Inflation OK (just don't pass it on)

Bank of England Deputy Governor Charles Bean defensive, comforting, just plain uncertain, or extremely confusing?
Bean said that inflation would likely remain above the MPC's (Monetary Policy Committee's) target of 2% "for a while yet"; I guess that means that it will run between 3 and 3.5% "beyond the end of next year". Personally I'm inclined to think that it will be higher than 3.5%.
Then, Mr. Bean says something rather extraordinary: "Tightening policy sharply in order to deal with the currently elevated level of inflation would simply have put a brake on the recovery unnecessarily and would have made inflation more likely than not to fall below the target in the medium term." Does this make sense to you? Does the UK have a traget inflation of 3 - 3.5 inflation, and if so, who benefits from this? Surely he doesn't mean that when inflation goes up, spending also goes up. So whose recovery is he talking about?
Bean noted that stock rebuilding contributed to about half of the past year's economic growth. Is stock rebuilding part of economic growth, or is it just replacing what was there?
By this point Mr. Bean has me compleetely baffled, though I am trying very hard to stay with the man's logic.
"So" he goes on, "economic prospects depend crucially on private final domestic demand and net exports picking up the baton; fortunately there have been signs that handover might be starting to take place in the latest quarterly data." I think he's saying that domestic demand (in spite of inflation and an increased VAT, has picked up i.e. spending has picked up) and that net exports are also picking up.
Well, I don't know if Mr. Bean has fallen off the ball. A recent survey carried out for the BOE suggested that consumer exuberence has fallen and could indeed fall further in the near term as households try to adjust to prospective fiscal constraint. Where does that leave Mr. Bean's demand figures, - the baton that is supposedly being passed to net exports? Mr. Bean himself noted the weakness in the UK's net exports, especially in its exports of financial services.
Bean seemed optimistic about market share of goods exporters, due in large part to a more favourable exchange rate. So why was he noting weakness in the UK's net exports, especially in its exports of financial services, if overall he's optimistic about market share?
Bean reiterated the MPC's view that the current elevated level of consumer price inflation "is likely to persist in the near term", though that would prove temporary. "The standard rate of VAT is set to rise again at the beginning of next year; but once that drops out of the annual comparison a year later, so the inflation rate is likely to fall back sharply." Wow, that's not going to encourage spending for a rather long time. I think that rattle I'm hearing is the baton hitting the floor.
Then with a suddenness that takes my economic breath away, Mr. Bean shifts to the US Federal Reserve's large-scale asset purchase program: "These criticisms seem to me mostly off the mark," Bean said, noting that the early stages of QE, both in the US and the UK had appeared to bring down longer-term yields "below where they would otherwise have been." If he's saying that no country wants US bonds, I understand, but surely Mr. Bean doesn't consider that a good thing, does he?
He said that only if the Federal Reserve fails to tighten policy promptly as the recovery takes hold is excessive inflation likely to be a problem. Well, I guess there's going to be a HUGE INFLATION problem because there's no recovery happening in the United States of America.
Bean conceded that the increase in capital inflows to emerging economies due to stimulus measures in developed economies justified imposing temporary restraints. I have no idea what he's talking about now? Do you?
"But where such asset price pressures are building, they seem more likely to be related to overly loose monetary and financial policies in those countries and their unwillingness to allow exchange rates to bear more of the strain."
He's got to be talking about the United States, right?
Bean: "Instead, in the absence of effective structural reform, they face the prospect of sustained low growth in order to drive down wages and prices. That itself makes the task of stabilising public debt harder."
Right on! This is exactly what is happening in the United States.

Some households are beter placed to bear the pressure of inflation than others. The BoE is quite mistaken in assuming that all households are the same. They should stop thinking in terms of statistical averages and start thinking in terms of real world practicalities.

For instance, anybody working on the mininimum wage is clearly going to feel the inflationary pressure a lot more than Bankers, Solicitors, Governors of BoE etc,.

Don't be complacent about the effects all this monetary pressure is having on some UK households, and how those households will react.

The student protests might prove to be the tip of the iceberg...

Stephanie, can we simply summarise the speech by saying that stagflation is the Bank's chosen route to dealing with debt and deficit reduction? Only they aren't allowed to say that.

Throughout all of 2010, CPIY and CPI-CT have been at or below 2% (see https://www.statistics.gov.uk/pdfdir/cpi1110.pdf%29 Therefore, CPI has only been above target because of tax increases - increases that were essential for economic stability. The impact of tax changes ought to be excluded from the target measure for the same reason as mortgage payment: because they create a circularity because fiscal tightening is deflationary.

GeoffK1874 - sssh

"That speaks to the larger surprise about the increase in inflation - which is the degree to which the cost has been shouldered by consumers rather than companies."

So..... That means that much of business in the UK is in the hands of monopolies or oligopolies, and there is little real competition out there. Not really a big surprise. The UK Government has pandered to various monopoly businesses for the past 30 years.

The 'Threadneedle Street Fools' are simply duplicitous fraudsters! They claim that their remit is to manage interest rates so as to ensure that inflation does not go outside a given range - but this is now a proven and absolute falsehood.

Inflation is out of control and above their target range which should have resulted in the raising of interest rates a year ago - but no, these idiotic badly educated failed economists now rely on praising politicians for cutting the deficit rather doing what they are paid to do - they should all have been sacked some time ago and the longer they remain, the more invidious and ridiculous their position becomes and the more damaging to the country.

We must get rid of these calamitous fools. If they possessed an ounce of integrity between them they would have fallen on their own swords long ago! Their lack of action just renders them a laughing stock.

Just what is the point of the MPC in the context of 'mañana' with inflation targets. What kind of creature is evolving in terms of economic management and should we all be worried that cost-push inflation seems so easy for consumer facing corporations. Perhaps what we are seeing is not only margin push inflation but what about bonus push inflation. We should study the sociology of corporate remuneration and incentive rather than what is laughingly called the laws of supply and demand.

SF: 'There are some plausible explanations for this, which the deputy governor went through in his remarks, the most important of which are unexpectedly high energy prices, and a surprisingly high degree of "pass-through" into final retail prices of the impact of a lower pound.'
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Currency may be a factor but, by and large, not much. Remember, Sterling was considered to be high for much of the past thirteen years. Our tax system - high transport taxes, especially fuel duties - plus high utility prices all impacted on Council Tax and Business Rates. These in turn raised other costs, including labour costs. Add commercial property and housing into the mix and well, problems are bound to occur, even in the best of times.

By the way, inflation averaged 3% pa through Labour's time when we should have been enjoying substantial (similar figure) negative inflation to also help get our economy competitive again.

Inflation has seen off the last six PMs despite their claims to have got it under control or defeated it.

Another one to go?

7. At 10:30pm on 13 Dec 2010, John_from_Hendon wrote:
The 'Threadneedle Street Fools' are simply duplicitous fraudsters! They claim that their remit is to manage interest rates so as to ensure that inflation does not go outside a given range - but this is now a proven and absolute falsehood.

Inflation is out of control and above their target range which should have resulted in the raising of interest rates a year ago - but no, these idiotic badly educated failed economists now rely on praising politicians for cutting the deficit rather doing what they are paid to do - they should all have been sacked some time ago and the longer they remain, the more invidious and ridiculous their position becomes and the more damaging to the country.

We must get rid of these calamitous fools. If they possessed an ounce of integrity between them they would have fallen on their own swords long ago! Their lack of action just renders them a laughing stock.

++

John - I think this is all part of the strategy to recover and use inflation to reduce our debts in real terms. Luckily our currency floats so it will have some effect (although the long term effect may be smaller since everyone else is trying to weaken their currencies).

As to their remit - I agree they are clearly not managing it as required but as I said above, I really think this is part of a 'nudge nudge, wink wink, say no more' strategy that is not admitted to but which is tacitly accepted by government. They are being duplicitous but well - that's politics.

Stephanie, in a well-thought out piece I am rather confused by the phrase, "That would suggest we have less room to grow without triggering inflation." Isn't the point of your argument that inflation is already pretty rampant. In an economy where 99% of workers are expecting either a pay freeze, or a pay cut or unemployment an inflation rate of greater than 3% seems to me to be pretty much "triggered".

You are right to be concerned about "wriggle room" though. This is the economic tsunami headed our way - the vast majority of households in this country have very little "wriggle-room". Encouraged by a generation of politicians to take the easy course of maxing out their credit cards rather than engage in the messy business of fighting for decent wages there are a lot of folk in this country who are going to find that they literally cannot afford to feed their families, keep them warm and keep a roof over their heads if inflation stays above growth for more than a few months. And even then, if growth doesn't feed into incomes, I fear that many may go under.

