, and the peoples’ right to control over the nation’s finances.
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The renewed housing boom and a return to high LTV is a national scandal, why is this being allowed to happen unchallenged? We were told this would not be allowed to happen again barely 2 years ago when we had the credit crunch and bailout , yet it is happening all over again turbo style. Get a grip media, represent the people.
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13th May 2009: 'The Bank forecast that inflation should fall to around 0.5% by the end of this year before picking up to around 1.2% in two years' time - below the Bank's target rate of 2%.'
http://news.bbc.co.uk/1/hi/business/8047593.stm
Take these current projections with a pinch of salt?
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sorry Stephanie, but along with many of the incredulous on here - there definitely does seem to be a plan which may not be explicit is certainly implicit. The BOE remit is to manage inflation - not the economy. therefore they should have put up interest rates before now. I don't think it is a coincidence that higher inflation helps inflate away debt and meanwhile the wheels of the economy are kept on by the very low interest rate - why wouldnt a sane manager of an economy use this - hopefully only in the short term but these things tend to get institutionalised.
note that we are getting house prices going up again - how bubblicious!
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Part of the problem of the VAT reduction and reimposition is that its produced a fair amount of inflation change which has muddied the waters when trying to understand the "real" inflationary changes, and made the 2% target a nonsense... in the sense that clearly the government don't expect the extra 2.5% back on VAT this year to trigger the BofE to raise interest rates to force inflation back to target.
It makes me laugh when Mervyn King says that it will drop back below 2% when we all know that VAT will be rising next year, so continuing the trend of above 2% inflation next year too. I've never even heard him say "unless VAT goes up..." when talking about future inflation. Does he really live in such a bubble?
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Financial Markets are forecasting sustained higher inflation for years to come.
Index-linked Bond prices and yields can also indicate the expectations of inflation amongst professional investors. They may not always be correct, but they have been signalling that UK inflation is expected to average 3.3% over the medium term (14yrs) and to average 1.9% in France over ten years. For France, perhaps we can assume the overall Eurozone inflation rate too?
That yield gap compares with the higher yields on UK conventional Government Bonds of +0.6% over 10 years compared with French Government Bonds and +0.9% for German Bunds.
For what it's worth, the implied US inflation rate over 12 years nets to 1.43% - also a much lower rate of inflation than for both the UK and presently.
That's what professionals are betting on: persistent higher sterling inflation than in the Eurozone. But not dangerously higher.
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Steph, RPI is not just an older measure, it is also more complete, ergo more accurate. This CPI figure bandied about is nothing more than a fig leaf.
Moving to the CPI target is what caused the BoE to miss the problems in the housing market and fail to raise interest rates when that was what was needed 3 years ago. The same problem appears to be occuring now, as rocketing housing costs are again disregarded in the Bank's calculations. This is not an academic question, it affects real people.
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56
What tosh
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get the money back from the banks
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#49 Dempster wrote:
'I wonder if the truth really does set you free.'
'Yes', in a word, it does.
It gives a grounding point, a point from which to survey all of the available options and possible futures.
Without the truth we are living in a fantasy world where all things seem possible and plausible but none will actually bear fruit as the tree was not really planted.
Oblivion, you post some things that make sense (your link with the picture of marx for example) however, if monetary policy is a lagging indicator of credit expansion/contraction then isn't QE (of 200bn) just taking up the slack that was created during the asset price bubble ?
Is the BOE base rate reflecting the desire of the BOE to monetise the credit created by the banks during the boom years.
Is the inflation we are now seeing in actual fact just delayed inflation from that period ? (inflation being the increase in the money supply)
If this is so then we should be able to predict the length and depth of this correction.
All I can say is that I am glad the election is now over, politicking can be put back in the box and we can get back to discussing economics.
My take on Stephanies' graph, if you invert it then the pink (magenta) line represents disposable income for those below the average wage, the blue line disposable income for those above average wage and if you interpolated a yellow line that would be those on average wages.
(a large number of people on tracker mortgages have seen effectively negative interest rates, some of whom have paid down debt, however inflation is eating away at their wages and so income is starting to drop again)
Real take home disposable income is falling, tax rate is stable, poor people are getting poorer at a faster rate than rich people (only the super-rich are immune)
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scrap trident or replace with off the shelf system
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the americans must pay for us to be their allies
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Central banks around the world should buy government bonds and then cancel them. The previous holders of the bonds would receive newly printed currency (eg French banks would receive newly minted euros in return for their holdings of Greek bonds).
The previous holders of the bonds should then invest their newly printed money in the deficit countries, in the development of green energy technology (eg French banks invest in new start up companies in Greece, Portugal and Spain with the aim of synthesising oil from captured CO2 and sunlight).
Britain and the USA both already earn net investment income from their direct foreign investments, which helps offset their trade deficits.
The private sector in deficit countries needs inward investment.
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legalise brothels and mariajuana ,and tax them
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There is no plan, cunning or otherwise. But there is a trap - a trap from which no exit is possible.
Interest rates cannot be raised since to do so would cause asset prices to crash which in turn would cause banks to crash. So that is not going to happen. No-one is ever going to admit this so they will simply make up a range of implausible and increasingly unbelievable explanations as to why interest rates need to remain at zero.
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the economic solutions are simple,just a question of implementing
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Mr King and probably others at the Treasury realised in late 2008 that there was no way out but to print more money. Politics in the UK has left situation stagant for a year or so.
The confidence in fiat currency is now being tested, and I hope not to destruction.
There is now a need for someone to take a lead in all this, as belief in ‘fiat currency’ is starting to wane.
If there was a clear path, irrespective of its implications, then full confidence may be restored.
But leave things as is, and there is a risk, the significance of which depends on your approach, regarding belief in fiat currency.
If someone like me feels it (and I’m just an average working Joe), then it’s likely I’m not alone.
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56. At 9:30pm on 18 May 2010, DebtJuggler
Good blog, I hope you're wrong, I do, God help us if you're not.
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Well done Merv, I see you haven't appeared on the telly, though I suspect if you did, your head may be on a platter. You know Merv, I think you've been listening too much to Gordon and his chum Darling for far too long; maybe some sort of brainwashing has taken place here? But anyway Merv (the swerve?), as Gordon said at the end...thank you, and goodbye. Ta ta ducky! By the way, I don't suppose you could lend me a fiver to help pay for.............
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Isn't it time we adopted the Euro?
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#70. armagediontimes wrote:
"There is no plan, cunning or otherwise. But there is a trap - a trap from which no exit is possible.
Interest rates cannot be raised since to do so would cause asset prices to crash which in turn would cause banks to crash. So that is not going to happen. No-one is ever going to admit this so they will simply make up a range of implausible and increasingly unbelievable explanations as to why interest rates need to remain at zero."
The madmen are running the asylum - BUT we HAVE to resolve this issue or this recession is just the start of twenty or more years of depression.
When everything is impossible - the answer is always to do what you are told is impossible. We have to have higher interest rates up by a half percent a time - but higher they must be and soon.
I set out in 30 above the consequence for employment if house prices boom again - yet that is exactly what we are seeing being created deliberately by the Bank of England. It will assuredly progressively further erode British competitiveness even more than it has already done. Yet the fools of Threadneedle Street with their fat pensions are blind to it. - All inflation is bad - out of control inflation is diabolically bad and that is what they are creating and they know it!!!
Your council of despair does not match my optimism and I reject it!!!!
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#75. mr_hag wrote:
"Isn't it time we adopted the Euro?"
Of course it is - BUT we are mad so we won't!
Just like we should raise interest rates and we won't!
The latter will assuredly destroy the country! (Fire M. King NOW)
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#63. At 9:56pm on 18 May 2010, Kevinb wrote:
'56
What tosh'
Kevin, there is more than a word of truth in what that poster says, Arthur Scargill (much as I despised the man) also told an unpalatable truth and was villified for doing so, only to be vindicated by history.
Think about what those in power are doing, not what they are saying, actions speak louder than words.
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#60. jonearle wrote:
"It makes me laugh when Mervyn King says that it will drop back below 2% when we all know that VAT will be rising next year"
His transparent dissembling - will however assuredly cripple the Nation!!!!
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The UK won't join the Euro...
We have a very special relationship with the US - why we went to war with them in Iraq and Afganistan.
The UK hasn't joined the Euro because eventually we will side with our special friends and join the dollar or more likely after the implosion of the fiat Currencies, the Amero currency.
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#55. Kevinb
You say why "bother raising interest rates" -
here some reasons why:
1. because of the hugely damaging effects on asset price inflation that will create irresistible wage inflation and decimate British competitiveness.
2. because a working economy needs savers to be adequately rewarded.
3. because banks have been borrowing at quite high rates in the last couple of years on longer term borrowing based on the assumption that interest rates will rise soon - if rates do not rise soon these banks will suffer enormous financial strain - and the state (i.e. we) will have to bail them out.
re point 2 above - of course the reason why rates are not higher now is the economy is absolutely bust and we are most probably just at the start of a long crushing depression. If we were not in this position, the Bank would have raised rates. Zero or negative interest rates show us that the economy is in fact dead and not recovering. The Bank is reflecting the appalling economic reality (which as an optimist I was hoping had already improved.) Your are on the other hand looking like a pessimist - buying you face in your hands.
In economics when all seems impossible the contrarian philosophy often works - like Keynes did - do the opposite of what seems the only thing possible to do and then the economy recovers. So put up rates now because it is the opposite of what the prevailing orthodoxy says the data tells us.
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I think there are several missing ingredients in this discussion which is highly significant to our current economic problems.
1. Most if not all of our gold reservses have been sold and this leaves any future govenment very limited ability to intervene in the market to support the value of the pound. Traditionally gold is used in time of crisis to buy back some of your own currancy to restore it market value. In better times currancy is used to buy back gold and restore your reserves.
2. Thanks to the policies of our previous two prime ministers, our manufacturing and agriculture industries are almost dead. Somehow neither of them seemed to realise than wealth needs to be created by actually producing something with marketable value.
Unfortunately our current inflation and interest figures are merely symptoms of an unproductive economy.
It's time to put the country back to worthwhile employment and give back to our people their dignity and something to go for.
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As I said some time ago, it must be very difficult being governor of the BOE and having to WRITE A LETTER when outside target inflation.
Happily, as an unemployed IT consultant, I can reassure everyone that Merv will have by now have been furnished with a set of stock sentences that he can use to produce this document without causing undue effort or stress (the same way teachers cobble together pupil reports).
Merv is quite clueless as is the treasury forecasting and I predict BIG savings could be made here by getting rid of so-called experts. Performance-related pay at the treasury and in the Met office would surely result in many staff OWING money to HMRC.
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In return for another World Cup, let's hand over economic control to the Germans.
Honestly, this is a win-win solution.
Who is with me?
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What a day, Mr 'Flipper' Berko gets voted back in as speaker not only in his constituency but also in Parliament - they are as rotten as they ever were. Maybe Liam Byrne has done us all a favour if he has trashed the UK, it smells increasingly like a rotten corpse, the body politic has been dead and decaying for years, and what I thought was the undertaker has just tried to prop it up again, but wearing a different tie. Today's charade just convinced me that if anyone got stuffed at this election, it was Tory voters - what on earth were they thinking of electing Cameron? Still, they deserve it, sadly, just like with Gordon, the rest of us have to suffer for it. Bring on AV, that just might split the 3 moribund parties and with luck all the Blair clones will end up in the Lib-Lab-con party and the rest of us might just get something worth voting for.
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You cannot devalue and import without inflation. You cannot have inflation without interest rates rising. It is like the deficit, the longer you ignore it the more you get impaled. The Conservative reflex is to sit on inflation because it erodes wealth. A socialist solution is to use inflation as a tool. We are probably seeing de facto socialist policy enacted by a pedominately conservative administration. What more do you need to tell you that the debt is controlling policy.
At least the maitre d' with his book cook has decamped.
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69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.
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It is interesting to note that inflation is so high yet supermarkets are increasing profits exponentially.
How can you increase profits by 30%+ except by the consistant rip off of customers.
Tesco Asda and the like are far too large and dominant to be competative, there are no checks and balances here. Look around and see how food prices have increased in the past two years. Normally prices are depressed in a recession but not in the supermarket retail section. OFT where are you?
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The maddness is here. We are about to engage in blood-letting in the public sector. There will also be consquential job losses in the private sector. Yet more mortgages were approved last month for a housing market that still hasn't deflated and the price of eggs in my local Post Office has increased 10% per dozen!
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77. At 10:35pm on 18 May 2010, John_from_Hendon wrote:
#75. mr_hag wrote:
"Isn't it time we adopted the Euro?"
Of course it is - BUT we are mad so we won't!
Just like we should raise interest rates and we won't!
The latter will assuredly destroy the country! (Fire M. King NOW)
=============================
I can see us now, Dear Frau Merkel, we'd like to join the Euro and as a our starter for £165 Billion, can we have it in Gold please?
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Dear All, can someone tell me where I can get zero pcent interest on my debts? I got that on my savings WHEN I had some, BUT the interest rates I'm paying on my debts vary between 4.9 and 5.9 pcent and that is good, they could be up to 6.5% or more.
