A tale of two zones

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?

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.

'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.

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.

Funny how the people who think the government has secret plans are often the same ones who decry the government's incompetence...

All this user's posts have been removed.Why?

This comment was removed because the moderators found it broke the house rules. Explain.

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.

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.

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!

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......

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.

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.

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.

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...

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.

Further to my post no.11 above,

UK input prices have risen by an annual rate of 10.1% as this BBC report shows:
https://news.bbc.co.uk/1/hi/business/8611370.stm

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........

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.

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%.

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.

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.

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.

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.

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.

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

The above graph is a mirror image of this graph:

https://news.bbc.co.uk/news/business/market_data/currency/11/158240/twelve_month.stm

...now I wonder why... [yawn]

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.

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.

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.

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

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.

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.

#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.

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.

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.

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?

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!

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...

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.

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.

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.

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.

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.

#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.

How long is 'temporary'?

Everything is temporary if you wait long enough!

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.

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?

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.

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.

#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.

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.

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.

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?

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

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.

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.

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%.'
https://news.bbc.co.uk/1/hi/business/8047593.stm
Take these current projections with a pinch of salt?

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!

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?

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.

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.

56

What tosh

get the money back from the banks

#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)

scrap trident or replace with off the shelf system

the americans must pay for us to be their allies

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.

legalise brothels and mariajuana ,and tax them

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 economic solutions are simple,just a question of implementing

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.

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.

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.............

Isn't it time we adopted the Euro?

#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!!!!

#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)

#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.

#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!!!!

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.

#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 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.

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.

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?

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.

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.

69. At 10:03pm on 18 May 2010, zekken wrote:
legalise brothels and mariajuana ,and tax them

==========================

Seconded.

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?

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!

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?

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.

This should make the next few days rather interesting!

‘Market chaos warning after German ban on shorting’
https://www.telegraph.co.uk/finance/financetopics/financialcrisis/7738144/Market-chaos-warning-after-German-ban-on-shorting.html

#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.

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'

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

Look at the Leaf from Nissan for example: https://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.

#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?

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.

This comment was removed because the moderators found it broke the house rules. 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.