Evening Stephanie,
It always makes me very angry when I read the MPC reports that inflation is (only) 3.2% for 2010.
Anyone living in the real world knows that it doesn't feel like 3.2% but more like 10%.
Consider, for example, fuel has increased by 11% this year, my Gas and Electricity are increasing by 6%, you can make up your own figure for food inflation, insurance is up by 50% for a car, council tax only up by 4%, water bills only up by 5%...
So not one of my bills has increased by the rate of inflation and I wonder why. Could it be that private companies are taking this opportunity to increase their profits (surely not)? Could it be that these increases are necessary for future investment (that old Thatcher line), I think not?
The biggest risk to my prosperity (since I am on a fixed pension) is the amounts of money that are being stolen brazenly to pay for a new green world. Ignoring the wholesale price of gas and electricity, your Government's green energy policies are going to cost 15% extra on domestic electricity bills, 23% extra on your gas bills, not to mention increased industry costs of 15% and 30% respectively! (source Mr Millibands UK energy policy 2009).
This is a scandal and a scam being perpetrated by the EU, aided and abetted by the UK government who haven't got a clue about what Britain needs as a comprehensive energy policy!
But then again, nobody cares, they are just too busy trying to make ends meet. Don't say I didn't warn you.

I am a little confused by the statement "This has been a running theme here." This blog very rarely mentions inflation and the last time it did we were told that there were no signs of it.

Thanks BluesBerry for adding a little more information.

The whole statement seems to be infected by statistical corruption augmented by rarefied 'snow blindness'. By that I mean that the staistics themselves take on a value all of their own and become detached from the real situation that lies behind them. Allied to that is the myopia that comes from working continually in a rareified environment.

In an earlier existance I was working on marketing plans 1-2 years out. When problems arose in real time it was very hard to come to terms with them. I therefore appreciate how hard it is for these people to actually see what the rest of us are seeing.

I am somewhat surprised to see his comments about exports. It would appear that the 25% reduction in the value of sterling has been used by the majority of exporters to support margin rather than gain market share. So where is this 'new' growth going to come from because without it, it won't be only the baton that hits the floor.

Still, the BoE, the government and business all believe that there is even more to be squeezed out of household budgets so everything must be OK - shouldn't it?

Darling should never have lowered and then raised VAT in the first place. It seems to me that messing with VAT just sends contradictory signals to business. When domestic businesses try to raise prices in line with VAT-induced inflation, they will then find that sales drop-off severely and they will have to go back to discounting again. The pressure on them from the fiscal contraction will then cause many of these businesses to go bust, and a double-dip will ensue.

The MPC is able to define inflation in any way they like, and, as many have said on this and other blogs over the past few years, it appears that now inflation no longer means a rising in the cost of living, but wage rises. So by implication don't expect interest rates to go up until wages start to rise again. But when will that be I wonder?
The new emerging economy is one of low paid, part-time, temporary contract employment, and any wage inflation pressures that survive that will be snuffed out by the rise in economic migration which will start to increase as the economy picks up.
In the past the MPC, or government had to take into consideration the fact that people wouldn't put up with falling living standards and would strike for higher wages, so rising prices were a real factor in the inflation/interest rate calculation. Today's workers are not unionised in the same way, and are more easily discounted because of it.
The interesting question is where will ordinary people draw the line?
We could, in theory, go on like this forever, with prices steadily climbing but wages stagnating, with the government telling us each month to be thankful that we live in such a 'low inflation, low interest rate economy', while out in the real world a shrinking number of people can afford to have the heating on...take a holiday...run a car...save for a pension...keep a roof over their head...start a family...in short be a consumer and keep the economy going.

This is the same Charlie Bean who said we had to spend our way out of the recession; while, at the same time, the BofE was destroying income from bank deposits.

Inflation would have really taken off - if we could have afforded it.

I've no doubt real, personal, inflation is a lot higher than the published figures; but unfortunately that's irrelevant to the BofE.

The Bank is not charged with setting monetary policy to generate growth in the Economy - that's the Government's job. The Bank is only concerned with inflation - and they have demonstrated they are just as bad at their job as every other banker. I hope they are not going to get a bonus this year (that's a euphemism for "keeping their jobs")

As JfH often says (paraphrasing) - these guys don't really have a clue what's going on or how to get out of the mess created by the other bankers.

This has been going on for far too long - it's a national disgrace.

Does Mervyn write a different letter each time or did he run off 50 copies of the same, undated, letter 4 years ago?

16. At 01:53am on 14 Dec 2010, muggwhump

Well said muggwhump !

Lets raise VAT again.
Oh no! prices appear to be rising.
More austerity needed.

Dont panic Mr Mainwaring.

'The inflation may be temporary - and it may be due to "exceptional" increases in energy and other costs.'

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

Temporary ... definitely not.

The UK is importing too much stuff that we should be trying to make ourselves

The UK is being ripped off on its imports and needs to 'box and bit more cleverly'

The UK has e.g. no integrated transport and energy policy e.g. full UK transport electrification of road and rail transport. We need to plan ahead and become non oil and gas dependent (within e.g. 30 years) and invest massively in full transport and energy electrification on a massive scale ... the investment will also lift the UK clear out of recession ... free solar power vehicle charging stations etc on every lamp-post and street corner etc ... plan and implement and GO FOR IT now or we're in further serious long term economic stagnation going forward

UK inflation will force interest rate increases upon the UK (and EU) as our UK and EU policy makers fail to deal with Britain's net trade deficit - because British Business and trade needs a massive overhaul and protection for British domestic business and UK process value adding capacity.

The Bank of England now has a dilemna on interest rates - v - inflation because our frightened rabbit UK politicians/self serving business community will not forge a new economic business model on the UK and enforce re-balancing of our UK economy with intelligent fair trade protectionism and the taxation of inflationery import goods and suitable import tariffing.

In other words the UK must apply e.g. taxation/tariffing/rationing and get tough on its trade or the UK regional stagnation will become much wosre when the interest rate rises are forced on the UK through higher and higher inflation which will get much worse when the global economy picks up and Britain gets left behind with higher and higher inflation and interest rates.

This is very serious for the UK - Everything affects everything else - in economics!

Radical and urgent strategy, planning and action please!

AS I understand it the purpose in allowing inflation to run ahead of target is to steadily erode the real value of our debt. "Inflate it away" has become a theme.

What does this mean? If prices rise, then obviously our money will buy less: but if wages are not rising people will not have any more money to spend. Therefore consumers' spending will not increase - they will, at best, spend about the same amount but this will buy fewer goods. In sum, price inflation cannot lead to a consumer led recovery.

Equally, for the debt to be effectively reduced then it must become easier to pay off - and for the Government that means that the debt burden goes down relative to tax receipts (income). Receipts are mostly income tax, which cannot increase unless people are earning more: and VAT which cannot increase unless people are spending more. Unless of course the rates of tax go up (again).

Conclusion? The strategy of price inflation and wage deflation described in this post cannot inflate away the debt. Wage deflation will prevent price inflation from having the desired effect.

The Government may be taking this path because of fears that once wage inflation takes root then we're into an uncontrollable feed-back loop. It may, in part be because if you let things rip then the markets will demand higher interest rates.

Whatever the reason, there seems to be a high risk that this squeeze on consumers' income (and so on their spending) will squeeze out any prospect of the artificial growth that was supposed to cover the deficit and erode the debt.

Got silver?

splendidhashbrowns - rob #4 and various tv economists either never go outside or just by cd players and usb memory sticks. I agree goods have increased in price significantly.

Luckily we don't hear too much about this on the BBC because they are either all minted and / or slavishly repeat the given line even if it conflicts with their direct experience of the outside world.

And I usually find that even if something is a big problem if the BBC say it isn't I just pipe down and get on with it. Toodle pip!

re #12
Amen, baby!

If the Coalition doesn't address this pretty smartish, we are doomed to more upheaval, recessions, business failures, etc., etc., ...

Hey! etc., etc., ...

I am receiving nothing on my hard-earned savings (after Brown stole my pension I had no other choice than to save).
A great many very greedy people are living with huge mortgages which cost them nothing.
Inflation is high so I suffer more; they have plenty so they suffer less.
The bank should be upping interest rates to ease inflation but it fails to do so for fear of upsetting the aforementioned greedy.
I am not saying the government has any say in the machinations of the BoE but .....
The consideration of poverty in older age is nothing compared with the thought of so many losing their ill-gotten homes. After all they are the voters of tomorrow, the ones we baby-boomers are supposed to have left in the lurch! Oh yes!?!

re #18
Great candidate for Chuckle of the Day Award!

It interests me, Stephanie and Posters herebefore, that not many people, it appears, want to discuss your Blog and the subject of inflation.

Is it because Gordon Brown abolished inflation? ;-)

Is it because we are all aware of the 'inflation conspiracy' as emkay @ #10 suggests and think it is just too big for us?

Or we don't like talking about the 'i' word just as people didn't like to talk about cancer, fifty, forty or so years ago?

Or we are all resigned to it?

tFoth - they can help erode the debt. I guess they feel it will erode the debt by pushing some of the cost on to consumers. Also it's an implicit tax on savers. I agree that thanks to the feedback it's not a clear cut case.