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This should make the next few days rather interesting!
‘Market chaos warning after German ban on shorting’
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7738144/Market-chaos-warning-after-German-ban-on-shorting.html
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#87. At 11:43pm on 18 May 2010, DevilsAdvocate wrote:
'69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.'
--------------------------
Thirded.
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Dear Mr Moderator,
send me my post back, I can't remember what I wrote and I'd love to know what it was and who it uspet, it gives meaning to my life now I've not got Gordon and his cronies to hate. I only need this as a crutch for a few weeks, I'm already getting to dislike the current bunch and they only started today - Ahhh, yes that's what is was! The Berk shire MP and the body politic - wow do his minions read these blogs - get a proper job you sad people!!! Wow, and I thought we had free speech in this country, well you live and learn as they say.
Mr Moderator you need a motto - here is one from History
"Publish and be damned'
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The late est mouthful of p ink uk elephant extrapolations are on their way up to meet the tooth fairies with their orifices and gentlemans club wide open , poor mervinking will have to send a dear Cameron and Clegg letter...."hey there pilgrims on the trail of the loansum pyne where brown carved my his name and then carved mine]
Clearly Mohammed didnt want to go to the mountain so the mountain will have to come to Mohammed
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Look at the Leaf from Nissan for example: http://news.bbc.co.uk/2/hi/business/10120053.stm
Everyone I have spoken to about the vision of cities that are quiet, pollution free, with clean air and little transport-related roaring and dust, where people buzz along in electric vehicles, has been enchanted with the idea.
These products *should* be more expensive, but the price should be going into domestic manufacturing and particularly labour costs. The price of employment, but more people would have more to spend.
Another thing to consider is that these products *will* get more popular. It may be the slow on-ramp of an exponential curve now, but the explosion *will* come. In this case we can expect electricity prices to *dramatically* increase. In this case we should be investing in energy generation, and we should revise our planning when it comes to solar/wind products.
For example, I was looking recently at laminated flexible photovoltaics from a company called Unisolar. This is a rollup PV cell with an adhesive backing that is lightweight and easy to mount.My terrace has a wall with a metal top, and it would be easy to cover the metal surface with this stuff. At current electricity prices, given my expected sunlight, over the lifetime of the product I would not quite break even on my initial investment (though exchange rates play a role here). But I can be quite confident of two things:
a) There will be oil and gas shocks over the next 30 years (lifetime of the product)
b) Electricity prices are going to dramatically increase
So, in terms of peace of mind, flexibility, and reasonable planning, it makes no sense *not* to start switching infrastructure.
If this is reasonable for me, then it is reasonable for everyone.
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#55 KevinB is a good argument but #81 John-from-Hendon is the effective counter argument.
At the end of the day the BoE is supposed to set interest rates to meet an inflation target. It has consistently failed because it has misread temporary signals that become permanent, and seems to have an eye on the wider goal of preventing a house price collapse.
KevinB makes a good case that raising interest rates would not lower inflation. I disagree. A percent point rise would strengthen the pound which would lower inflation in an instant.
Given its consistent record for failing to target inflation, you can only assume that the over-riding aim is house price support in the name of economic stability. IS this what the BoE should be doing?
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According to the Telegraph, the American Congress voted 94 : 0 against using IMF money to bail out nations where debt has passed 100% of GDP.
Germany has now banned short selling of European Government bonds.
The ECB is now purchasing Government debt, in direct breach of Article 104 of the Maastricht Treaty.
The Bank of England has also been purchasing UK Government debt, again in breach of Article 104 of the Maastricht Treaty.
And people are converting currency into precious metals.
The price of a one ounce gold coin two years ago was around £425.00.
Last week it was around £850.00.
Now that’s what I call inflation.
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This comment has been referred for further consideration. Explain
If the American Congress gets its way the IMF €320 billion part of the €1 trillion EU bailout fund may never materialise, and the remainder from other European Nations is also looking questionable.
Which in turn means the ECB may have to print its way out of this mess, or nations will have to go without a bailout.
But
No Bailout = No Union
And
ECB Printing Money = Devaluation of the Euro, and therefore significant inflation.
Either way it’s looking like someone’s not going to be a happy Euro bunny in the near future.
However ‘always look on the bright side of life’:
The ECB was ridiculing our Mr King last year for his QE activities, and it's now looking like he was way ahead of them in figuring out how all this was going to pan out.
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What worries the banks and the BoE is not what happened to house prices in America ie 40% drop on average between 2007 and 2010, but what happened in Japan ie 40% drop in house prices between 1889 and 2010! What first-time buyer would get a mortgage today if they thought their home was going to be worth 40% less than today in 2030? What mortgage lender would be willing to provide a mortgage if they thought those loans would be given against an asset that would slowly depreciate by nearly half over the next 20 years?
This is a long term problem, its not going to go away, and there is nothing that won't be thrown at keeping house prices inflated in the years ahead...whatever the cost. The banks have too much tied up in the housing market, think about all those equity release plans and personal loans made with a home owners positive equity standing behind the deal. The problem is that the ongoing price for this support is too high for too many people. So get used to rock bottom interest rates...they're here to stay...
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Here are some things I don't understand:
First, if the devolving of control of interest rates and control of inflation to the BofE was meant to be a strict and impartial move, then how come the BofE isn't doing anything about inflation. Simply writing a letter to the Chancellor seems a bit weak when inflation is running so far above target. Surely, the bank should be taking some action now?
Secondly - and this may negate my first question! - isn't the use of BofE interest rates as a control mechanism just an illusion. My understanding is that by varying interest rates, the rate charged for borrowing is supposed to vary, making people spend more or less, and hence control the demand side of the equation, and therefore impact on inflation. And yet, in spite of the BofE interest rate being at a record low, the rate paid by borrowers, whether business or personal, is more akin to a BofE rate of 3% to 4% or even higher. So how is this supposed to work?
Maybe it's just me, but it seems like the link between the supposed control mechanisms and the resulting output is disconnected.
Free Business Training Online
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#97. StopFiddling wrote:
"Given its consistent record for failing to target inflation, you can only assume that the over-riding aim is house price support in the name of economic stability. IS this what the BoE should be doing?"
Quite so - but I think you have missed the point that unless and until there is rough house price equality between us and our competitors they British business inevitably faces higher wage bills and is thus at a serious competitive disadvantage. (Firms have to pay wages that allow their staff/workers to live in suitable accommodation for obvious reasons!)
The Bank and its foolish Governor seen not to understand how business works and the support for ever increase house price inflation is an absolute odds-on certainty to destroy British competitiveness, and so our business on which we all depend. This is compounded by the idiocy of 'affordability'! The Nation cannot afford it!
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re #9 Anand
'Talk about catch 22.
Higher (but not rammpant) inflation suits the government and the feckless.
Lower (but not deflationary) inclation suits the prudent public.'
----------------------------------------------------------------
On what do you base those two statements?
If I had a lot of spare cash and I could therefore convince a bank to give me loads more at a low rate of interest, I would be buying up properties in certain locations. That's not feckless, that's making lots of money out of prevailing economic conditions. Sure, it suits the Government because it keeps an unsustainable property boom going and makes them look good. And it brings in taxes.
What is wrong with deflation? Don't fall for the MUM that is being created, at present, around deflation. For sure, rapid or strong and increasing levels of deflation can cause other problems, but the world economy has rarely seen these in its history.
Lower inflation does not suit the prudent public, especially if they do not carry debt or cannot control the rises in their income levels.
Government conspiracy or cock-up. Dunno. Either or both tags could be applied to the previous Government. Only time will tell.
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#101. muggwhump wrote:
"This is a long term problem, its not going to go away, and there is nothing that won't be thrown at keeping house prices inflated in the years ahead...whatever the cost."
Even at the cost of the whole Nations economy! This is madness in the extreme and we have to step away from the destructive precipice or we will truly experience another long depression like the 1870's (Which was founded itself upon overinflated property prices - so we have leaned nothing in 140 years!)
I think you are wrong as I am an optimist and I believe that in the end sanity will resume - if for no other reason the market will force interest rates up. And because it is the market it will be a uncontrolled surge in interest rates completely outside the control of the Bank of England and its hapless Governor.
Like the 1870's Long Depression the current malaise will end and the insanity of absurd (low) interest rates will reverse - but it would be better on all of us if we stopped digging the hole and started working towards a sane economy!
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Both sides of the coin have been well debated about the issues of raising the BBR or leaving it where it is - as Arma pointed out, it is a trap.
It is accepted that higher than average inflation is preferred over deflation. And with the imminent employment cuts I can understand why the BBR is not forcasted to budge any time soon.
So the strategy of keeping the BBR low is most defintely a 'plan' - it is part of the 'stimulus' to ensure the presence of inflation. But if they are protecting house values, negative equity, consequently individuals and banks, it sends a clear signal that the UK is still perilously close to a depressionary spiral and far from recovery.
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Let me understand this. The last administration has left us with:
1. No money
2. Inflation at a 20 year high (and unlike 1970s and 1980s completely different to our competitors inflations rates which are substantially lower)
3. Rising unemployment
4. The biggest peacetime budget deficit in decades
5. Public spending (as a percentage of GDP) at the highest since WW2
6. Tax take (as a percentage of GDP) substantially higher than at any time since the 1960s
And yet the Lab supporters still think GB/Darling have done a good job.
Personally I thought the interesting thing about the graph is how consistent the gap is between UK inflation and Euro inflation. Any analysis why UK inflation is consistently 2-2.5% higher than in Euro land?
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Post 105 John. I had forgotten about the 1870's and the Long Depression. May I congratulate you not only on that point but also a number of cogent comments on this particular blog.
It is on reflection a very apt analogy. It just reminds me that unless we learn from history we are doomed to repeat our mistakes.
The more I think about it the more I am convinced that the view from the Bank of England, no doubt supported by the previous administration, is that a little bit or inflation is a price worth paying to get them out of the hole we are in.
It is becoming increasingly clear, much like Liam Byrne's jokey note, that Gordon and Alistair sought to stay in power at any cost and hang the long term consequences.
The economy was reflated via QE, and we are starting to see the inflationary effect of that kick in. Also there was to be huge public sector spending to not only hold up the core labour vote and keep the unions happy but also to reward friends.
The Labour party see inflation as a good tool as it
a) will help reduce the size of the debt in real terms.
b) Will help reduce the real value of debts.
c) Punish savers and those with fixed incomes.
To use a huge wide brush here those with debts and mortgages tend to be at the lower end of the economic spectrum, younger and disproportionally labour supporters. Many people will have parents, like mine, whose mortgage and debt was reduced phenomenally by inflation in the 1970s.
Those with savings and living on fixed incomes tend to be more conservative and tend to be on average both older and more likely to vote conservative. If you don't believe me just look back at the polls and see the likely voting split by age.
The problem with inflation is like pandora's box once opened can have huge implications in lots of different areas.
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#11 >>But then again, this inflation problem is only temporary......
Exactly !! After all, life on Earth is "only temporary", having begun a mere few hundred million years ago !!
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"I know even the use of the word "coincidence" will send some of my regular correspondents rushing to their keyboards, outraged, once again at my naivete."
Do you mean us? - surely not, because every time I refer to any BBC reporters Naivete - I get moderated out!
"To be clear: I don't think there is such a plan. Cunning or otherwise. "
There's no plan? - Aaaaaaaaaaaaaaaarrrrrrrrrrrrrrrrggggghhhhhhhhhhhhhhhhhh!
At least I felt a little comfortable in the knowledge that this was a conspiracy to inflate our Government debt away, bailout the borrowers and penalise the savers - if this isn't the plan - then what the blue blazes are these suited monkeys in power doing?
"Mervyn King once again last week said last week that he thought inflation would fall back next year, which would imply that interest rates would stay low for a long time - even as growth starts to pick up."
Wearing a suit and acting like a fool is not an excuse for wrecking the Economy - did Merv not consider that QE and record low rates would actually work?
It seems to me there is no way out (if what you say is true Stephanie) - in that Merv engaged in QE thinking it won't work anyway (hence his surprise at the lack of deflation), meaning he doesn't understand the principles of QE and low interest rates and their consequences - or he mis-read the economy thinking deflation was the biggest threat and not hyperinflation through liberal use of the money press.
If in 5 years time you're sitting in smoking rubble wondering where it all went wrong - then remember the day when writingsonthewall stated.
You want financial collapse and social disaster - I bring you the combination of (any) Government, Bank of England and a population completely oblivious to it all
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#13 >>Mind you it looks like the ECB is going to have to do it in a big way to, given that the American Congress isn't at all happy with the IMF proposed bailout of Greece.
Well, there's no law that disallows the Americans from being unhappy, just so long as they stump up their share of the bailout funds. If they fail to do so, then their share of voting rights will be cut accordingly.
To paraphrase their "Revolutionary slogan" - No representation without taxation !!
BTW, the Chinese will probably be quite happy to pay America's share of the bailout funds *AND* get America's share of the voting rights !! The Indians will probably be quite happy to do the same for Britain !!
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#19 >>Oh and I'd guess Police Riot Shields bear the logo 'made in china'
I think the Chinese out-sourced that to Bangladesh !!
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The BoE were made independent and mandated to control inflation at around 2% by Gordon Brown. Maybe these instructions have changed with new tenants at No 10 and there is a new agenda on the table.
I would also point out that inflation isn't the demon many think. Low postiitve levels of inflation are welcomed for growth, slightly higher inflation is suddenly the floaty brown thing in the swimming pool.
Interest rates are staying low for one reason and one reason alone, to avoid debt meltdown, nothing to do with inflation, sterling value or inflate the housing index. Private debt is exceedingly high and the differential between the base rate and loan rates has increased significantly such that any move in the base rate will be catastrophic.
Remember; higher rates will also effect industry, all well and good raising the value of sterling but combine this with higher rates and it will tip many industries over the edge. Also, it will wipe millions in asset values off the balance sheets of certain institutions that are too big to fail and we can't have that can we, surely not.
You can whinge and moan all you like about your cash being worthless, your savings earning no return, effective pay cuts etc, none of it amounts to a hill of beans compared to economic catastrophe that awaits higher interest rates. You may argue that they will increase at some time so let's get it over with - not a good policy YET, rates will be very low for a prolonged period until private debt is either paid down considerably or affordable. How you make it affordable is a debate for a blog to yet to come but it is linked to JFH's passion for money and its value. It is not an option to raise rates and let the ensuing defaults revalue asset prices, it will leave a significant number of people "Credit Dead" for several years and all the assets will be acquired by the institutions that are too big to fail. In turn we will have another credit crunch dictated by lack of demand through affordability and fear so . As they say confidence is everything.
Finally, a comment to all disgruntled savers out there. You're not really in the equation here, you SAVE, that's no good they want you to SPEND, our economy is consumption driven, saving only benefits the saver (and a bank or two) not the economy. Painful to realise I know but that's how it is. You're going to spend it one day, so why not spend it now.
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It's not really inflation though is it?
The prices were driven up by exchange rates (see Renmimbi conversion) and tax hikes.
In the meantime the prevailing force is debt deflation as the money supply slows down, people struggle to pay off debt, and unemployment/underemployment shows no signs of improvement.
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113. At 11:21am on 19 May 2010, NorthSeaHalibut wrote:
"Finally, a comment to all disgruntled savers out there. You're not really in the equation here, you SAVE, that's no good they want you to SPEND, our economy is consumption driven, saving only benefits the saver (and a bank or two) not the economy. Painful to realise I know but that's how it is. You're going to spend it one day, so why not spend it now."
...and the fact this is totally unsustainable - isn't putting off the rainy day for a long time?
How can borrowers borrow - without savers? Currently all that has saved Japan from total meltdown is the savers instinct of the people. Take that away and we're plummetting into corporate slavery.
You, and the members of the Government may be happy to be corporate slaves - but I don't remember being asked if it was OK by me.
Also, your analysis (which is true) misses out on vital point - the moral hazard.
If you agree that it was excessive borrowing which led to this mess - and you agree that this is not a good place to return to - then why are we certifying the actions of borrowers by bailing them out and thereby encouraging them to do it again?
I agree that solutions are thin on the ground - but that's because all solutions involve monetary manipulation - which is limited.
Maybe it's time we looked beyond money.
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From Dec03 to Jan08 the CPI average was 2%
Since that date and for the last 27 months the average was 3%
There has been a recent tendency for September inflation CPI and RPI to be lower.
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23. At 7:01pm on 18 May 2010, MacHoolahan wrote:
None of this matters. As long as house prices don't fall, the BOE and the Government will be happy. The price of petrol, food, travel can go to the moon.
I repeat nothing else matters, just the housing market.
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In most Cases House prices cannot fall otherwise those repaying their Mortgages will fall immediately into Negative Equity, and placing yourself in this position on top of ALL the other movements that is Now beginning to reduce peoples everyday Life - Styles will only add to that feeling of hopelessness.
House Prices in many ways IS the only measure that is clearly in the hands of the individual, for since the Recession and throughout the price of Housing has not come down as far as expected.
While it is true that many First - Time buyers have been missing from the Market Place due mainly to the fact that Banks won't advance the Mortgage levels required, at the same time the General level of House Prices have remained high, and this trend will continue, if only for the Owners to enjoy some sort of feel good factor, and to show that it is indeed these same House Owners whom are really in Control of Property Prices, and not those sitting in the H.M.Treasury, or Estate Agencies,
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#76 John_from_Hendon. I offer no counsel (or council if you prefer) of despair. I am merely telling you what is going on and why it is going on. No-one has any intention of raising interest rates. Sure there will be adverse consequences - probably terminal, but they don´t care. That is just the way it is.
Reality must be faced, and it is those who refuse to accept reality that are the agents of despair. On this blog you can read comments bemoaning the attack on the "prudent." These people are being wiped out - so they are self evidently not prudent. Prudent people understand what is going on and take actions to protect themselves.
Neither you nor I can force the BoE to raise interest rates. That they are not going to raise rates is all that needs to be understood. No-one in their right mind would keep substantial cash balances in a rigged financial system. Removing yourself, to the extent that is truly prudent, from a rigged financial system is where the power of the individual resides.
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It is irresponsible borrowing and lending that has got this country into such a mess and yet it is prudent savers that are paying for the mess.
As well as plans to introduce new taxes on the banks, the government should focus attention on borrowers fund the national deficit. This should include individuals, companies and public bodies.
I support increasing VAT to 25 per cent where payment is made by credit card. Payment by cash, cheque, debit card and direct transfer should remain at 17.5 per cent.
Sorry borrowers, but those of us that save to buy things and save for our retirement are tired of funding your lifestyles.
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#38
"The inflation higher than 5% is indeed a dangerous development: In the background of your comparison stands the fact that the fundamental economic data of the Euro zone are still better than the UK and even US data - despite the Greek irritations. The UK´s deficit is too high, the urgent needed cuts stand against the generating of growth - a difficult act of balace!"
The UK situation is indeed difficult and I stand by my prediction, made several weeks ago, of a return to stagflation - inflation and low growth - which historically has been a UK speciality.
The 'Greek irritations' are just that, an irritation, or a storm in a teacup, given the tiny percentage (2.4%) of Greek GDP to EU GDP. Though the markets do seem to be getting a trifle excited but will probably get bored and pick on easier prey, namely Sterling.
The fundamentals of the EU and Eurozone are are a lot better than the UK, two examples being inflation and deficit (EU average of 6.8% compared to UK of 13% and rising), and export led growth will be helped in the EU by the devaluing Euro.
Rather clever of Clegg and the LibDems to pursuade Cameron that Euro entry for the UK in 2014/15 be kept on the table; I have this on good authority though for Party unity Cameron has to play this particular issue carefully.
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Does it matter if inflation comes back down again? The inflation we've had is still there; prices don't fall back, they just rise less quickly. How about a bit of deflation to even things out? Like we apparently used to have on and off before fiat currencies?
Isn't it about time the Beeb did a programme, presented by Flanders or Presto, looking at fiat currencies, how they came about, how they work over time, and why they aren't all just a big confidence trick?
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Post 113 NSH.
Your argument seems to be that a little bit of inflation is a good thing.
The crux is simple how much can it rise before it ceases to be "a little"?
The problem as far as I can see it is as follows.
1) QE has pushed a huge amount of hot money into the system which has helped stimulate the economy but at the expense of higher inflation.
2) There will be public sector cuts which will help to rein inflation by reducing demand. The question is how big will these cuts be and how soon will they start to take effect.
3) The MPC seem to think that there is a decent amount of slack in the economy which means that the economy can grow without inflation getting out of control.
I think that the MPC are wrong re point 3.
The rise in RPI will start to have an impact on wage demands. I don't think there is much spare capacity out there. Some of what there is has probably been lost for good and companies will remain reluctant to take on further staff until they believe that the recovery will be strong and long term. Much of this spare capacity will have been closed down, sold off or outsourced.
Also what businesses are likely to invest until they know the impact of the public sector cuts especially at the penal rates banks want!
If I owned a business why should I borrow GBP 1 million from a bank at a penal rate where I will almost certainly have to put up my house and huge amounts of assets as security when I fear that they could demand the money back or put up rates or cut my overdraft. If the last few years have shown us anything it is that the banks can't be trusted and it would be a brave businessman to look to expand at the moment.
Sorry to be negative but common sense says keep calm, keep your head down, keep working away and lets wait and see.
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At 10:26pm on 18 May 2010, mr_hag wrote:
Isn't it time we adopted the Euro?
Patience. It is a given by 2015/16. Strangely, I have a hunch that a Conservative administration will take us in. After all they took us into the EEC.
What else can we do. We have an unbalanced economy, an un-cuttable deficit, high inflation and very soon high interest rates. In short the UK economy is an accident in waiting.
The combination of high unemployment (all you need for this is a freeze on Public sector recruitment), inflation and high interest rates will make life very interesting.
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#107
"Personally I thought the interesting thing about the graph is how consistent the gap is between UK inflation and Euro inflation. Any analysis why UK inflation is consistently 2-2.5% higher than in Euro land?"
Stefanie does offer us a clue..
'It is also not entirely unrelated - after all, our fiscal plight is one reason why the pound has fallen so sharply, and why prices of imported goods have gone up.'
Average EU deficit is roughly half of UK deficit; despite the efforts of the PIGS to push it up. What people (pay attention Mr b) don't seem to grasp is that the 'main engine room' of the EU (Germany, France, Benelux, Italy) is relatively (context of the Western World economic situation) healthy, only the smaller southern countries are struggling; were it to be the other way round even I would be forecasting the end of the Eurozone.
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I think it was back in 1972 that the late Mr. Heath sort to prevent an increase in interest rates from eroding his support from the mortaged middle classes by forcing the building societies to flatten the rate of return to savers. We all know what happened next: inflation took off!
Now the same old reactionary forces have been up to the same old thing all over again and guess what? Inflation has taken off.
Those who argue above that a proper rate of interest is the necessary first step in resolving our difficulties are quite correct. That this is at variance with the majority preference is surely the most prescient argument for a return to a proper rate of interest. To argue there is no plan is insufficient: there is no wish for a plan because there is all this lovely cheap money sloshing around, asset prices are going up and imports are being sucked into the country.
Loadsamoney!
Why worry about economic recovery when we can have a lovely boom instead!
Sorry: but we have a serious problem encapsulated by Mr. Byrne when he apologised for there being no money left. There is no money left: only the monopoly money of QE and government debt. What do we do when all that is used up: print some more?
No way: things must change because they have to. It is best to embrace reality before it falls in on you.
Government spending cuts will be deflationary: could this mop up the inflation? Perhaps, perhaps not. Given that fuel prices are a significant measure of this inflation - and there are rumours that the margin between wholesale motor fuel prices and retail has been increasing - I do not perceive that any reduction in government spending would have any perceivable affect on inflation at all.
When QE was brought in early last year we were told that if inflation kicked in as a consequence then the Bank could easily mop up the excess cash through an increase in interest rates. Well, over to you Mervyn and your Monetary Committee.
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#119 TheHandsomeMan. What is the point of yourt post? If you are supporting irrseponsible borrowers and lenders and you don´t like it then stop supporting them. Where is the difficulty?
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#120 Richard Dingle. What fundamentals would you have in mind? How about 20% unemployment rate in Spain with over 1 million empty houses. Or perhaps you have in mind the Euros 70 billion that French banks have pushed into Greece, and the fact that France almost found itself unable to finance its own sovereign debt less that a fortnight ago.
Or maybe you are thinking of the thoughts of Karl Otto Pohl who is of the opinion that Greece cannot and hence will not ever repay its debts. Now I wonder where that will leave France and its banks? Even the Germans will have a hard time swallowing the 30-40 billion that its banking system has invested in Greece.
The only fundamental that matters is whether people take to the streets, and it looks like the south may come to the rescue.
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93. At 00:19am on 19 May 2010, BobRocket wrote:
#87. At 11:43pm on 18 May 2010, DevilsAdvocate wrote:
'69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.'
--------------------------
Thirded.
Fourthed
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Is it too sceptical for me to wonder whether the BoE would rather not raise interest rates to avoid gilt devaluation/sympathetic gilt yield rises when it now owns £200bn / a substantial proportion of the free float of gilts.
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So more misery for savers as the new government seems determined to keep the BoE rate as low as possible and let inflation creep up. Its virtually impossible to see even a return of half the RPI figure, even before tax.
Maybe it's an even more cunning plan to get more Joe and Jane Public's to put their cash into National Savings tax free RPI + x% fixed term bonds. They look just about the only deposit based investement that will provide a net 5%+ return.
I think we can all FEEL that inflation is starting to get a grip in the UK, but my employer, as a manufacurer, is finding it very difficult indeed to pass on any price increases in Eurozone countries to which it exports.
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114. At 11:47am on 19 May 2010, Oblivion wrote:
"It's not really inflation though is it?