I'm surprised that some people are saying the cost of living "is a disgrace". We've had 10 years of not producing much, other than passing houses around in an excitable little circle like fools. The prices and cost of living you are experiencing now is how much it costs to live when you are not adding debt every day and when you are also having to pay down the debt of a decade of stupidity. Plus our currency has tanked and we are a net importer. I don't like having my savings taxed ie how they are going about reducing the debt, but the days of ordinary workers getting coffee and sandwiches out every day is gone. Make 'em at home. Sell the second car. Get on yer bike.

You will all get used to it as it's here to stay for a really long time. Thanks for saving the world Gordon Brown! You are a legend!

re #20
The radical action would be re-nationaise the railways and switch, at regular intervals, taxation raised away from fuel duty to the two higher rates of income tax, especially the highest one.

But the Conservatives are running scared of high earners, especially those in the media and the other seven or eight high paying professions. They are now, albeit reluctantly, willing to admit to the botched rail privatisation but totally unwilling, especially doctrinally, to do anything about it.

They may have their hand forced. It is said there may be a train company or three - despite record passenger numbers - on the edge of severe difficulties.

The fact and statements that our financial and political leaders along with the economic and financial media 'experts' view energy prices as "unexpectedly high" sums up the incompetence which continues to dog our economy.

You have to be completely "blinded by exponential growth faith" not to have foreseen energy and the dependents of energy such as food and other commodities going through the roof.

Heads up "experts" there's more and worse high energy and commodities prices to come. Don't try and claim they are unexpected this time next year when CPI and other inflation measures are higher than they are now. (Unless of course you change the goalposts on how you measure them)

15. At 01:37am on 14 Dec 2010, Charles Jurcich wrote:
Darling should never have lowered and then raised VAT in the first place. It seems to me that messing with VAT just sends contradictory signals to business. When domestic businesses try to raise prices in line with VAT-induced inflation, they will then find that sales drop-off severely and they will have to go back to discounting again. The pressure on them from the fiscal contraction will then cause many of these businesses to go bust, and a double-dip will ensue.
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Charles,
Welcome back and with a good and interesting post. You are right in that business likes to be able to plan ahead; uncertainty is unpopular.

But in our highly retail based economy, VAT changes are expensive. It costs a lot to change prices.

Having said that, the purpose of VAT {a sales/transaction tax} is to expand and contract demand in an economy. It is a fiscal tool - not just a tax raiser. Unfortunately this has been lost sight of, for about a quarter of a century, and only recently discovered. So, AD was right to reduce it but he didn't go far enough. The Coalition are gambling on a measure of recovery coming along to sustain 20%VAT AND are hoping, really hoping hard, that a lot of businesses will absorb the VAT increase. That will put pressure on wages and jobs. Which will in turn put pressure on business trade/transactions ... as you point out.

Hey! {Oh! I've already done that one today!}
Yours,
Snuffy

What’s happened thus far:
2007 Credit crisis starts and the Northern Rock goes down.
2008 RBS & HBOS fail and the ‘people’ bail out the banking system.
2009 BOE starts printing money to repair the damage

So who has had to pay the price for bailing out the banking system, and how much has it cost them:

Retail price index (all items) RP02:
Jan 2009 210.1
Sept 2010 225.3
Price inflation = + 7.2%

For the average working Joe or Jane:
Jan 2009 Average weekly earnings = £444
Sept 2010 Average weekly earnings = £443
Increase = – 0.002%

And if whilst working, you end up sick (statutory sick pay, standard rate)
Jan 2009 £75.40
Jan 2011 £79.15
Increase 5%

And last but not least:

The young:
Jan 2009: University tuition fees = £3225.00 p.a.
To be uplifted to = £9,000.00 p.a.
Increase = + 179%

So if you didn’t know who’s paying the price for bailing out the banks, now you do. And that’s why I post this link:
https://www.positivemoney.org.uk/

"The other, more worrying, explanation is that there is less spare capacity in the economy than we would think, given the depth of the recession - because the financial crisis has destroyed more of our long-term capacity than we thought. That would suggest we have less room to grow without triggering inflation"

__________________________________________________________________

Yes it's a shame we can't use those 2.5 million unemployed, or the spare time of the part time workers, plus maybe some of those recipients of incapacity benfefits aren't as sick as we make out.

Of course that would be far too obvious a way of increasing capacity and unemployment is, after all, voluntary.

Stephanie,

For quite a while, you've been saying that the UK is fortunate to be able to manage it's own interest rate - and exchange rate, because it has allowed the country to "re-position" itself by an effective devaluation of the Pound by 25%, while other countries - such as Ireland or Greece - didn't have that "benefit", which means they have no alternative than to cut deep into the economic well-being of their populations.

Doesn't this post proof the contrary though? My point is that an "external" devaluation (you don't touch nominal salaries, but you devaluate your currency by 25%) basically has the same effect as an "internal" devaluation (you don't touch your currency, but you decrease wages and entitlements by x%).

Both are basically the flip sides of the same coin: in the end both mean that countries that have lived (way) beyond their means will pay a heavy price. Devaluation is no panacea, it doesn't solve anything.

Both carry great risks, since an external devaluation could lead to rampant inflation which is just as damaging and difficult to control than deflation, which can be the consequence of an internal devaluation.

There is basically one massive difference between the two: an external devaluation and the inflation it causes punishes those who have not taken excessive risks in that it reduces the value of savings, while making life easier for those who have borrowed excessively (by reducing the real value of debt). An internal devaluation does the opposite: it punishes those who have gotton you into the mess while rewarding those that have been produnt savers. (Which than gives those savers an opportunity for bargain hunting).

An internal devaluation thus has a much lower degree of moral hazard.

It is about time inflation figures were properly reported for each socio-economic group. We all know that the inflation for a call centre worker in the North East is different to the 4x4 driver in the home counties. By mashing all the data together it becomes meaningless, and certainly should not be used for policy decisions.

One of the striking qualities of 3rd world cities like Nairobi is how you get walled rich estates in walking distance from slums. Some how we humans can desensitise ourselves from our neighbours, and justify living in such unequal conditions.

Already we are seeing all the signs of the new way it will be for the Western economies... a splitting away of the rich and well paid from the poor and uneducated. And I see no policies that will reverse it, as globalisation will always mean the rich choosing to use cheaper labour in other countries rather than their own neighbours, even though this means our overall wealth is leaking out of the country.

This rant is about inflation. When you look back in a few years time you will have seen that the combined effect of several years of inflation combined with static wages at the lower end of the economic scale will have made real living conditions dire for large parts of the economy. We will be back to Left verses Right Politics with a vengeance.

At 8:53pm on 13 Dec 2010, TGR Worzel wrote:
"For instance, anybody working on the mininimum wage is clearly going to feel the inflationary pressure a lot more than Bankers, Solicitors, Governors of BoE etc,."

You're forgetting, they are poor people and so don't matter to our 'lords' and 'masters'...

What they are concerned about is keeping the corporate-capitalist ponzi scheme going (and soaking more wealth from the poor to the rich). Poor people being driven into the ground counts as 'acceptable losses'.

Good morning fellow economist watchers.......

We are now suffering the consequences from a time of self indulgence and now unfortunately we all are suffering with the hang over, even those who did not sip at the goblet of cheap credit.

And still we hear that the problem is that we do not have access to cheap credit and that it is stifling business, personal finances and even the housing market which many are hoping is going to be their saviour.

We have learnt nothing from the last recession as we didn't from the one before that Etc Etc Etc.

Can we blame all of this on Gordon and the last administration, well the answer is no not all of it. They did make a bad position worse and they had laid us bare to any downturn in the market by over leveraging us during a time of plenty but they did not cause the whole collapse. Unfortunately the blame has to fall on everyone, from the bankers to those enjoying spending on twenty different credit cards and those taking obscene bonuses to those making stupid money from buying and selling property they could not afford. The majority of us in the western world bought into the dream and we in the UK more than most. Did we believe that St. Gordon had ended boom and bust, well I don't think so, but boy did we want to.

The concern now is that China and India are now starting to display the early stages of this disease. It is very contagious and is known more commonly as "GREED".

Until we start to live within our means and stop expecting everything to be given to us on a silver platter then nothing will change.

I had the privilege to stop and talk to some of the students who were protesting in London last week. They covered the spectrum from those who thought it was a bit of a giggle, to those who cared passionately about the issue to those who were obviously just up there for the crack as they say in Ireland and if there was a little "bother" as one of them put it so much the better. The one and only thing they all had in common was that they had been sold a dream that they now realised was not true. The picture that had been painted was that they could have it all and have it now was one that was never going to be a realistic one.

So until we all wake up and realise that we can only get out what we put in we are doomed to continue in this cycle.

The sad thing is that it is not just the young it is all generations. Last night I watched the news talking about the devolved powers to local parish and district councils. The people questioned thought it was a good idea but none were willing to put anything into it. They all had reasons why, some valid but some such as "we are enjoying our retirement" smack of I'm all right jack syndrome or as I would call it selfishness.