The prices were driven up by exchange rates (see Renmimbi conversion) and tax hikes.
In the meantime the prevailing force is debt deflation as the money supply slows down, people struggle to pay off debt, and unemployment/underemployment shows no signs of improvement."
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That is easy two explain. First off GBP:
The deficit
Hung Parliament
Strong trade ties with EU
Despite weaker currency no real up take in Exports.
CNY:
Market priced in a possible revaluation.
You are not the only person to bang on about Irving Fisher, the man who claimed days before the ’29 crash “Stock prices have reached what looks like a permanently high plateau." Also that assets were not overinflated but should actually go much higher. Honestly when the first person mentioned Fisher to me as a source my brian automatically thought of Stanley Fischer. At least that would have been a decent source.
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I am still reading articles, even posts written by some bloggers that believe the following:
The primary purpose of quantitative easing is to stimulate the economy.
I quote from Stephanie Flanders | 17:40 UK time, Friday, 26 February 2010
‘The whole point of the Bank of England's quantitative easing policy - pumping money into the economy - was to boost growth in nominal spending and demand’.
It isn’t.
The primary purpose of quantitative easing is to keep the government funded when tax receipts are low and borrowing would cause a compound debt trap.
Just think logically, that’s all you have to do.
The Bank of England (wholly owned by the UK Government) has created money from nothing and given it to the Government, by ‘buying’ UK Govt debt, (gilts).
It has achieved this by sleight of banker’s hand, in that it has bought pre-existing gilts on the understanding that the GEMM will purchase new gilts (likely with a slightly better yield).
The reason why it went this roundabout route is simple. Section 104 of the Maastricht Treaty forbids a Government raising money from its own central bank (printing money).
Why does the Maastricht Treaty forbid this.
Answer: because the end product is inflation.
And what exactly have we now got……… Inflation.
But one should ‘always look on the bright side of life’
Those at the ECB that ridiculed the Bank of England at being complicit in this breach of the Maastricht Treaty, are now doing it themselves.
Which if nothing else, just goes to show that Uncle Mervyn was several steps ahead of them in working out how this financial crisis was going to pan out.
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Today Govt debt is the equivalent of a 3.5 x income mortgage on every private sector worker. If the unfunded public sector pension debt is included that becomes a 7 x income mortgage.
After taxes there is nothing left. No food, No mortgage or rent, Nothing.
Higher taxes, cutting public sector spending and pensions are to deal with the yearly deficit, the creation of further debt, but they won't get anywhere near reducing the existing debt.
Whatever Mervyn says, the plan has always been inflation. What else is QE but creating inflation.
I think hoping the markets are still as stupid as ever is a bit dicey. QE on govt wages and gambling by banks doesn't improve the economy.
But QE to pump private investment in UK business' for capital, training and employment together with physical infrastructure, add to it amending rules and regs that price out modern business models, this is what will make a difference.
The govt has a short period of grace. If they don't pull it off we can expect mass repossessions, banks collapsing, govt defaulting on it's guarantee of bank assets, mass unemployment and IMF loans.
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127. At 1:08pm on 19 May 2010, armagediontimes wrote:
#120 Richard Dingle. What fundamentals would you have in mind? How about 20% unemployment rate in Spain with over 1 million empty houses. Or perhaps you have in mind the Euros 70 billion that French banks have pushed into Greece, and the fact that France almost found itself unable to finance its own sovereign debt less that a fortnight ago.
The Euro-zone is made up of many countries so how about not cherry picking the worst examples to suit a rather worn and desperate argument.
'What fundamentals would you have in mind?'
I did actually cite inflation and average EU deficit.
I will add low (4.7%) unemployment in Holland and average EU unemployment of 7.8%.
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The "City", or in reality the banks, might try to frighten our new and inexperienced Chancellor into doing their will, just as they frightened the old Chancellor into bailing them out. But their threats to sell UK public debt to force up interest rates above the level thought appropriate by the MPC, are empty. If the banks were to do so, the BoE would simply buy up public debt to cancel out the effect of the private sales.
The resulting increase in the money supply would be to the banks' disadvantage because it would reduce the money and credit famine that the banks are exploiting, at the moment, by charging high interest rates for credit. The banks might move the money abroad, causing a depreciation of Sterling, but where to. Surely not the Eurozone, and the Federal Reserve would probably not wish to see further appreciation of the USD and would be willing to provide currency swap arrangements to prevent it.
Normal central banks, if they are willing and able to collaborate, can impose their will on currency and public debt markets. The euro is having a bad time because the ECB is not allowed to intervene as the BoE would be able to do.
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God, us students of economics are a miserable bunch aren’t we? I’m normally a massive cynic myself, but a lot of the comments posted in response to Stephanie’s article are a bit O.T.T. to say the least.
I do not believe the recent increases in inflation are a huge cause for concern – not yet at any rate. I am well aware of the time-inconsistency argument, the need for monetary policy independence and credibility. However, we need to put the current situation in context before judging the Bank of England. Stating that “inflation has been above target –ergo they have neglected their duties” is overly simplistic in my view.
Firstly, it is clear from the graph that UK and Eurozone inflation rates are moving together – it looks as if there is only one month (July 2009) where they move in opposite direction. Mervyn King can therefore feel justified in the sense that the current increase is not due solely to a lax monetary policy in the UK.
Of course, the cynics may point out that we have a higher inflation rate, and this is no surprise given their interest rate has been 0.5% greater. It could therefore be argued, if the Bank of England matched the ECB, then we would currently have lower inflation. This is undoubtedly true, but it is also worth noting that if we had done so earlier, we would have likely been significantly below target for longer than we have currently been above it. Also, whilst we would have a lower level, Stepahnie’s graph suggests the momentum would still be in an upward direction.
More pertinently, monetary policy does not act instantly. If the current data the Bank of England suggests that inflation will fall back without their intervention over the next few months, then an interest rate hike now could potentially be really damaging - in a couple of quarters down the line when they start to bite. Doubtless central to the thinking of the MPC will have been the new government’s pledge to cut spending immediately, which is likely to have a much more rapid effect on macroeconomic demand. If this turns out to be true, the Bank of England will have been proved to be right, and their credibility will be undented – even though at the moment it may superficially appear they are doing little in the face of rising inflation.
As for people who think that the sky is going to fall in because RPI inflation is at 5.3%, then I would suggest they look at a graph that stretched back to the 70’s – the current rise will barely register on the scale. Let’s be clear – I think it is right that we have a target lower than the current level for when times are good: inflation tends to have a high level of persistent, and keeping it down when you can makes it less of a problem when things go wrong. However, to over-react to a few months of higher than expected price rises would be folly in the current state of economic affairs. Re-setting the target might also be more damaging to credibility if this is perceived to be moving the goal posts. I believe the calm approach they have adopted is therefore the right one. This is especially true given that inflation is not generally higher in value, but also more volatile – the risk of deflation in the medium term is still very real. This being said, if the current rises continued at this rate for much longer the situation would naturally have to be reassessed.
The bottom line is the budget deficit is by far the more worrying concern. Thankfully, it looks as if the markets realise this and that is why they have barely batted an eye lid at the MPC’s decision not to raise interest rates.
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This comment was removed because the moderators found it broke the House Rules.
16, 23, 36,
True, it's all about house prices.
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The Chancellor's reply to Mervyn King (that housing costs need to be added into CPI) implies (effectively) a change to the 'set point' for controlling inflation.
As any engineer knows, an automatic control system reacts quite dramatically to a chage to the 'set point'. So expect interest rates to kick upwards quite soon.
A change in V.A.T. to 20% would have a similar effect.
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#134 Richard Dingle. Yes the eurozone is made up of many countries, the biggest of which is Germany.
It would appear that the Germans are preparing to deal with debt in their own particular way.
http://ftalphaville.ft.com/blog/2010/05/19/236066/germanys-plan-to-deal-with-budget-transgressors/#comment-1024828
So it would appear that the Germans do not share your unbridled love of the eurozone. Now who might be more influential in this debate you, or the German state?
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SF the inflation charts and the fact that the Governments fiscal forecasts have been consistently wrong would indicate to me that the treasury models are seriously flawed and the permanent secretary to the treasury on a salary of £250,000 should surely be in line for the tin tack if not why not.
Similarly Merv the swerve is still in a job why.
His objectives were not only to keep inflation below 2% which he has failed to do but also to maintain sound money through effective management of the money supply - his supplementary objectives were at one time stated on the BOE web site but disappeared a couple of years ago - I wonder why ?
I would suggest that the Governor of the BOE and the PS to the treasury have both failed to meet their primary objectives .
Rather than George Osborne creating another quango wouldn't it have been better to sack the top tier of management in the treasury and the NAO starting with the PS on the basis that they have clearly not operated in a independent and non partisan basis and that they clearly have been complicit, if not in allowing this mess to develop at least in covering it up.
Are we surprised that UK inflation is higher than our European partners? Surely the whole point of QE and near zero interest rates - was to increase the money supply and hence devalue in real terms but not in nominal terms both assets and money, with the consequent fall in the pound against the dollar and the Euro.
With the dollar price of oil increasing, the pound falling and the UK being a net importer of oil and gas I would think that the current inflation rate - what ever Merve says in his letter - was a matter of policy not extraordinary unforeseen factors
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Your news and blog are very useful in the classroom, Stephanie, but last night on the BBC News you did say that the RPI index includes house prices, which of course it does not (it's mortgage interest repayments). Hope this was just a one off slip!
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With regard to a number of posters advocating interest rates to increase and house prices to fall can I pose a couple of question.
If you accept that the economy is in a fragile state how would this help? If inflation is running at something between 3.5 and 5% and there is a pay freeze in the public sector for two years and the private sector holds pay increases to between 0and 2% this represent pay cuts for the majority of workers in the UK and unfortunately as a result of the previous governments mistakes this is the choice we have either pay cuts across the board or much higher levels of unemployment. To achieve the the same effect with inflation running at 1.5 to 2% would require much higher levels of unemployment or real monetary pay cuts which are almost impossible to implement particularly in the public sector.
There is no doubt that those that hold cash on deposit will loose value but why do you believe that leaving your money in a bank should generate higher levels of interest. Given that your deposits are guaranteed by us the tax payers you are exposed to zero risk - it would seem to me that it is perfectly equitable that if there is zero risk to an investment you should expect to receive near zero interest.
If you want to improve your returns invest in businesses directly - of course there is higher risk but the idea that there should be a zero risk investment with high returns just does not make sense. Of course if you all decide to withdraw you deposits and start to invest in higher risk investments the banks will of course increase their rates but not while you all just bang on about it but do nothing.
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It's not really about money, is it? It's about consumption.
Britain is a consumer society. Our whole economy is based on providing two things: (1) elaborate ways to borrow money and (2) big shops full of stuff from China to spend it on.
As soon as we stop doing one or both of these things, the wheels fall off.
That's the problem with capitalism: we can't all be winners (unless, of course, you're a bank that's 'too big to fail', in which case you can be rubbish and still get bailed out). Every now and then the music stops and you just have to hope you're not the one standing up when it does.
No doubt I'm naive. But I can't help thinking that, if we all spent a bit less time worrying about not being able to buy as much stuff as we used to, and a bit more time making and growing things that are worth having, we'd all feel a lot happier.
Let's face it: consumption-based capitalism is a tough game. Most of us are a bit too nice to make a go of it.
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I am confused with your position on this Stephanie. First you say the Government is inflating the debt away:
"As I said in that earlier post, every percentage point rise in the cash value of our economy makes it a little easier for the government to bring down borrowing as a share of GDP.
Tax revenues go up, even if real growth has not - and fixed spending totals end up looking smaller, both in real terms and relative to the overall economy."
Then you say this is not part of the Government's plans:
"I know even the use of the word "coincidence" will send some of my regular correspondents rushing to their keyboards, outraged, once again at my naivete. In their view, this all part of the authorities' cunning plan to inflate away the debt.
To be clear: I don't think there is such a plan. Cunning or otherwise."
So which is it? You seem to argue for an inflationary solution, but then say it is not part of the Governments plans, and this is some big coincidence. What about QE? Did some data-entry clerk at the BoE just slip on his keyboard and accidentally add 200 billion to the balance sheet?
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I want house prices to crash, interest rates to rise through the roof, share holders to be wiped out, bankers to be burnt at the stake, the smug middle classes to be reduced to begging on street corners and the rich to be asset stripped and then forced to leave the country on small leaky boats. I'm fed up of being a reasonable person. I'm fed up of those who attack the poor in society and propose the same sort of ideas as these on their side of the argument being taken seriously. Off with their heads!
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#140
"So it would appear that the Germans do not share your unbridled love of the eurozone. Now who might be more influential in this debate you, or the German state?"
Excellent plan, though needs to be ratified.
The Euro is Germany's currency and as such they will do anything to protect it. Seems logical.
The Euro currency is more important than the Eurozone; members will come and go.