So in a nutshell the majority of us in the UK are Greedy, Selfish lazy good for nothings who are not willing to help themselves not to mention others.

Big Society - little people.
Discuss........

I read this chap's speech. What struck me was the play on words in relation to the MPC's remit. His message was : we can leave inflation move up in situations where the causes are temporary to avoid unnecessarily volatile output shifts. He emphasises that the MPC's discretion allows them to "look through" temporary price movements. Problem is that he points to the temporary factors becoming more " general", particularly in regard to commodities and tradeable goods.We know Chinese inflation is building. Rebalancing toward exports is disappointingly slow, he says. So, what happens when a "temporary" upward pressure on inflation becomes "general".

Generally, who said it was fair for the burden of inflation to be carried in real wage cuts and erosion of savings but not in corporate profit margins. The message seems to be, again, that " if you try to defend your real wages, we'll increase interest rates.." - shouldnt we be questioning these value judgments by unelected appointees...

26. At 07:37am on 14 Dec 2010, Up2snuff wrote:

It interests me, Stephanie and Posters herebefore, that not many people, it appears, want to discuss your Blog and the subject of inflation.

~~~~~~~~~~~~~~~~~~
As the uninformed village idiot on here, I don't like to jump in at the head of a discussion.

But yesterday (I think...memory not what it was) I was saying that we had 10 years of house-price inflation, and now its catch-up time. The price of everything else has to rise. It might meet house prices on the way down, but vested interests will hold house prices as high as they can.

In my confused little world I think that this is because the value of money is being manipulated...£1 at the shop is not the same as £1 in your bank, is not the same as £1 in your mortgage is not the same as £1 on your credit card etc.

As to the the "credit crunch" I think the manipulation got out of hand, and the elastic snapped.
~~~~~~~~~~~~~~~~
On the supply side, I don't think that the country (private or public sector) can afford the wages/benefits/pensions/health service, etc. that it pays. On the demans side, I don't think that anybody is considering the "pyramid of needs" when they demand a consumer-spending growth. I saw the WEEE man in St Austell, Cornwall, and it had the effect it was supposed to have.
~~~~~~~~~~~~~~~~
Putting both these factors together, I expect my standard of living to deteriorate over the next 10 years, and face a retirement of poverty in a declining infrastructure.

It annoys me that any planning I might have done for my retirement has been stolen by unelected officials to pay the bonuses of the uber-rich.

It annoys me that Lord HawHaw and his ilk say that it is because of our unfortunate cultural tendencies that we are fit only to be come a suburb of Brussels/Frankfurt.

It annoys me that "the powers that be" set up my household economics so that I could never break free of being a consumer.

But nobody said life was going to be fair.
===================
You be careful too.

This is absolutely not OK. It is being used as a mechanism to reduce debt and serves to make everyone poorer.

With interest rates at 0.5% and inflation at 3.3% even I can work out that the people of the UK are being made 2.8% worse off. Is this a good way to keep wage claims in check in a time of austerity? No.

The coalistion is confirming that it is a "one session" government unless they bring this menace under control. The BoE shows there incompetence in these figures.

Ben #27

I agree that consumers are being asked to pay more for less: and that savers are getting less (ie an implicit tax). They are clearly the losers in the current policy: but I'm not so sure how this will lead to erosion of the debt.

The debt does not get any less because of either of the above - although its true that interest repayments are being kept artificially low. (On the other hand, if interest rates rise then that's a further squeeze).

Talking, in particular, about Government debt then I don't see how either of these can lead to increased Government revenues - which are very much weighted towards Income Tax and VAT (corporation tax (including tax from "The City" comes in a poor third).

If people are no longer borrowing (and I very much agree that we are suffering the consequences of over borrowing) they can only spend what they earn, and so income tax and VAT receipts will be linked to wage inflation not price inflation.

The value of our debt can fall (in terms of what it might buy) but it will only become easier to pay off if we are earning more. I reckon the Government can just about keep tax receipts on track this year with the change to VAT and other tax increases: but to stay on track next year will require a 7% growth in tax receipts and that can only come either from a 7% growth in taxable activity or from another round of increased tax rates.

#39. DibbySpot wrote:

"The BoE shows their incompetence in these figures."

No - we show our incompetence by not firing these idiots!!!!

Look at Japan since 1990, look at core (dis)inflation in America today. It is unsurprising that many businesses are doing well as it is their money which is flooding into the money markets and driving government borrowing rates down; there is little new demand for their goods. But Osbourne, the coalition, and the CBI all think that the fall in the government borrowing rate is due to their political-economic alliance to deal with the deficit. The fundamentals are Keynesian, our politics are Mellon and Snowden.

Here is Brad Delong, "In his memoirs Hoover was bitter toward many, but bitterest of all toward Mellon, whom he called the head of the 'leave it alone liquidationists.' Hoover quotes Mellon: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.' Hoover opposed Mellon's policies, he said, and worked to undermine them. But what could he do? He was, after all, only the president. And Mellon was Treasury secretary."

#38. stillpuzzled wrote:

"... we had 10 years of house-price inflation, and now its catch-up time. The price of everything else has to rise. It might meet house prices on the way down, but vested interests will hold house prices as high as they can.
"

This is the consequence of a deliberate policy decision to destroy all money! The reason house price inflation took place was the price of money was deliberately and wantonly kept t0o low by the idiots of Threadneedle Street. They were warned, be me and many other, of the inevitable consequences by they just ignored everyone. Now the chickens are coming home to roost.

BUT WE ARE THE FOOLS FOR NOT FIRING THESE IDIOTS! (Mervyn King the whole MPC, the FSA and the Permanent Secretary of the Treasury and his predecessor.)

(PS I've been banging on about this for well over 2 years.)

39. At 10:10am on 14 Dec 2010, DibbySpot wrote:
The coalistion is confirming that it is a "one session" government unless they bring this menace under control. The BoE shows there incompetence in these figures.
--------------------------------------------
Meet the new boss, same as the old boss.

And just from where is a different government going to emerge?

stillpuzzled:

"Putting both these factors together, I expect my standard of living to deteriorate over the next 10 years, and face a retirement of poverty in a declining infrastructure.

It annoys me that any planning I might have done for my retirement has been stolen by unelected officials to pay the bonuses of the uber-rich."

Correct on point 1. I'd say point 2 is not so simple. Your generation (not you personally) have put in place a totally unsustainable system that had to end in tears. Banking debts took some of this but much of it has really gone into a housing ponzi scheme rather than bonuses. We have a deficit every month - that is not down to bonuses. To just cite bonuses smacks of the typical Brit moaning - simplistic, blaming one set, lazy thinking. The housing ponzi coupled with insane pensions as life expectancy races ever on yet retirement age inches upwards. 20 years of responding to "vote for me and I'll give you X" is catching up. As Dempster pointed out - at least you guys enjoyed the party. Youngsters are paying for this mess from day one.

Don't get me wrong - I feel sympathy for anyone who has been responsible only to get dragged down by the majority of muppets in the uk, but the next generation has it worst of all.

The older generation, secure in their houses they bought in their 20s, trot out the "we didn't have ipods" line as though this were a valid replacement for a life of debt and no chance of the security of savings / a home.

You think they will retire at 65? I think they won't retire anywhere near that, and they will pay through the nose from now until then to patch up the savings gap of defined benefit schemes, and most won't buy until they are well over 40 at the current protected income multiple, which won't last either, so I hope your retirement plans don't include the "wealth" in your house ;-)

Who precisely is this article written for?

I'm sure if I had an education in Stephanomics and then the patience to wade through it it would make sense but in how many 'households' (not to mention business premises) would any of this mean anything?

For most folk (living outboard of the Republijc of Westminster anyway) you could sum it all up in a simple sentence:

'WE CAN'T MAKE ENDS MEET BECAUSE THE MONEY'S DISAPPEARED OFF THE STREETS'

Not quite sure what the elegant way of putting that is, ie: translated into Stephanomics anyhow..

GC

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

Inflation rise are definitely not got to help Britain’s debt worries -
In 2010, 1.4 million people have received advice on their debts. That is the equivalent of one in every 33 adults.
With inflation, vats rates rising, high unemployment I bet that figure will soar!

https://www.mindfulmoney.co.uk/2724/economic-impact/record-numbers-struggling-with-debt.html

Meanwhile back at the ranch Portugal go cap in hand to China for help. Could it soon become the next province of China and will Fernando Teixeira dos Santos be a fully paid up "little red book" member?

Me thinks things are worse than they are letting on for they are now doing anything rather than letting in the bean counters from the IMF and the EU.

We need to watch this one closely as I think things could move quickly.

47. At 11:13am on 14 Dec 2010, Samanthav wrote:
=========================================================================
Do you really think we are out of this recession?

'(Put simply, when a 25% fall in the pound caused a sharp increase in the cost of imported materials, companies have chosen to pass this increase on directly to the consumer.)'

Yes. In a lean operation there is nowhere else for the increase to go. basically if consumers want it they have to pay.

'The other, more worrying, explanation is that there is less spare capacity in the economy than we would think, given the depth of the recession - because the financial crisis has destroyed more of our long-term capacity than we thought. That would suggest we have less room to grow without triggering inflation.'

No. The decline has been decade on decade. An thinning out in the last couple of years is not a lot against what has gone before. Investment outcomes take time. Investment is also problematic against reports of a rise from 16 percent a year ago to 21 precent now as the measurement of consumers concerned about the abvailablity of borrowing. Borrowing been seen as a buffer. Therefore working to cash in hand and no risk taking is more the norm. People running businesses first and foremost are interested in the welfare of that business not 'saving' the UK. HMG has to launch its own rescue mission not expect people to paddle other passengers up and down the creek. When BoE rates are 0.5 percent and high street interest rates are routinely floating towards 20 percent it is obvious what the problem is. When RBS is effectively owned by HMG the route is also obvious.

Well if we look at the figures for household incomes & outgoings in price change terms, we have:

Incomes:
- Interest rates on savings at 0.5%
- Wage increases at ~1%
Outgoings:
- Headline inflation at ~3%
- Inflation on food, fuels and other essentials over 5%
- Credit card & other insecured debt at 10-25%

So we have costs going up, but incomes stagnant. Looks a lot like stagflation to me.

45. At 10:48am on 14 Dec 2010, Ben wrote:

stillpuzzled:

"Putting both these factors together, I expect my standard of living to deteriorate over the next 10 years, and face a retirement of poverty in a declining infrastructure.

It annoys me that any planning I might have done for my retirement has been stolen by unelected officials to pay the bonuses of the uber-rich."

Correct on point 1. I'd say point 2 is not so simple.

...

We have a deficit every month - that is not down to bonuses. To just cite bonuses smacks of the typical Brit moaning - simplistic, blaming one set, lazy thinking.
~~~~~~~~~~~~~~~~~~~~~~
Thanks for the response. Heartfelt, I can tell.

I am still learning, a lot by conversing here. Two things I think I have learned:-

1. Keynes advocated Government running a continual deficit, as a stimulus to growth and to promote full employment.

2. Money skimmed out of an economy increases inequality and reduces government income.

I have a novel, which I might someday write down, which I call the Idyllic Saxon Village. The villagers behave like you and me. And I run thought experiments to imagine what happens in the village when basic economic scenarios are played out, such as what to do with a surplus, who owns the infrastructure, etc.

Now, what do you think those villagers would do if they discovered that their taxes were not being used to dig the local well or build the local roads, but were being given by the lord of the manor to his wealthy friends who live in a town far away?
~~~~~~~~~~~~~~~~~~~~~
If you, as a generation, want a fair deal, you are going to have to challenge the status quo and get back some of the money that has been skimmed out of the economy. There is no use asking the older generation for it because we don't have it either.

For a "fairer Britain" will be the only way to cope with price inflation now that the young have been loaded with debt, had their job opportunities exported overseas, and will have stand helplessly by and watch prices rise faster than wages for the foreseeable future.

Don't expect the vested interests to give it back to you as easily as they stole it from us though.

I wonder if the Bank / Chancellor have got their strategy right? The highest spending socio economic group are those with greatest savings. The low interest rate has had a profound effect upon their disposable income and spending ability hence our economy grows more slowly. A low interest rate also means a low exchange rate for the pound which is good for exports but as our balance of payments is so poor - is this better than a much lower import bill and as a result lower inflation? I don't have the answer but would be interested to read what you think.

#44 Kit Green,

But it appears that we WILL get fooled again - and again - and again!!!

7. At 10:30pm on 13 Dec 2010, John_from_Hendon wrote:
The 'Threadneedle Street Fools' are simply duplicitous fraudsters! They claim that their remit is to manage interest rates so as to ensure that inflation does not go outside a given range - but this is now a proven and absolute falsehood.

Inflation is out of control and above their target range which should have resulted in the raising of interest rates a year ago - but no, these idiotic badly educated failed economists now rely on praising politicians for cutting the deficit rather doing what they are paid to do - they should all have been sacked some time ago and the longer they remain, the more invidious and ridiculous their position becomes and the more damaging to the country.

We must get rid of these calamitous fools. If they possessed an ounce of integrity between them they would have fallen on their own swords long ago! Their lack of action just renders them a laughing stock.

..........
Increasing interest rates will of course effect mortgages which will help the already dropping house prices down, increasing negative equity, leading to defaults, bad debt and yet another banking crisis. Its going to happen anyway, but the BoE dont want to be seen as the cause of it, hence no attempt the stem inflation. Inflation will continue as long as the prices of commodities rise in the face of the de-valuing of the dollar though QE.

"There is no use asking the older generation for it because we don't have it either."

Hello stillpuzzled...

No - much of it has gone into:

* housing - borrowed loads from abroad to pump up a non-productive asset way above it's intrinsic value
* pensions - let's all have part of our final salary for 20+ years - we won't do defined contribution otherwise we'd get loads less

It's totally wrong to just blame banks alone. They are a big part of the problem. However, there are other factors such as housing and pensions and the people who will carry the can are the younger generation. The demographic issues will make this look like a picnic thanks to the policy of current workers paying for current pensioners, no matter what the ratio or the actuarial issues.

To just say it's gone on bonuses is to look one layer deep. People got bonuses based on loans that were risky. The bonus is less than the commission. The commission is a fraction of the loan value. The loan went out into the economy and people then said things like "wow my house has gone up loads and will continue to do so forever - I'll take some equity out and spend it on tat" or "my house has gone up so much I don't need to save for a pension - I'll spend my disposable income on tat".

Why is it lots of older people have far more generous pensions than younger people? Is it because we could only have that for a finite time because it's totally unsustainable?

I feel your village example lacks explanation. Who are the actors you define, who are just handing over cash to outside parties?

People need to understand the city. Yes it skims money off. It's of limited use functionally, it's should be simpler, etc etc. But it's global - it skims some money off the UK but it also skims money off of tens of other countries - and much of that comes back to the UK. Whether you agree with that morally or not, it is a major contributor to our economy when it works well.

The housing bubble was only possible thanks to BoE and Labour riding on the back of what anyone with half a brain knew must pop at some stage. In the meantime much port was drunk and a fine time was had by both these lot and a good many Brits who just didn't get it and drank the Kool-aid.

The vested interest is now home-owners. They are "too big to fail". Interest rates are being kept low to try to ride out the inevitable second crash when rates go up and those who have borrowed loads default. In the meantime it's an implicit tax on everyone else, the vast majority of whom are people too young to buy a home.

I see the discussion on how the young are being fleeced to pay for this has arisen here again. I've made my views on this perfectly clear before and won't reiterate how this is excessively punitive in detail again.

Now, how about some more QE to drive inflation right up to deal with our debts? Never mind the actual people who live in the UK though.

I'm personally getting all kinds of comments from various people about how aggravated they're getting with working full time whilst getting poorer with no decent offer on the table at the end of this.

As for anyone unemployed, no-one's going to be retiring at any specific point and there's no spare capacity in the economy. That'll be quite some time before you find decent, long term stable employment then. Remind me again, how old are the largest portion of the unemployed from this recession - seem to recall it was under 25; and have also been told their study options are being reduced whilst those that remain are much, much, much more expensive. And people wonder why the young are rioting?

Perhaps the time for peaceful protest is over and some more direct action is called for. Perhaps it's time the students got some older support.

And as for inflation, hasn't this simply become a way of keeping business profits up?

After all, inflation was EXCELLENT at tracking the house price bubble wasn't it?

As Steph points out, wage growth is 1%.

I've long thought both our governments through this crisis have been attempting to inflate away debt rather than deal with the cause. It looks like they misjudged the spare capacity in the economy to enable reasonable salary rises to absorb this.

We appear to be in the grip of stagflation with no obvious route out.

How long before an offical has the balls to call this what it is - a depression?

Inflation is the key measure. Interest rates are the key control. Yet the Bank of England is operating so independently, that we have to ask this:

How many of its employees, and committee members, and especially the Monetary Policy Committee, are biased by having index-linked investments and Tracker Mortgages?

As the BBC considers itself to be a news gatherer that serves the public interest, instead of telling us the very obvious things about Inflation rates, trite economics, and the excuses by the Bank of England,

Have the Members of the Monetary Policy Committee declared their personal, friends and family interests in interest-rate related investments?

The Public should want to know THAT.

(The Bank of England is run by economists, with their small, prejudiced, fashion-conscious mindset. Economists are not subjected to sufficient competition even now. Economists are not adequately exposed to free market forces, for them to be performing adequately. Economists are exercising a monopoly of intellectual influence, as they have done one way or another since World War 2, over all things financial, numerical, and political. Breathing sighs of relief when GDP is up or inflation is down is not a substitute for performance by economists. )

This isn't a surprise. Prices and incomes are created in production. In a positive inflation world wages are being (at best) held in money terms thereby taking more of the pain in favour of profits.

Interest rates rising will redistribute profits between sectors of the economy but continue the process of reducing the purchasing power of income from wages in favour of the profits of financial companies through a further increase in the cost of borrowing.

What exactly is "spare capacity"?

#56. Averagejoe wrote:

"...yet another banking crisis. Its going to happen anyway, but the BoE dont want to be seen as the cause of it...
"

Of course we have to de-leverage the debt bubble. However many people on this blog seem completely unable to get their head round this problem! Last week I was attached for telling it as it is (yet again - I don't actually care about this). But it does show how little many people recognise the hard place we are actually in at present.

The scale of the problem should be recognised. (Again many people refuse to read up the history books so continue to spout nonsense!) Property bubbles take a couple of decades to deflate. The evidence for the assertion if what happened in the Long Depression of 1873-1896 in the UK. The question arises: are we prepared to suffer for this length of time and further can we afford to put the Nation through this suffering?

Preparedness: As you asserts and I agree, the problem has to be resolved so whether we are prepared or no the problem has to be fixed.