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Well economy watchers - here we have the US with a 'surprise' fall in prices:
http://news.bbc.co.uk/1/hi/business/10127615.stm
...and here in Britain and Europe we face bouts of inflation. Pound and Euro devalue, 'flight to safety' takes capital to America, next thing you know is that prices have fallen in the states - possibly due to their strengthened currency reducing the cost of imports (note 'lower fuel costs' was cited as a reason)
International monetary equilibrium anyone? Is anyone really surprised that if you hammer the scales down on one side of the Atlantic the result is a jump upwards on the other?
...but these scales are multi-faceted, we must include the effects of Japan and China in this story - both of whom are throwing huge efforts into currency stabilisation.
For every action, there is an equal and opposite reaction. This is why we get worldwide volatility and the more intertwined the world becomes financially - the worse the effects are.
Next the US will probably lower interest rates and print more money to stave off their biggest fear - deflation. Meanwhile we shall see the effects here with a jump in sterling and the Euro (although not by much).
Obama's concern for Greece summed it up last week - he doesn't care two hoots about the Greeks - he's just concerned what the effect of a Euro collapse will have on his currency and his export market.
The collapse of the worlds biggest property deal last month in New York (What do you mean nobody on the Beeb even mentioned it) - is the first signs of a CMBS collapse in the states - this will require more financial intervention (or should it be invention) and the consequences of those actions will be felt worldwide again.
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If I was a UK bank I'd have rid myself of MBSs and loaded up on CDS for my fellow UK banks and the UK govt.
We are the mother lode. Sorry guys but it's true.
The un-sustainability of our govt debt, our unfunded public sector pensions, our ridiculously high income multiple mortgages. We haven't a hope of paying it all. And inflation, it can't happen quickly enough. It's simple, we're broke, our banks are broke, many of our people are broke, our central bank is broke.
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No sooner do I mention Japan and the IMF are right in there....
http://news.bbc.co.uk/1/hi/business/10127279.stm
A consumption tax - on a country with diminishing internal savings and a currency devaluing faster than anyones?
Are you trying to go for the theoretical model of an 'export only' country - with no internal demand and no imports?
Take not people, the Japanese elected a new prime minister who had ideas of 'change' and 'coordination' to bring their Economy out of the wreck it is.
....and now he's a lame duck, not supported by his own party and floundering in the panic he resorts to his only saviour - money printing.
Japan is going to teach the world a lesson on 'how it will end'. I've lost count of the number of people who claim Japan is a 'powerhouse' Economy. - Well it's not, it's broke and so is the rest of the world.
However, broke in monetary terms we may be - but this is just a problem of measurement - rich in resources we are still - and it's time to detach the essence of money from our Economy - it serves no further purpose.
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144 tao-das
I think inadvertently you have put your finger on the nub of the problem. Currently money has no value other than as a means of exchange and it is even losing that value at the rate of around 5% a year.
This however is topsy-turvy as without value money becomes worthless. Hence the move into assets and gold. This is not a recipe for economic recovery and growth: we just all get poorer.
The argument to invest cash in a commercial ventures is a good one. However, nobody is going to that in an atmosphere of uncertainty where that wonderful word `confidence' is missing.
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147 Emily:
"Off with their heads"
_____________________
'ear 'ear, luv!
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#145 "Let's face it: consumption-based capitalism is a tough game. Most of us are a bit too nice to make a go of it."
Good point, or rather two points. First, it really IS a game. It's rules are completely made up, changed regularly and could be completely different. Second, that most of us are 'a bit too nice to make a go of it'. I would also add that the VAST majority of the population don't have the first clue what the rules are so couldn't take advantage of them even if they weren't too nice to, plus they start off with such a bad hand in the game that, even if they knew the rules and weren't too nice, they'd still have no chance.
Some might say 'well that's life', but I really don't think it has to be.
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Richard Dingle
Unfortunately you are unable to see the wood from the trees with the Euro, having previously stuck your neck out on it
The Euro is in trouble, and Germany and France are of different opinions on it
You called it a storm in a teacup time after time, when it was obvious to me, and anyone without your Euro tinted glasses that it won't work, and it is not working
You now say the Euro is the most important aspect, and members will come and go
Well, you abused and mocked me when I said that this could be the outcome
What has altered your mind?
Germany has only ever been interested in Germany
This is a truth, of such profound meaning, that it should never be forgotten
The reality is that the euro was a stupid idea in the beginning, and remains stupid now
The pain is being felt by unemployment levels all over Europe, particularly Spain
As I have said all along, thank goodness we weren't stupid enough to join
You said that Euro and Sterling would be at parity by now, and that the Euro would replace the dollar
I can't resist pointing out that I said this was a foolish opinion then, and is a foolish opinion now
The only chance of Euro surviving is to have a two tier system, with Germany and the Benelux countries in the core, and the remaining countries in the second tier
Your comment about the Euro remaining an option for the Conservative Government is simply one of your world famous 'funny comments' ...not particularly funny, and very wide of the mark
Rather like the Euro
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81. At 11:08pm on 18 May 2010, John_from_Hendon wrote:
#55. Kevinb
You say why "bother raising interest rates" -
here some reasons why:
1. because of the hugely damaging effects on asset price inflation that will create irresistible wage inflation and decimate British competitiveness.
2. because a working economy needs savers to be adequately rewarded.
3. because banks have been borrowing at quite high rates in the last couple of years on longer term borrowing based on the assumption that interest rates will rise soon - if rates do not rise soon these banks will suffer enormous financial strain - and the state (i.e. we) will have to bail them out.
re point 2 above - of course the reason why rates are not higher now is the economy is absolutely bust and we are most probably just at the start of a long crushing depression. If we were not in this position, the Bank would have raised rates. Zero or negative interest rates show us that the economy is in fact dead and not recovering. The Bank is reflecting the appalling economic reality (which as an optimist I was hoping had already improved.) Your are on the other hand looking like a pessimist - buying you face in your hands.
In economics when all seems impossible the contrarian philosophy often works - like Keynes did - do the opposite of what seems the only thing possible to do and then the economy recovers. So put up rates now because it is the opposite of what the prevailing orthodoxy says the data tells us.
I utterly disagree with you
Increasing interest rates will not reduce inflation, and as such is not a good option at all
It will cause the economy to cool down even more, and will create further difficulties, immediately and downstream
It will also fail to encourage anyone to save
Once the scale of the scorched earth policies followed by the inept previous government is truly known, we will have even less room to move
I notice that you are very vehement in your opposition to Mervyn King, yet never have a bad word to say about Gordon Brown
I wonder why that could be?
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78. At 10:35pm on 18 May 2010, BobRocket wrote:
#63. At 9:56pm on 18 May 2010, Kevinb wrote:
'56
What tosh'
Kevin, there is more than a word of truth in what that poster says, Arthur Scargill (much as I despised the man) also told an unpalatable truth and was villified for doing so, only to be vindicated by history.
Think about what those in power are doing, not what they are saying, actions speak louder than words.
I have looked again, and it's still tosh
Please could you tell me where the word of truth is, so I can look again
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97. At 07:03am on 19 May 2010, StopFiddling wrote:
#55 KevinB is a good argument but #81 John-from-Hendon is the effective counter argument.
At the end of the day the BoE is supposed to set interest rates to meet an inflation target. It has consistently failed because it has misread temporary signals that become permanent, and seems to have an eye on the wider goal of preventing a house price collapse.
KevinB makes a good case that raising interest rates would not lower inflation. I disagree. A percent point rise would strengthen the pound which would lower inflation in an instant.
Given its consistent record for failing to target inflation, you can only assume that the over-riding aim is house price support in the name of economic stability. IS this what the BoE should be doing?
Hi
In the current turbulent times on the currency markets, even if interest rates were increased by 1%, it would not have the textbook effect on Sterling, so if this is your reason for disagreeing with me, then I don't think that you find that it would work
The very reason I believe that interest rates shouldn't and won't increase for the remainder of 2010, and possibly even all of 2011, is that the upside is guesswork, whereas the downside is pretty much a known factor, ie it would cool the economy down, when public sector pay will be frozen, or will rise very slowly, private sector pay is rising by next to nothing, and the absurd overspending by the previous government is about to be slowed down
Whichever way you cut it, there is no case for raising rates
Obviously there is a point of view, which I can see, I just disagree with it
In fact, I still think inflation will work it's way out of the system over the next 12 months, and get back down under 2%
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82. At 11:11pm on 18 May 2010, Mark Lacey wrote:
I think there are several missing ingredients in this discussion which is highly significant to our current economic problems.
1. Most if not all of our gold reservses have been sold and this leaves any future govenment very limited ability to intervene in the market to support the value of the pound. Traditionally gold is used in time of crisis to buy back some of your own currancy to restore it market value. In better times currancy is used to buy back gold and restore your reserves.
2. Thanks to the policies of our previous two prime ministers, our manufacturing and agriculture industries are almost dead. Somehow neither of them seemed to realise than wealth needs to be created by actually producing something with marketable value.
Unfortunately our current inflation and interest figures are merely symptoms of an unproductive economy.
It's time to put the country back to worthwhile employment and give back to our people their dignity and something to go for.
Mark
We didn't sell all the gold, just about 55%
We are still the 6th largest manufacturing country in the world, although manufacturing has dropped by 11% since 20005
I agree with you that it is bleak, although slightly less bleak than you suggest
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151. At 5:00pm on 19 May 2010, writingsonthewall wrote:
Japan is going to teach the world a lesson on 'how it will end'.
-------------------
So it is and let's hope that Japan will also show the world how it could begin, with a Resource Base Economy and the Power of Technology.
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There are many and varied comments about inflation on here but the simple facts are the control of our inflation is dependent on the oil price and our $ exchange rate. Or is that too simple?
Crazy things are still around... take coal. In 2008 we produced 17.9 million tonnes and imported 43.9 million tonnes! Why are we importing coal? I can understand some special cokes perhaps but importing more than double the amount we produce? It does not make sense. So whilst we are building our "green" energy revolution can we invest in producing more coal for a decade or so?
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#111 >>The prices were driven up by exchange rates (see Renmimbi conversion) and tax hikes.
Actually, the RMB( or CNY, as it is now called) is not a very good yardstick since it is more or less "pegged" to the USD !! A better yardstick is the SGD !! It was SGD 2.2 to 1 quid before Christmas; now it's SGD 2.0 to 1 quid !! This means that the QuEasy Quid is worth less and less when compared to other more stable currencies !!
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"Interest rates cannot be raised since to do so would cause asset prices to crash which in turn would cause banks to crash. So that is not going to happen. No-one is ever going to admit this so they will simply make up a range of implausible and increasingly unbelievable explanations as to why interest rates need to remain at zero."
Exactly, and Flanders knows this, and finds it increasingly hard to hide it. It's disgusting that the MSM, and BBC, have to hide the facts from us thinking they are serving the nation. They are merely postponing the crash, and making it ever bigger while doing so. Steph, be honest.
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#155
KevinB, would you care to introduce some facts into your anti Euro diatribe.
A 'fact': verified information about past or present circumstances or events which are presented as objective reality
I have previously listed unemployment figures for March 2010 in the Eurozone which range from 4.7% in Holland to 20% in Spain. The average for the Eurozone is the same as that for the UK. These are facts.
Inflation is consistently lower, interest rates are steady and low (not as low as the Mickey Mouse UK rate which is set to rocket), in France, Germany and Italy the Eurozone has the three biggest export engines in Europe (the UK is not even fourth) and the Euro is used by 300 million Europeans. These are all facts.
The countries in the Euro experiencing 'problems' represent only a tiny part of EU GDP; another fact. Storm in a teacup is a very fitting description; not a fact but an opinion.
The Euro is still stronger against Sterling than it was 5 years ago; another fact.
In short the prognosis for the Euro is much rosier than that for Sterling as we shall soon find out.
Apologies for all these facts that get in the way of your prejudice.
Facts please not diatribe and waffle.
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#117 >>In most Cases House prices cannot fall otherwise those repaying their Mortgages will fall immediately into Negative Equity, and placing yourself in this position on top of ALL the other movements that is Now beginning to reduce peoples everyday Life - Styles will only add to that feeling of hopelessness.
If you think a reduction of life-style will lead to a feeling of hopelessness, then you ain't seem nothing yet !! When the IMF stormtroopers march in, it wouldn't be just a feeling of hopelessness !!
This sound so typically like the malaise affecting our economy - we want our spend, spend, spend life-style and we don't care where the money is coming from. Keep up the inflation and the deficit and massive debt and it will soom be forcefully made known where the money is coming from when there's no more coming from them !!
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11. At 5:24pm on 18 May 2010, MrTweedy wrote:
One cannot inflate away one's debts unless incomes and profitability increase in line with inflation.
The problem is, however, that inflation erodes Britain's global export competitiveness, as UK based businesses experience rising input costs which:
(i) Reduce UK business profitability, which reduces the tax-take along with it; and/or
(ii) Increase the selling prices of British exports as UK based businesses try to maintain their profit margins, which unfortunatey then offsets the benenefit of the sterling depreciation.