Time-scale: I think there may be a choice (and I hope there is!) Here I am excoriatingly scornful of the Bank of England. The Bank of England seems set on a policy choice that will prolong the agony. I think this is wrong. Mainly because that the make the country suffer for twenty years when they could choose to dramatically shorten but deepen the suffering. I see it like this to miss meals entirely for a few days is painful, but you survive by just depleting your fat - but to take their chosen path, to exist on a starvation diet for months does immense long term damage.

By the way, it is also a bit rich for the Bank of England not to wish to be seen as the bad guy when they, without any doubt whatsoever caused the bubble and hence the crash!

There is clearly no point in having savings any more as the western status quo have decided on a stagflation policy to protect their interests.

Inflation is obviously long term and the energy crunch is also coming. The recession is currently masking this issue. I would like to hear more from Sage_of_Cromerarrh on this and also any progress on energy accounting.

I think Stephanie's point on growth is bizarre.. As if growth only depends on capacity. The answer is simple. Businesses know we aren't out of recession so why would they want to grow. In recessions businesses prioritise survival rather than growth and any business prioritising growth at the moment is run by dangerous risk takers.

There are a lot of good posts on this thread. I like Not Buzz Windrip's post on investment. This has always been a problem in the UK but it's one that has considerably worsened over the last 2 decades.

I've recently become wise to Not Buzz Windrip's mind games and I think I can announce that he is in fact Buzz Windrip using a cunning disguise. It's also great to see Charles Jurcich posting as he has written some of my favourite posts.

But then again this goverment is so sure they have it Right I can only believe they must know what they are doing(!);

https://www.guardian.co.uk/politics/2010/dec/14/treasury-rejects-civil-service-chief-plan-b

Now, now JfH,

I agree with most of what you say, but BoE 'without any doubt caused the bubble'...

Not sure on that - all was fine whilst you were able to move house easily to a nicer area / have greater purchasing power wasn't it?

I agree people seem to be unable to comprehend that a deleveraging needs to take place. There also seems to be a group of people who seem totally unable to accept that by borrowing more and more, they snowballed the property bubble.

It's all the BoE's fault, it's all the bankers fault etc, etc, etc. Never it's also a bit my fault for excessive borrowing.

Supply & demand is very basic economics no? Or doesnt this apply here and the BoE signed your mortgage deed?

Ben @57

You're aiming at the wrong target. Pensions were over generous because they were all devised with an assumption of low inflation which would make long term investments feasible. This was a lazy assumption. Debt requires economic growth to repay debt with interest. Growth has to be generated by either work or inflation. When too much debt is issued then the only options are inflation or defaults. It wasn't the pensioners that borrowed all of the money. I also think it's unfair to blame the young for borrowing too much money. The real culprits are the governments, central banks and banks.

Centralist London Government.....Seems that everybody outside London is going to suffer...But London and The City will carry on regardless....
QE....who were the winners....The City and Banks...Back to the good old Thatcher days...Loads of money for the City Slickers...Not allowed to fail.
So we have the priveledged Government dishing out the lolly to their City friends. (The Free market cannot be allowed to fail even tho.' it's full of dinosaurs)...Where is that money coming from.?..
Ans....QE and public service cutbacks...A slight of hand by our Centralised London Government.
Just have to hope that the population at large sees through this....It's history repeating itself, except that the figures involved are colossal.
The S.E will carry on regardless and the other parts of Britain are going to suffer...including the younger generation.
This is similar to the USA where Main Street is suffering whilst Wall Street continues as normal.
Can this corruption of public funds continue...This continual propping up of the Market and The City..in the name of efficiency.
It's blatarntly obvious where all the wealth is...The S.E....and this process of wealth redistribution to the S.E has been going on for quite a while now...Probably since the 60's (remember the Beeching cuts)...
Anyway that is the way I see it and no doubt time will tell...Recapitalise the Banks...Yuch.

INFLATION on it's way, also will adversely affect the rest of the UK...No doubt London will benefit.
Can someone please explain why getting the masses to buy plastic and electronic goods manufactured in China will get us out of this financial disaster that we are in...The Economists seem to think this is the way....Spend to get out of Debt>!!!???
Economics for the city spivs and slickers...whilst at the same time, the savers are also being attacked.
This situation seem to be an attack by the City and the Government, on everbody who are not in the City or the Government....It's almost akin to a Communist regime.!!
Also considering that 80+% of the Government/ Civil Service/ Media are from a private schooling background.....Just like the school playground where all the priveledged kids huddle together around the sweety stall and prevent the lesser ones getting their fair share...or akin to the strongest pigs getting the swirl before the weaker ones...Just as in Nature...Dog eat dog.
Just what on earth is this private/ priveledged education producing nowadays...Where are the Statesmen...people that one could entrust with power...All we have now is self interest tied up with the City....Enough said....

37. At 09:59am on 14 Dec 2010, shireblogger wrote:
"Generally, who said it was fair for the burden of inflation to be carried in real wage cuts and erosion of savings but not in corporate profit margins. The message seems to be, again, that " if you try to defend your real wages, we'll increase interest rates.." - shouldnt we be questioning these value judgments by unelected appointees..."

a very good remark.

It's an absolute joke - virtually every month the BOE explain the missed inflation target as "exceptional", and every month a different excuse ....the weather etc!! so where's the spare capacity in the economy he's always talking about keeping prices down?

of course it's nothing to do with the lowest interest rates in history, the billions in quantitative easing swishing around, and feeding a commodity bubble leading to imported inflation, nothing to do with the effective 25% devaluation in sterling, plus a few billion in banks bonuses feeding into the economy.

as 52. At 11:52am on 14 Dec 2010, Hawkeye_Pierce wrote: stagflation here we come!

@45. Ben:
@53. stillpuzzled wrote:

"If you, as a generation, want a fair deal, you are going to have to challenge the status quo and get back some of the money that has been skimmed out of the economy."

I second that.

But you could start in the here and now, by participating in this campaign:-
https://www.positivemoney.org.uk/
which is aimed at stopping money from continuing to be "skimmed out of the economy" from now on.

Creating New Money: A Monetary Reform for the Information Age, by James Robertson and Joseph Huber, presents a similar proposal, somewhat more detailed, with plenty of numbers in the appendices. Available as a .pfd file here:-
https://www.jamesrobertson.com/books.htm
if you're interested.

I would suggest that a lot of what is called here our long-term capacity departed for further shores long before the financial crisis. Unbeknownst to those in charge at the time this was just nodded offshore as the workings of a free market. As a consequence incomes in the real economy were on the slide well before the financial crisis took hold.

Given this Pelleon, the Ossa of the financial crisis has not only created a lot of pressure on ordinary people it has put many of them and smaller businesses into a vice-like squeeze. There is no prospect of any recovery for as long as that squeeze continues. If you have debt you are squeezed by that and if you have savings you are squeezed by absurd interest rates.

There needs to be some remission so that the population can see a way forward, but there is none and so there will be no economic recovery.

Given the remorseless increase in the rising price of road fuel which will inevitably work its way through the entire economy, how can anyone argue that inflation is temporary?

Hacky - think we have partly crossed wires - I wasn't blaming the young. At best they are misguided for getting sucked in to a ponzi scheme close to it's final days.

Regarding the "lazy assumption" on pensions. I imagine it was a bit like this:

Board all 50+ - agenda: pensions (could be a council meeting or a private company, or BT or BA):

"lets calculate our pensions - I vote we make some positive assumptions so we either do ok at worst or rake it in at best. All who agree say 'I'"
Lots of hands raised

10 years later. Agenda: closing pension scheme to new entrants:

"Aggressive assumptions...hurumph...unsustainable...hurumph...keep current scheme going...hurumph...close to new entrants, say 'I'".
Lots of hands raised

Lazy assumption or not, the youngsters are the "have-nots". I think "lazy" is a lazy way to describe hundreds of billions of miscalculations that these guys are expecting to get paid, regardless. That generation have voted for increases in everything year after year after year. Shall we just say the bankers were a bit lazy in calculating loan risk and leave it at that? The kids didn't build this but they have to live with it.

inflation is not important to the politicians in the short term compared to keeping mortgage rate low to camouflage the real degree of brown stuff that we are in. If the bulk of us peasants had to pay 6- 9% rates as of a few years ago to keep a roof over our heads I do not think it would only be the produce of rock stars and the aristocracy causing a minor fuss on the streets.

57. At 12:34pm on 14 Dec 2010, Ben wrote:

To just say it's gone on bonuses is to look one layer deep. People got bonuses based on loans that were risky. The bonus is less than the commission. The commission is a fraction of the loan value. The loan went out into the economy and people then said things like "wow my house has gone up loads and will continue to do so forever - I'll take some equity out and spend it on tat" or "my house has gone up so much I don't need to save for a pension - I'll spend my disposable income on tat".
~~~~~~~~~~~~~~~~
Yes, of course, we have all behaved like that. NOT.