Of course, UK businesses can overcome the problem by moving their operations to lower cost economies abroad. This will cause UK unemployment to rise. To counter this, UK workers could offer to take another cut in salary, but who wants a reduced salary when the cost of living is rising.
But then again, this inflation problem is only temporary......
----------------------------------------------------------------
How do you work out that inflation is only temporary? Are we seeing an attempt at creating yet another Modern Urban Myth: if inflation is at 0% in May 2011, then there is no inflation? Is not the inflation prior to May 2011 still inflation and still there?
Does not your opening sentence depend on everyone being on exactly the same income, whether an individual or business, and to be involved in making 'things' rather than investing in assets or buying and selling assets?
Someone earning £200,000 is likely to have some disposable income and savings accrued from that level of disposable income in the past. Even if their income is flat for several years, they can invest in debt to buy assets which is paid off with future earnings which have lost value. If the asset appreciates - ie. land, property, commodities, then they make additional gains. And if their economic power extends to increasing their income, they make even bigger gains. That option is not available - or not available at a scale to make it worthwhile - to someone who is earning £20,000 a year.
In between those two challengeable statements, you have one with which I fully agree. We are on the way to becoming the poor of the first world.
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147. At 4:10pm on 19 May 2010, emily wrote:
"I want house prices to crash, interest rates to rise through the roof, share holders to be wiped out, bankers to be burnt at the stake, the smug middle classes to be reduced to begging on street corners and the rich to be asset stripped and then forced to leave the country on small leaky boats. I'm fed up of being a reasonable person. I'm fed up of those who attack the poor in society and propose the same sort of ideas as these on their side of the argument being taken seriously. Off with their heads!"
I think I'm in love.
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164
You are so in love with the EU and the EURO that you just can't see or accept what is happening
FACT
I am not prejudiced, just able to see the disaster it would have been had we joined
Rather like saying I am prejudiced about my house being on fire
No
Just bright enough to see my house being on fire would be stupid, rather like joining the euro would have been
I notice, also, that you do not deny making the parity comments, and Euro replacing the Dollar comments
Or abusing me
FACT
If you think that what is happening to Greece is not damaging the Euro then you are either deceiving yourself, or are not able to understand
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#119 >>I support increasing VAT to 25 per cent where payment is made by credit card. Payment by cash, cheque, debit card and direct transfer should remain at 17.5 per cent.
And it will cost double the tax take to administer just such a complex system !! This is exactly how the previous government got itself into such a mess by issuing masses of dictats, initiatives and brilliant ideas without any thought about the costs and consequences of those, often contradictory, dictats, initiatives and brilliant ideas !!
This system was tried once when VAT was split between 8% and 12,5% (if I remember rightly) and it was so onerous to the small businesses and shopkeepers that there was nearly a revolt !! And you want to bring this silly system back ??
Truly, those who do not learn from history are doomed to repeat its failures !!
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166 Uptosnuff
He was being sarcarrrrrstic, as they say
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#121 >>Isn't it about time the Beeb did a programme, presented by Flanders or Presto, looking at fiat currencies, how they came about, how they work over time, and why they aren't all just a big confidence trick?
Just a quick summary - people who carry around large sacks of gold tend to get knocked on the head unless they are heavily guarded, which cost them more gold. Paper money reduced the weight you have to carry around.
I would like to see you carry a few hundred kilos of wheat into a shop to barter for an MP3 player !!
Thus arose fiat money !!
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#122 >>Sorry to be negative but common sense says keep calm, keep your head down, keep working away and lets wait and see.
Alternatively, keep your money where it wouldn't be affected by this inflation; like a "safe haven" perhaps !!
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167. At 7:10pm on 19 May 2010, NorthSeaHalibut wrote:
147. At 4:10pm on 19 May 2010, emily wrote:
"I want house prices to crash, interest rates to rise through the roof, share holders to be wiped out, bankers to be burnt at the stake, the smug middle classes to be reduced to begging on street corners and the rich to be asset stripped and then forced to leave the country on small leaky boats. I'm fed up of being a reasonable person. I'm fed up of those who attack the poor in society and propose the same sort of ideas as these on their side of the argument being taken seriously. Off with their heads!"
I think I'm in love.
LOL
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#128 >> 93. At 00:19am on 19 May 2010, BobRocket wrote:
#87. At 11:43pm on 18 May 2010, DevilsAdvocate wrote:
'69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.'
--------------------------
Thirded.
Fourthed
Oh *NO* !! That would be terrible !! Think of all those VAT forms you have to fill up before you can get any "service" !! Puts a serious *damper* on things, old chap !!
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#132 >>Those at the ECB that ridiculed the Bank of England at being complicit in this breach of the Maastricht Treaty, are now doing it themselves.
Can't blame them, you know. Previously, they had not seen what a wonderful way it was to fudge the books. Now that someone is doing it, they'll all join in the fun !!
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#139. At 3:02pm on 19 May 2010, Chris wrote:
"The Chancellor's reply to Mervyn King (that housing costs need to be added into CPI) implies (effectively) a change to the 'set point' for controlling inflation.
As any engineer knows, an automatic control system reacts quite dramatically to a chage to the 'set point'. So expect interest rates to kick upwards quite soon.
A change in V.A.T. to 20% would have a similar effect."
Cracking idea, house prices are going to fall soon when the market is flooded with repo's. That should hold inflation in check.
My feeling is there's a hiddden agenda with house prices I can't quite put my finger on. It doesn't take a genius to realise prices can't rise indefinitely, price falls would be very unpopular with Joe Public but a static market would be really useful. Despite the housing bubble continuing apace the constant vibe from lenders, estate agents etc is that "We expect house prices to level out soon and remain flat for quite a while." Is this forlorn hope, political pressure or realistic forecasting. Static property market would be a blessing for government allowing inflation to let (realistic) asset values to play "catch up" with the inflated housing market. So are we being told housing prices will level out because they might do, should do or WILL do if they tell us often enough.
I have my consipracy theory head on.
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#168
A clear indication that you really do not differentiate between fact and opinion.
'If you think that what is happening to Greece is not damaging the Euro..'
Obviously it is not good but keep a sense of proportion. The countries involved are peripheral and due weight needs to be given to the shaky state of the Western economies. A bit of devaluation will improve the outlook for Eurozone exporters.
Speculators will now move on to Sterling or the Yen.
When (it never ever was an if) we join you will begin to experience the benefits.
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#135 >>Those at the ECB that ridiculed the Bank of England at being complicit in this breach of the Maastricht Treaty, are now doing it themselves.
And with what, pray tell, will they buy up these debts ?? More QuEasy Quids to pump up inflation and devalue the Sterling ??
>>The euro is having a bad time because the ECB is not allowed to intervene as the BoE would be able to do.
Except the BoE either can't because their cupboard is barer than Mother Hubbard's !!
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177. At 7:41pm on 19 May 2010, Richard Dingle wrote:
#168
A clear indication that you really do not differentiate between fact and opinion.
'If you think that what is happening to Greece is not damaging the Euro..'
Obviously it is not good but keep a sense of proportion. The countries involved are peripheral and due weight needs to be given to the shaky state of the Western economies. A bit of devaluation will improve the outlook for Eurozone exporters.
Speculators will now move on to Sterling or the Yen.
When (it never ever was an if) we join you will begin to experience the benefits.
You really are quite deluded
Greece, Spain, Portugal, Ireland, Italy
Hardly peripheral
We will not join, a further delusion
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#136 >>God, us students of economics are a miserable bunch aren’t we?
Perhaps a strong argument for a few less "students of economics" and a few more people with grease on their hands and faces !!
>>Thankfully, it looks as if the markets realise this and that is why they have barely batted an eye lid at the MPC’s decision not to raise interest rates.
They will also not bat an eyelid when they individually evaluate the British economy as below the AAA rating !! While everyone here is bemoaning about the need for growth, China is suffering from a surfeit of FDIs (Foreign Direct Investments) !! I wonder why people are so eager to chuck their money at China and not at Britain ?? Answers on the back of a postage stamp, please !!
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#176
"Despite the housing bubble continuing apace the constant vibe from lenders, estate agents etc is that "We expect house prices to level out soon and remain flat for quite a while." "
Estate Agent speak for 'mother of all crashes just around the corner'.
Odds on that interest rates will rocket and unemployment will soar (employment freeze in Public sector makes this likely), with little or no growth.
There has to be an argument for buying property to live in rather than as an ATM machine. Property inflation is no less a scourge than other types of inflation.
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I too join the emily fan club. Try this....
http://www.scribd.com/doc/30570224/Danny-Dorling-Presentation-to-the-RSA-April-2010
Here are a few gems from his presentation:
A third of families now contain someone suffering from depression
A fifth of adults in UK and US are serial debtors
A seventh of children in affluent countries are found "simple limited or simple at learning"
We have a 13.8 multiple from poorest 10% to richest 10%. One of the highest in the developed world and catching USA quickly.
Indeed emily, 'ear, 'ear, 'ear....
And also not only legalising brothels and marijuana also let's buy the Afghan poppies saves the services a job!
Ine
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93. At 00:19am on 19 May 2010, BobRocket wrote:
#87. At 11:43pm on 18 May 2010, DevilsAdvocate wrote:
'69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.'
--------------------------
Thirded.
Fourthed.
Fifthed...
But we could do so much more - legalise, and tax, ALL narco products - if our great leaders weren't so stupid.
Drugs is the biggest business in the world (much bigger than oil) but what do we do with it? We hand over exclusive distribution rights to the crimminal fraternity! What a great idea! Rather than tax it as we do with booze and fags we invite Mexican cartels and Taliban insurgents to do the work for us.
No amount of moral preaching is ever going to stop human beings from using substances that make them feel better, as history has long proven, so why not take advantage of the fact and end the financial crisis now?
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#144 >>If you want to improve your returns invest in businesses directly...
Or go risk-free and buy gold !! So long as the developed nations are in the mess they are in, gold will hold its value !!
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Post 172 I have previously suggested Switzerland as safe bet for cash and assets.
The only problem I have is I don't have enough of either to make it all worthwhile.
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155. KevinB
Kevin, The euro was/is not the cause of Spain's dreadful level of unemployment. It was the housing bubble (sound familiar?).
That, and ludicrous 'Spanish practices', will conspire to keep it dreadful for a very long time to come.
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#145 >>Let's face it: consumption-based capitalism is a tough game. Most of us are a bit too nice to make a go of it.
It's not consumption-based capitalism that tough; it's excessive consumption *without* the means to pay for it that's tough. It's simply a maxed out credit card !!
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185
You could buy Swiss Francs
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#147 >>....bankers to be burnt at the stake...
Oi !! Oi !! This is strictly verboten according to the EU regulations on clean air !! Please think of the pollutants being poured into the atmosphere by all that burning !!
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186. At 8:14pm on 19 May 2010, ElEnfadado wrote:
155. KevinB
Kevin, The euro was/is not the cause of Spain's dreadful level of unemployment. It was the housing bubble (sound familiar?).
That, and ludicrous 'Spanish practices', will conspire to keep it dreadful for a very long time to come.
I didn't say it was the cause
However, they have no room to do anything, and being in the Euro is worsening their plight considerably, and unemployment rising now, is part of that plight
Spanish economy is 5 times bigger than Greece's
It is going to get very much worse
Blaming it ALL on the housing bubble is absurd, although obviously it is a factor
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At best the government/MPC are incompetent, many many of us predicted the financial crisis back 2005 to 2007 and many more predicted high inflation from the highly inflationary monetary policies from late 2008.
Brown, King, Obama, Bernanke, Greenspan and even Flanders/Peston ... if you couldnt see what was coming you were not competent enough to do the jobs you were/are doing.
In reality I doubt the govt/central bankers have simply "not realised" Zero Interest Rate Policy & QE would lead to inflation ... as ZIRP & QE is inflation. No plan to do this my backside.
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A few more Dorlingisms..... this guy is great .... recommended reading...
http://www.sasi.group.shef.ac.uk/hguk/fig6_2.htm average earnings per year per Barclays customer in 2003 in the UK
http://www.sasi.group.shef.ac.uk/hguk/fig6_7.htm proportion of adults functionally illiterate in the UK map.
and compare http://www.sasi.group.shef.ac.uk/hguk/fig6_6.htm levels of poverty in the UK map.
And now tell me that education isn't linked to poverty and isn't linked to lack of wealth. Scary for some areas as more than 20% of adults are functionally illiterate! See how your county/region fares on the maps above.
Memo to DaveNick - invest in teacher's who can teach people to read so they know how to vote for you both in five years time!
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192
On Question Time recently Heseltine said Education was the top priority
It s very scary if the maps are correct
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#192
Dorling also points out that equality is greater in Germany than the UK.
In Germany fee paying schools, though protected by the Constitution, are prohibited by law to pay teachers more than the equivalent grade in a state school, consequently they are effectively marginalised. They have one of the best education systems in Europe which is a major driver of their economic success.
There is a link. The biggest failure of 13 wasted years of New Labour was not dealing with the issue of private fee paying schools. It continues to be a major driver of inequality and poor social mobility. What does it say about a modern country in the 21st Century that only 7% of children have a first class education and the rest travel second class.