Lets look behind the "one-layer" model shall we, and this is thinking on the fly, so feel free to correct this?

Q. Where does the money come from to issue the loan?
A. From the valuation of assets? i.e the value of money is tied to the value of assets. Right? Wrong? It seems to me that only certain types of asset count. Depending on who is doing the counting, and what the deal is. RPI vs CPI? Hosue price inflation 300%. CPI around 3%.

What is the value of money? What should it be if the money supply increased exponentially between 1990 and 2010.

Now, if I have a secured loan, and have therefore given the lender the title to an asset, is there any net increase in wealth to me? If the asset is my home, I get to live in it, but for the same money less interest payments, I could be living in rented.

Let us assume that the price of my asset does not change over the life of the loan, and I pay off my loan. I therefore get title to the asset, and the bank no longer has a creditor. Who has a net increase in wealth?

A. The lender. The extra hours of labour I put into paying the interest are the only net increase in wealth.

All my life I have been paying interest, and never gaining ground. It is called "debt slavery".

Loans are tomorrow's earnings spent today. Government has been spending tomorrow's earnings, people have been spending tomorrow's earnings, and the only people who have not been doing so are those with a net surplus, (those receiving interest payments)which they have been squirreling away in offshore tax havens, therefore taking the money out of circulation where neither the government can spend it nor the economy revalue it.
=====================
Returning to the problem of inflation...house prices went up because they allowed the lenders to make bigger loans. And the more loans they made, the more interest payments (and bonuses) they received. But sooner or later the increase in money supply has to either reflect a real rise in net asset value, or result in inflation.

i.e. Loans 'per se' are not a bad thing, but they should be spent on increasing net asset value, not wasted on "tat".

That both government and households spent a lot of it on "tat" was to keep the spending-based GDP growing (consumer led recovery...ROFL).

While there may be sound reasons for public (tax) money being used to dig holes in the road and then fill them in again...there are no sound reasons for borrowing the money to do that at interest. Remember who gets the net increase in wealth?

Result...tomorrows earnings have been spent today...on tat...because the economists said we had to. And price inflation is an inevitable result of increasing the money supply in order to provide increasing quantities of loans, which in large part was driven by an OTE culture amongst lenders.

Not quite as shallow, perhaps?

Inflation has been about to come down for a long time now and still we have clowns telling us that we have done well through the recession. Of course this is true for the small proportion of the population who have mortgages and especially those who are in the "buy to let" market. Whilst house prices may be static at present this will not last because of inflation leaving these guys quids in whilst those who are savers (me for instance) continue to lose out. Equitable; I think not.

@57. Ben wrote:

"The vested interest is now home-owners. They are "too big to fail". Interest rates are being kept low to try to ride out the inevitable second crash when rates go up and those who have borrowed loads default. In the meantime it's an implicit tax on everyone else, the vast majority of whom are people too young to buy a home."

Very penetrating critique IMO.

But let's not forget that the banks were the first to be "too big to fail". In the last house-price collapse, nobody bailed-out the home-owners caught in the negative equity trap.

What's needed is a land value tax.

#74

I think you should be titled "notatallpuzzled" as you've hit the nail on the head.

Here's a copy of clear & articulate argument & evidence submitted to the Independent Commission on Banking that describes how this fiasco can be undertaken:

https://forensicstatistician.wordpress.com/2010/11/19/is-modern-banking-fundamentally-flawed/

I hope and pray that they listen.

stillpuzzled - ok looks interesting - will read in a bit as it's a bigger one. What happened to all the cutesy saxon village stuff. I think I like the "bad" stillpuzzled better :-)

I'm no economist but I read this blog with great interest. I think it is fair to say as a middle class 30 something with young children and a £250K mortgage to live in tiny 3 bed house on the outskirts of London, is that Housing is the fundamental issue, cause and solution to much of the problems we face. It is right to say that if interest rates go above 6% the whole thing collapses like a pack of cards and the banks go under again. It is also fair to say that my generation has had very little choice but to borrow these huge amounts just to get a basic family home. I did not buy a house to make money I bought a house to raise a family, to be able to choose the colour of paint of my childrens walls, not to have to worry about eviction every twelve months.

The housing policies for last 25 - 30 years in this country and others have been nothing short of disastrous. There is no long term rental market for families, there is a lack of stock in the south east for families and demand forced prices up etc.

Its all very well blaming the public for over borrowing and the baby boomers complaining about their savings, but my generation has had to work with what is available, the baby boomers have been in control. The baby boomers got very wealthy on the back of housing and privatisation it seems to me it requires a radical rethink of housing policy to move away from home ownership but allow families some of the benefits of ownership before any macro economic policy which can get us out of this hole can be implemented

#66. Jack_Dwakins précis: Support for the BoE.

Sorry, I have to disagree. It was the regulator's fault that the price regulator of monetary inflation was not used to moderate house price inflation. The BoE (and or some other part of the tripartite system) should have raised rates a decade ago to put downward pressure on the availability of money. They didn't - so they are culpable.

From memory, the last Conservative government during the 1980s forced an escalating rise in lending interest rates to around 15% for families with a mortgage to contain rising inflation rates as our exports declned and unemployment rose? Those same families saw their mortgages rise beyond belief as the property market crashed leaving decimated families suffering negative equity and repossession.

Inflation figures for 2011 will rise further as the expected increase in fuel duty and increase of VAT to 20% on top, kicks in from January. This will further increase the cost of food in the UK, as most food is distributed by road transport.

The huge rise in the costs of public transport for rail commuters were announced in November.

Front line services commuters - on internal rotation shifts - who rely on their car to get to work promptly and before time for hand-overs to other professionals and then get home safely at night, or the early hours of the morning with no safe public transport - are on a pay freeze.

Can we expect the Bank of England to announce, during 2011, a rise in interest rates to combat rising inflation due to higher taxation and rising unemployment as the Government cuts bite hard and indiscriminately?

It is not quite fair Stephanie for you to criticise the performance of the Bank of England on inflation. You write this article as if you saw the rise in inflation coming and yet back on the 1st of October you wrote this.
"With the possible - very limited - exception of inflation expectations, it is hard to identify a single indicator suggesting inflation is about to pick up"
So you too were not expecting this rise.

Baz Rutter - I'm in a similar family boat. How old are most people with their hands on the levers of power? How old are most voters?

Utility sell-offs, increased public debt and fantasy pensions are all sustainable in the short term. Medium term is someone else's problem. Ask the master: Merv King.

Why is my 2 year old nearly 20K in debt? My parent's generation - because they're worth it...

@74. stillpuzzled wrote:

"Q. Where does the money come from to issue the loan?"

Out of thin air.

Have you never heard the mantra:- "loans create deposits"? Banks issue loans to the fullest extent their lending-criteria for the time being in force allow. Separately, they maintain in their reserve account at the BoE the quantity of reserves either their internal risk-management or the authorities (under Basle 3) require as a ratio of their lending. The lending decision is not directly coupled to their reserve position. Instead, the fitting of the latter to the former takes place ex post facto on a daily (or twice-daily) basis whereby any shortfall is met by very short-term borrowing in the inter-bank market. All else failing they borrow from the BoE. At the height of the bubble, their lending exceeded thirty times their reserves. Now they are all busily repairing their balance-sheets - ready for the next lending-spree. Meanwhile loans are in relatively short supply.

The whole of our economy is governed by this crazy system, which grossly magnifies the swings which in any case are inherent in the normal business cycle.

The money which fuels it comes, I repeat, out of thin air and its sole purpose is to make the maximum possible profit for the banks, and the biggest possible bonuses for bankers.

And BTW the supply of debt is not driven by the demand for it - the quantum of debt is driven by the supply (most especially in the household sector). The bigger the supply of credit (which the banks determine for the aforementioned purpose), the greater the amount of debt. But the banks do not create the money with which to pay the interest, which means that in order for that to be paid, more debt must be incurred.

It would be a sick joke if only it weren't true.

#80 A decade ago the BoE was 6%. July 2007 it was 5.75%

So the idea that interest rates had been put up and weren't sustained at a level for a significant part of the last decade is incorrect. What it shows is that the creation of money through the advancement of credit by private institutions is not effectively regulated by interest rate policy.

I thought that inflation was what they wanted, the quick and easy way out of monstrous debt.
Regards, etc.

77. At 3:01pm on 14 Dec 2010, Hawkeye_Pierce wrote:

#74

I think you should be titled "notatallpuzzled" as you've hit the nail on the head.

https://forensicstatistician.wordpress.com/2010/11/19/is-modern-banking-fundamentally-flawed/

~~~~~~~~~~~~~~~~~~~~
Ah well, give enough monkeys enough typewriters...

Really good article...I had no idea that banking used to be Originate and Hold. Whose idea was it to change that?

As to not allowing financial intruments to be traded at all, I was suggesting something similar on RP's forum, but nobody would discuss it. Assumed it was too naive to be worth a comment.
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79. At 3:38pm on 14 Dec 2010, Baz Rutter wrote:

there is a lack of stock in the south east for families and demand forced prices up etc.

While local demand may have had small effect on property prices, I am fairly sure that the population of the UK has remained roughly static for teh last 20 years. ONS figures show that UK children of UK-born mothers is less than 2.

In mushroom's world there are three key causes of the rise in house prices.
1. Immigration, legal or otherwise.
2. Breakdown of family units
3. Availability of money.

The government could have dones something about 1 and 3, (I won't get into the debate about 2). But it didn't.

Regarding 3 the law of supply and demand says that if the banks offer someone 100k to buy a house, the seller will prefer them over someone who only has 50k. The banks win, the estate agents win, the seller "wins", and the buyer loses, by having to pay back interest on 100k when the property could have been valued and sold for 50k.

Having sold one house for £100k, the estate agent says "there is another one down the road in even better nick...lets put it on the market for 120k. The banks offer a loan, a buyer steps up, and the prices ratchet again. This has nothing to do with a shortage of housing, and everything to do with the OTE culture of selling loans and skimming customers.

House price inflation (300%)in 10 years correlates almost exactly with the increase in money supply during the same period.

Nobody voted for it...but the unelected officials who were supposed to regulate it chose not to. Perhaps because it would have negatively affected what they could report about "spending-based GDP".

Look, they cried, we have "growth"!

JfH,

I didn't dispute that - what I said was are we really meant to believe there wasn't any demand for this additional money?

and a 2nd point:

RPI was changed to CPI by New Labour. As RPI includes housing costs, isn't this transfer actually a failure of New Labour's rather than the BoE?

@85. SeanBroseley wrote:

"What it shows is that the creation of money through the advancement of credit by private institutions is not effectively regulated by interest rate policy."

Quite right. Interest-rate policy affects the price of credit but not the volume of its creation. Especially when - as in the recent house-price bubble - any remaining vestiges of caution or prudence are cast aside in a frantic drive to lend, lend, lend. More lending meant bigger profits, so all the "normal" rules were bent to achieve it.

"Asset backed securities" (aka sub-prime mortgages, aka "toxic" assets) were utilised to pass the risk on to unsuspecting buyers of this AAA-rated junk. Hence all the (still potential) bad debts which the banks now have on their books but are extremely coy about quantifying, let alone writing-off. Hence the keeping of MLR as close to zero as possible for as long as possible, regardless of inflation.

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

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

Ben @72..

I didn't think you were blaming the young, I thought you were blaming pensioners. Their pensions were funded under the conditions at the time they joined. Since then there have been low birth rates and high inflation. I am saying that inflation is inevitable when there is too much debt. The recent debt explosion is primarily due to borrowing by the 25 to 40 age group. The demographic timebomb of baby boomers retiring is also starting to hit but this is a trend that will continue for a long time. The debt economy that we now have would have been unimaginable to people who are currently retired when they were working. This is because the debt explosion is absurd and obscene. You said that your circumstances are similar to Baz @ 79 which means that you are likely to be one of the zombie households that JFH wants to decapitate (if that's how to kill a zombie). Sorry if I'm stretching the metaphor too far. The point I was making is that pensions are not achievable for anyone with current levels of debt in the economy. It doesn't matter how much money goes into pension investments, the return will be insignificant once the inflation needed to pay off current debts has taken its toll. People should either accept that pensions cannot exist, ie. supporting elderly from taxation, or allow debt defaults therefore making investment return feasible again.

I am probably a similar age to you but I chose not to buy a property because I thought the debt bubble was going to burst. I didn't anticipate that governments would adopt a policy of bail out the banks at all cost. I tend to get slightly offended when people start attacking my parent's generation. Stephanie Flanders has been the cheerleader for this argument by writing an attack on baby boomers.

93 Hacky The Hufrex

There are mechanisms driving this along and drove the whole thing to this point. They are still driving it when 1/3 of new housing is cancelled due to a new thing called localism aka a old thing called Nimby. You can get as offended as you want, just look up the gain in relative wealth over the last 50 years, and ask where it came from.

BTW state pensions are already paid out of money as it comes in, there is no buffering fund. The principle adopted at the start was money in money out otherwise the first pensioners would never have go a pension because they could never have saved in the scheme because the scheme never existed for them to do that.

Inflation with wages rising is one thing, inflation without wages rising is another. Sterling was overvalued at 2 dollars to the pound.

SF refers to an effective 25 percent currency drop. This neatly links with factory gate prices rising by 4 percent, as a common ratio on raw material is 6:1.

The only things apparently doing well at the moment are - essential consumables, high end stuff with cultural content, and high tech. that leaves a lot of people not doing so well.

If your running a gas guzzler as your mode of transport and the gas guzzler is housing and the fuel to run the show, debt, becomes scarce then you end up on shanks's pony. And people used to cruising on a gas guzzler dont like it much.

Its quite simple. Instead of people and their errors trying to keep inflation at the target 2% we have a computer that lowers or raises interests rates accordingly. No political manipulation etc. Inflation above then increase rates. Inflation below decrease rates. Sack most people at BOE and save on their salaries!

@90 said "Hence the keeping of MLR as close to zero as possible for as long as possible, regardless of inflation."

A high price to pay for culpable mis-management by the Banks and the BoE.
Pre MPC when the Chancellor set the base rate we had the opportunity to vote him out of office, if we didn't like his policies. Not any more. The BoE MPC accountability seems to stop with "writing a letter".

@ 66 If you think the banks don't deserve all this flak, Jack D, then check out the link below.

https://www.guardian.co.uk/business/2010/dec/13/wikileaks-rbs-chairman-philip-hampton

I'm not sure who should shoulder more blame - the FSA, some of the banks or the BoE. Maybe it doesn't matter. The whole sorry tale is gradually coming to light and exposing the real agenda of the men in grey suits. They don't care about the economy or British industry or T C Mits with his savings (or mortgage). They only care about the survival and future prosperity of their financial institutions.

What justification is there left for continued 0.5% rates. We've already had two years of the lowest interest rates ever seen and we're not in recession? What do we pay this lot for?

These inflation figures come as no surprise to most people.

Come on BoE, let's have an increase in interest rates. What I need right now is my mortgage payments to increase so that I am forced to stop wasting money on food and heating.

84. At 5:04pm on 14 Dec 2010, torpare wrote:
How can all the banks borrow these vast amounts of money from each other each day? Maybe they lend each other their deposits?
How does it show in their balance sheets? I am fascinated!

Not Buzz Windrip @ 94
You can get as offended as you want, just look up the gain in relative wealth over the last 50 years, and ask where it came from.
-------------------------------------

As you say it came from debt, but it didn't come from pensioners borrowing too much on houses did it. It came from people approximately Stephanie Flanders age borrowing too much on houses and people younger than her borrowing too much on credit cards and houses. It came from governments hiding off balance debt, ineffectual regulators who didn't want to rock the boat and bankers looking to make a quick buck. The inter-generational mud slinging is offensive and should stop. Pensioners may have paper wealth because they own houses but the value of their pension income has been and will continue to be wiped out by inflation. Any thrifty pensioners who have saved money in their lifetime will not be eligible for benefits if they exceed the savings limit. Many pensioners have worked all their life and live on less than income support because they exceed the savings limit. Even those with a full pension may be living in poverty. Companies have also legally drawn money out of pension schemes that were considered to be over funded during stock market booms. The paper wealth in housing is irrelevent for many pensioners and well paid journalists should start thinking about how people live before they start throwing blame about. Do you think Stephanie Flanders would write such a critical article about Mervyn King. Instead she writes an artice about people who have no voice to defend themselves.

Apart from that I do already know about the other issues that you've raised.