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#183. At 8:07pm on 19 May 2010, ElEnfadado wrote:
93. At 00:19am on 19 May 2010, BobRocket wrote:
#87. At 11:43pm on 18 May 2010, DevilsAdvocate wrote:
'69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.'
--------------------------
Thirded.
Fourthed.
Fifthed...
Sexed........sorry, damn, I mean SIXED.
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Sorry to come late to the party
Using the RPI index (can't be bothered to calculate the alternatives) the April figure gives an annual chage of +5.3%
This is of course historic.
Guess what (or work it out) the latest trend figures are for say the last three months?
An annualised increase of +8%
The RPI figures as published give where inflation has been - for those interested in history.
For those interested in where it is now and where it is going look at the shorter time trend
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#151 >>However, broke in monetary terms we may be - but this is just a problem of measurement - rich in resources we are still - and it's time to detach the essence of money from our Economy - it serves no further purpose.
The question is how can that concept be made acceptable to the international markets ?? Barter is all very well but how will trade be paid for across boundaries ?? In the days of yore, they transported tons (literally) of gold or silver. What resources will we transport to pay for our purchases ??
Money is merely a measure to account for purchases or sales. You sell X units of widgets for Y amount of money which can be used to to purchase Z units of bits.
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Here's another question: never mind raw material costs for now, but what percentage of a medium to large company's operational costs are related to information technology, and what has the trend been like over the last 20 years re IT spending in absolute terms? Typically.
Any takers? If so, I'd be keen to know others' results and discuss the economic implications.
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#159 >>We are still the 6th largest manufacturing country in the world, although manufacturing has dropped by 11% since 20005
Sorry to be pedantic but we are the 6th largest economy, *NOT* the 6th largest manufacturing country. The three largest manufacturing countries are China, USA and Japan. Following that are South Korea, Germany and France.
Much of Britain's income is derived from "invisibles" for the last 100 years !!
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195. At 9:19pm on 19 May 2010, NorthSeaHalibut wrote:
#183. At 8:07pm on 19 May 2010, ElEnfadado wrote:
93. At 00:19am on 19 May 2010, BobRocket wrote:
#87. At 11:43pm on 18 May 2010, DevilsAdvocate wrote:
'69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.'
Thirded.
Fourthed.
Fifthed...
Sexed........sorry, damn, I mean SIXED.
Can't believe you lot. I get the legalising bit, it's the taxing bit which concerns me.
Can't we just legalise it and not tax it?
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190. At 8:24pm on 19 May 2010, Kevinb wrote:
"Kevin, The euro was/is not the cause of Spain's dreadful level of unemployment. It was the housing bubble (sound familiar?)."
I am not sure who said what but the Euro was the cause of Spain's housing bubble. Interest rates were hold low for the last ten years because the stronger Euro economies demanded and earned it.
In an economy not so industrialised it had the effect of creating the housing bubble (same in Portugal, Latvia and Ireland). If we had been in the Euro no doubt we would also have have had the same effect - and before anyone says we did, at least we devalued out of the problem. Our problem was caused by excessive Government spending and a banking bust.
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#152. stanilic
144 tao-das
I think inadvertently you have put your finger on the nub of the problem.
=========================================================================
Stanilic, Sorry but I have to admit that this analysis was almost a direct lift from Keynes General Theory of money and Interest in which he advocated a small amount of inflation whilst holding nominal wages flat to overcome the problem of cutting wages in accordance with the Philips curve so as to try and maintain employment levels.Whilst by no means a Keynesian in this respect I believe he was right.I am sure those making policy are fully aware of what they are doing
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Let's face the reality here guys. Capitalism is going through its death agony.
The market volatility is going to get worse and social disruption and wars will intensify as we are now witnessing across the globe. The Euro will potentially collapse and we will see a break-down in Franco-German relations which will be a disaster for everyone (We all know from the history books what happened last time). Economists can to and fro and number-crunch till the cows come home, but it won't change the reality of what is before humanity.
Working people will foot the bill for deficits and bank bail-outs through endless cuts which we are all aware of. This is inevitable and governments have to implement these measures in a desperate attempt to save the system. The working population will see their living standards erode and as a result we will see more social disruption. Conditions of mass unemployment will increase in western Europe and the US and will be used by governments and business to drive down labour costs in an attempt to create a competitive job market with eastern Europe and Asia. The pursuit of new markets by the US led coalition (Iraq, Afghanistan, Pakistan and Iran) will intensify.
There is only one winner out of this and that is the wealthy top layer of society whose interests are protected foremost by the establishment.
The fundamental contradictions of capitalism are plain to see. A 'global' economic system with competing nation states with conflicting national interests. No wonder we have all these problems. Good luck to all as we are going to need it.
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#199
"Sorry to be pedantic but we are the 6th largest economy, *NOT* the 6th largest manufacturing country. The three largest manufacturing countries are China, USA and Japan. Following that are South Korea, Germany and France"
Not pedantic at all - facts are healthy.
The top ten manufacturing countries (2007 in USD BN) are:
1 USA 1,831
2 China 1,106
3 Japan 926
4 Germany 670
5 Russia 362
6 Italy 345
7 UK 342
8 France 296
9 South Korea 241
10 Canada 218
We are behind one of the PIIGS.
As for 'invisibles' tell me about it, my income has been invisible for years :)
Incidentally, China was number one in 1830 producing 30% of world manufacturing.
Japan is still number one in per capita terms.
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inflation - stingflation. If you strip out fuel, duty and other tax rises there isn't a lot of inflation. If this new hybrid government wants to really show it is serious about fixing some of the wrongness, how about these:
1. close the final salary schemes of ALL publicly paid people earning over £100k
2. close it to all new employees
3. impose a 3 year pay freeze on all those publicly paid employees earning over £100k
4. limit pay increases to 2% per annum for those earning less than £50k, and 1% for those on £50-100k
5. impose a pay freeze for the duration of a parliament on all MPs - it is strange how they always manage to get their increase through before limiting others to less
6. ban all foreign "jollies" for non-ministerial/shadow politicians for the life of the parliament
might help a bit...
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#201
"In an economy not so industrialised it had the effect of creating the housing bubble (same in Portugal, Latvia and Ireland). If we had been in the Euro no doubt we would also have have had the same effect - and before anyone says we did, at least we devalued out of the problem. Our problem was caused by excessive Government spending and a banking bust."
I would agree with the above analysis but point out that the respective countries have been appallingly let down by their governments and now have to pay a painful price.
' at least we devalued out of the problem'
This bit I take issue with. Devaluation is not and never has been a cure. It simply moves the problem somewhere else. In the case of the UK we are seing the effects already in higher (imported) inflation. A different sort of pain is coming our way, but pain none the less.
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I really don't understand (economics) a lot of these posts.
There is a perceived link between inflation and pay rises.
Yet inflation is affected mostly by the cost of oil and our exchange rate, both of which have negatively affected my spending power.
I don't know anyone (in the private sector) who has had a pay rise in the last 2 years.
Where exactly is this link ? is it something that happened in the 80's ?
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163. At 6:51pm on 19 May 2010, PingoSan wrote:
"Interest rates cannot be raised since to do so would cause asset prices to crash which in turn would cause banks to crash. So that is not going to happen. No-one is ever going to admit this so they will simply make up a range of implausible and increasingly unbelievable explanations as to why interest rates need to remain at zero."
pppppppppppppppppppppppppppppppppppppppppppppppppp
Exactly !quantitative easing and 0%interest is nothing more than embalming fluid that allows the tutts and car men to carry on hanging out both sides of sillycon valley going "whos a pretty boy then" until 2013 when gravity will get the better of them as they get drawn into the vortex of a passing comet and carted off to the black hole of....
The question is "why have these stiffs been allowed to nail themselves to the perch and are they pining for the frauds"
The economy is dead ,why have pension fund contributors been sold a dead economy as part of their pie in the sky.
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#207 PFC_Gaz
The point is its the other way round, not that pay demands affect inflation but that inflation, if it goes on long, or hard, or both, will push up pay demands to possibly unsustainable/unrealistic levels and perhaps lead to strikes etc when they aren't met. That's the point people are making.
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Just watched Newsnight and the bit with SF talking about why the markets were edgy today being down to them having some inkling that the 'Germans' (in general, it wasn't clear!) didn't understand the problem as they'd made a big deal of banning naked short selling amongst other things and that that 'wasn't a big part of the problem' was pretty harsh. The way I figured it the banning of naked short selling was a political (and perhaps slightly moral) gesture rather than anything they believed would aleviate any wider problematic issues with overspending etc etc. A point I don't think was considered at all, which was a shame.
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In fact, come to think of it, her description of naked short selling made it sound completely benign. Now, of course, some would argue it is, but when you have some in the financial world calling it everything from fraud to counterfeiting to outright financial terrorism it is a tad onesided to imply that it is not a problem, as I'd say she pretty much did.
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Never mind freezing Public Sector Pay!
Cut Public Sector Pay by 30%
For 13 years they have been overpaid by Labour
The Party's over over
Get on with it, have the guts to do it
Before its to late and the IMF do it for us.
Why should the Private Sector workers take all the Pain
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#160 >>So it is and let's hope that Japan will also show the world how it could begin, with a Resource Base Economy and the Power of Technology.
Japan has close to damn all natural resources and has to buy everything from abroad, rather like Britain. What they do have are (1) people that are willing to work cooperatively instead of antagonistically and (2) an ingrained culture of savings and (3) an ingrained culture that knowledge and scholarship are the most important aspects of society.
Their government and their businesses spend far more on R&D that anywhere else and they know how to value businesses instead of treating them like piggy banks to be raided at will. And being wealthy is *NOT* a sin to them as it is in Britain !! That's how they survived decades of zero growth and massive government debts !!
Meanwhile, back in Blighty.....
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#161 >>There are many and varied comments about inflation on here but the simple facts are the control of our inflation is dependent on the oil price and our $ exchange rate. Or is that too simple?
In one word, YES !! Britain still produces oil although many European countries have absolutely no oil at all. Yet they have far lower inflation than Britain !! Explain, please.
>>I can understand some special cokes perhaps but importing more than double the amount we produce?
Because British coal contains far too much impurities that need huge investments in scrubbing technology to make clean enough to satisfy EU pollution standards !! The problem is not in the importation of coal but in the fact that the last government simply ignored or refused any investment in clean coal technology. And it is not even rocket science or bleeding edge technology !!
The billions that the last government criminally wasted, on badly thought-out and managed IT projects that failed spectacularly, would have paid for lots of clean coal and nuclear technology. It would also have created lots on new jobs that are now desparately needed !! So where is the great prudence in that ?? All that Crash Gordon produced was spin and bovine manure !!
>>So whilst we are building our "green" energy revolution can we invest in producing more coal for a decade or so?
Following on the above, it's a total waste of time to produce more coal if we're not allowed to use them !! Until we have the clean coal tech in place, forget about producing more dirty coal !!
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#166 >>We are on the way to becoming the poor of the first world.
Alternatively, we are becoming a Third World country !!
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#185 >>The only problem I have is I don't have enough of either to make it all worthwhile.
Kuggerands and gold sovs and half-sovs aren't all that expensive. Gold bars (5 gm to 1,000 gm) tend to be more expensive in Britain than elsewhere, probably because of the level of "commission" on services and tax !! You don't need to be a millionaire to buy gold !!
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#192 >>Memo to DaveNick - invest in teacher's who can teach people to read so they know how to vote for you both in five years time!
But first, there must be teachers who can *read* instead of meekly sprouting the party line !! The SATS revolt was a good start but we need more !!
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#195 >>#183. At 8:07pm on 19 May 2010, ElEnfadado wrote:
93. At 00:19am on 19 May 2010, BobRocket wrote:
#87. At 11:43pm on 18 May 2010, DevilsAdvocate wrote:
'69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them
==========================
Seconded.'
--------------------------
Thirded.
Fourthed.
Fifthed...
Sexed........sorry, damn, I mean SIXED.
It is obvious to me that you are rather preoccupied and have something on your mind !! :-)
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#198 Define "IT" !! Are robots on the shop-floor considered as "IT" or are they merely smart machines ?? What about sensors and smoke/chemical detectors ?? They all have some form of computational intelligence so where does one draw the line ??
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#205 >>ban all foreign "jollies" for non-ministerial/shadow politicians for the life of the parliament
Oh, but they are not "jollies"; they are "fact-finding" missions !! Quite what facts they are trying to find are much beyond my meager intelligence !!
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#206 >>In the case of the UK we are seing the effects already in higher (imported) inflation.
Actually, I suspect that the cause is really that we are "exporting" less of our inflation since we are importing less of the cheaply manufactured goods. When that is balanced against a steady importation of expensive fuel, food and raw materials, it shows our inflation for what it really is !!
Similarly, there'll be more fun and games in the US when they finally successfully pressure China into revaluing their Yuan. A higher Yuan does not automatically mean less imported Chinese goods; it simply means more $ flowing into China to buy the more expensive Chinese goods and, thus, increasing their inflation.
And as for the Urban Myth that the cheaper $ will help US exports to China, it's patently nonsense since the majority of goods the Chinese really want are banned by the US government from export to China !! Will the US be selling a squadron or two of F22s to China, or even a nuclear carrier or three ?? Thought not !!
Hooray for lies, damn lies and US Congressional lobbying !!
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#207 >>Where exactly is this link ? is it something that happened in the 80's ?
If you paid £1 per litre of petrol last year and £1.10 per litre now, that's inflation and it happening now not 30 years ago !!
BTW, 30 years ago, petrol was sold in gallons !!
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#207 >> If you paid £1 per litre of petrol last year and £1.10 per litre now, that's inflation and it happening now not 30 years ago !!
I meant the link between higher costs due to inflation, and pay increasing. We have one but not the other.
I love the comments from the 'prudent savers' that's a lovely term for the wealthy minority who aren't struggling with huge mortgages.
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#219 Ishkandar
Actually my prime concern is organisational flexibility, but I don't at this point want to consider the challenges of physical flexibility - ie: moving machines in manufacturing plants, etc. What I am interested in is the automation of activities that are typically related to messaging and recording. So while applying change to the location of the robots themselves are out of scope, the task of changing the behaviour of, coordinating and communicating with the robots is not.
IT from this perspective is the infrastructure, methods and processes involved in managing the flow of information within an organisation without dealing with the physical structure of the organisation. Sure it's a fuzzy line to draw, but be charitable here please.
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204
As we are now ahead of Italy, we are 6th as I said in the first place!!!!!!!!!!!!!!!!!!!!!!!!!!!!
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This comment was removed because the moderators found it broke the House Rules.
..to all those seconding #87's suggestion of legalising and taxing brothels and drugs:
1) brothels cant be exported (unless we wish to promote sex-tourism as per Amsterdam and Thailand)
2) drugs are largely imported
So much for rebalancing our trade deficit !
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Re "I love the comments from the 'prudent savers' that's a lovely term for the wealthy minority who aren't struggling with huge mortgages".
Why do people always assume that it is "wealthy people" that save. I have met people with high 6 figure salaries that are unable to save & are loaded up with debt and people earning below UK averages that are able to save.
You would think a "fairer Britain" would actually reward the person who earns £20k per annum who lives within his means & doesnt borrow to fund a lifestyle he cant afford, rather than the person earning £500,000 per year with millions in mortgages & struggling to stay solvent.
The problem is the UK is analogous to the second person & under any of the current politicians the UK will be fiscally irresponsible as it refuses to live within its means. Even if we doubled our tax take I believe the UK would still run a deficit as the politicians would simply pay out more in buying peoples votes.
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#225
"As we are now ahead of Italy, we are 6th as I said in the first place!!!!!!!!!!!!!!!!!!!!!!!!!!!!"
1 2 3 4 5 6 7 8 9 10
Seventh. Thats the number after 6 and before 8.
Incidentally UK was ahead of Italy in 2000 and 2006.
If you have figures for 2008 and 2009 share them.
So Italy has a slightly bigger manufacturing economy and a much smaller deficit (5.3% in 2009) than the UK.
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re #220
Travel broadens the mind. Politicians with a broadened mind ought to be a good thing.
The last Government Minister with a broad mind, and who used it, and told the Cabinet of his thinking, was sacked.
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#227 littlebaffled wrote:
'..to all those seconding #87's suggestion of legalising and taxing brothels and drugs:
1) brothels cant be exported (unless we wish to promote sex-tourism as per Amsterdam and Thailand)
2) drugs are largely imported
So much for rebalancing our trade deficit !'
1 - those tourists from the UK would stay at home and spend their money in the local economy rather than exporting it
2 - marijuana, opium poppies and coca plants will all grow happily in the UK, we could build a thriving export business providing high quality controlled products to other consuming nations.
both of which would help to reduce the trade deficit.
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231. At 09:35am on 20 May 2010, BobRocket wrote:
1 - those tourists from the UK would stay at home and spend their money in the local economy rather than exporting it
2 - marijuana, opium poppies and coca plants will all grow happily in the UK, we could build a thriving export business providing high quality controlled products to other consuming nations.
both of which would help to reduce the trade deficit.
The Taliban aren't going to be very pleased though are they.
Bob Rocket, you're as mad as a box of frogs, however I think your train is about to arrive in Europe.
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The most depressing thing about your blog is just how desparate so many of my fellow countrymen are to see this country as washed up and finished. I work for the UK arm of an American company involved with the hospitality sector - the sector of the UK economy that is still apparently in recession. We shed 25% of the workforce in September and all took a pay freeze and lost a few perks. As of this month, we have rehired a significant proportion of the people let go, our order book is full (my own time is booked out for two months ahead), we have exceeded our profit target for the year with one month to go, and things look very positive - and they are reinstating the perks (thanks for the Cup Final ticket boss).
On the personal front: my pension fund grew considerably ahead of my contributions last year: naming no names but it is managed by an offshoot of one of our vilified banks. I don't understand what GB is supposed to have done to pensions: it doesn't affect annuities which have been adjusted because we are living longer and they expect you to make provision for your spouse and it was the Tory pension holidays that killed final salary schemes. My pensions are performing well thank you. 0.5% interest rates give me a tracking rate of 1.25% - which has enabled me to reduce my mortgage term by a matter of years not months. All in all, things are looking pretty positive right now. I will leave the Jeremiahs and Chicken Lickens to worry and wail.
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This comment has been referred for further consideration. Explain
161. At 6:31pm on 19 May 2010, Ilkeston_Tim wrote:
There are many and varied comments about inflation on here but the simple facts are the control of our inflation is dependent on the oil price and our $ exchange rate. Or is that too simple?
--------------------------------------------------------------------
No, that's on track. Widen it to all currencies and all the things we need to import (REALLY NEED to import concentrates the mind, not just the widescreen tellys) but you then have to add tax or any restrictive practices to the mix.
We used to import poor quality coal to chuck in power stations because the stuff our miners' unions wanted restrictive control over was expensive and good quality. The problem with our oil is that it is too good. So we sell it for purposes for which it is more closely suitable. And then we import cruder crude to refine.
But we then do something really daft. We add a lot of tax to the refined fuel. And not just one tax but three. Tax tends to inflate. And if one of the taxes is cumulative - sits on top of the others - then that is really inflationary. So every increase in the oil price, and the duty on diesel and petrol is increased, then VAT is levied on a bigger chunk most of which is .. ouch! tax! OUCH!
Now that wouldn't be so bad if petrol and diesel is used just for fun as environmentalists and some politicians seem to think. Your old Mum and Dad, or Grandma or Grandpa, love to have visits from you by car. But the local authority which provides their free personal care in their homes has to deliver that care via a car or possibly motorcycle or scooter. And a lot of other council activities use vehicles for which we pay Council Tax to pay tax on fuel. OK. For some things the VAT can be offset or reclaimed but you can see what we are doing. Paying tax on top of tax on top of tax.
That's how we import inflation and we make it worse once it is here.
Why do we do it? Well, it takes a lot of effort and really clever thinking to tax income especially when income is created in unusual, non-PAYE, ways and in large amounts and can be looked after by clever poachers, er, I mean accountants. And in today's global economy, when it is being generated by non-doms, overseas residents, eg Premiership footballers it is even harder for the Gamekeeper (CoExchequer) to police. So taking indirects (taxing specific things) is cheap and easy (other people do a lot of the work for the Treasury for free), results in a tax take before rather than after (improves Treasury cash flow) and they are more difficult to evade.
So, that's my explanation of why we are doing - with road transport - something really daft and inflationary with taxation. Actually, the car user pays taxes about ten times, but that's another story. The Modern Urban Myth is that cars are only used for the school run and trips to the shops. We tend to lose sight of the fact that the vast majority of vehicle mileage is to do with work, business and trade.
And if you think all the above is really dreadful and gives you a pain in the wallet or tax return, everytime a Government Minister tells you that you shouldn't be using your car for anything, let alone work, he or she will not long after be getting into their ministerial car and heading off to a meeting or their constituency. That car use is highly taxed. But they will not be paying for all of it. WE WILL!
I haven't been able to look at all of the posts since my last visit but I noticed the '... litre of petrol £1 a year ago, now £1-10, thats ten per cent inflation ... ' ones. Some people may be trying to convince you that there is no inflation in a year's time if a litre of petrol costs the same as today. Not so. The inflation once there, stays there. And because we tax road fuel, then that fuel's inflation gets into all sorts of other places. And stays there.
So, if George Osborne really wants to reform the UK tax system, he should read and re-read paragraph four above and then do something about it. Paying tax on top of tax on top of tax - and doing it on imports (the price of which we do not control) and paying for it in dollars (against which the pound has been in general decline) guarantees that we will go from (at best) boom to bust at regular intervals.
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Interest rates need to rise to a sensible level , in order to bring back the much needed investors confidence. Investors will buy more GBP assets to get better returns. The currency will regain some strength. A strong currency will bring down the import prices of essential commodities which will help lower the inflation rate. Low inflation will help improve consumers confidence.The economc activities will improve as a result.
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re #176 North Sea Hallibut
I've wondered about that, too, with or without my conspiracy hat.
Obviously GB used house prices as a 'feeling good' factor or a distraction from less satisfactory economic issues plus (hat on) he would have really got it in the neck from his party colleagues if their property portfolios were not appreciating ...
I have some worries. I have an uncomfortable feeling that UK housing stock is being bought up by overseas investors (still) but now they are doing it with our money, borrowed from our banks at rates below true cost. It is then being rented back to us. In addition, local authorities have continually reducing stocks - by and large. Social housing provision is being privatised. I couldn't get an answer from the last Housing Minister as to why Labour continued the Thatcher policy to prevent LA's from re-investing council housing proceeds in new builds.
But on a brighter note, I have noticed a lot of new building activity.
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re #199
Correct. Thanks.
But a look at specific products is quite interesting. Bangladesh is in there for some things.
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re #204
Yeah! Me too! And, strangely, I'm still :-) too. Money ain't everything.
Hope Osborne doesn't read this.
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233. At 10:23am on 20 May 2010, Tyto alba
Its not all about you Tyto.
Try a little empathy
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People seem to argue over whether or not there's a plan to disenfranchise some sector of society, but isn't it irrelevant whether or not there's a plan? The only question is: Is it happening?
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I feel that the following quote from Aristotle's 'Politics' might serve well as a basis for the actions/decisions of statesmen in our own times:
"In all states there are three state-sections: the very well-off, the very badly off, and thirdly those in between. Since therefore it is agreed that moderation and a middle position are best, it is clear that, in the matter of goods of fortune also, to own a middling amount is best of all. This condition is most easily obedient to reason, and following reason is just what is difficult both for the exceedingly rich, handsome, strong and well-born, and for their opposites, the extremely poor, the weak, and those grossly deprived of honour. The former incline more to arrogance and crime on a large scale, the latter are more than averagely prone to wicked ways and petty crime." Politics IV. xi. 4th C. BC.
Or I fear we might be heading in this direction again:
“Whatsoever therefore is consequent to a time of Warre, where every man is Enemy to every man; the same is consequent to the time, wherein men live without other security, than what their own strength, and their own invention shall furnish them withall. In such condition, there is no place for Industry; because the fruit thereof is uncertain; and consequently no Culture of the Earth; no Navigation, nor use of the commodities that may be imported by Sea; no commodious Building; no Instruments of moving, and removing such things as require much force; no Knowledge of the face of the Earth; no account of Time; no Arts; no Letters; no Society; and which is worst of all, continuall feare, and danger of violent death;And the life of man, solitary, poore, nasty, brutish, and short.”
Thomas Hobbes, Leviathan, 1651.
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Stephanie
We knew that the numbers would be inflated this year because of the technical VAT raise change impact.
It is less easy to be confident that the oil price rise may be such a temporary phenomenon.
There are a couple of other items that we also need to keep in mind, with regards to setting interest rates. Firstly, that the lower rate of the £ sterling against the US$ and the €uro could lead to imported inflation. Secondly, that the Quantitative Easing could lead to inflation too, though the effect and the timing of this is uncertain.
UK growth is currently anaemic and overall aggregate demand is likely to be further suppressed by the now imminent public spending cuts and lower overall public spending for some years to come.
So it would seem that a number of questions remain to be answered. Are the proportions given over to the various basket of measures adequate for CPI measurement in the current UK context? Are the figures subject to revision? If not, when should the Chancellor order the BoE to change the target rate of inflation from 2.5% to 4% until recovery picks up pace? When does it have less credibility with markets, explaining on future occasions that inflation has over shot the target, without having been seen to use its one policy lever; that of adjusting interest rates?
These are really crucial and difficult policy matters for the Chancellor, as he orders the BoE Governor and the MPC what inflation rate to target and their margin of error. There were some people that before the election questioned George Osborne and David Cameron's ability to manage the economy in these very testing times. We will find out quite soon whether they are up to the job or not.
"Events, dear boy, events". £6bn of public spending cuts is not the answer, or least not all of it by a long way.
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