Thursday, Sep 24, 2009
Where exactly will the political will for interest rate rises come from?
ThisIsMoney: MPC expects 'sharp rise' in inflation
Don't worry about the coming rise in inflation we are being told. It will not require any 'policy measures' (i.e. raising of interest rates). Funny how nowadays, all inflationary rises are defined as temporary spikes not needed corresponding rate rises and all falls in inflation present a deflationary threat requiring an urgent expansion of quantitative easing! Crisis meetings here and there ... is it time to end this boom and bust cycle the Bank of England creates, let the Old Lady retire and hand the reins of interest rate setting to the ECB?
Posted by paul @ 08:36 AM (1985 views) Add Comment
55 Comments
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2. mountain goat said...
Where exactly will the political will for interest rate rises come from?
There won't be political will for this because of the mass debt defaults that will result. So it will have to be forced on the government of the time. For example a currency crisis leading to a very big fall in GBP.
Personally I don't expect this. I expect another even more vicious panic deflation episode again in the next 6 months to clear out more of the toxic debts and a big hpc, followed by more QE and eventual high inflation. Why another panic? Because Central Banks can't justify increased QE the way things are going at the moment (rising stocks and hp). But the over capacity and debt burden is still too high to allow recovery. So the boil has to be lanced again and from the panic will come new acceptance for the need of big time QE. Eventually we get high inflation when a true recovery starts.
3. jack c said...
Where exactly will the political will for interest rate rises come from? - imposed by the IMF perhaps?
4. hpwatcher said...
In fact I have been bolder stating HYPERINFLATION & FOOD SHORTAGES.
Why? Because that's what they want and they always get what they want.
Who? Give me a break, you all should know by now!
Not sure about that - would cause too much political unrest....more than half the country are already ready to lynch the politicians....
5. mark wadsworth said...
They want people to think that there will be inflation to stampede them into buying (or at least not selling) houses.
I see no reason why we would have big inflation.
6. smugdog said...
Don't under estimate the Government's hell bent desire to generate inflation ;0)
7. uncle tom said...
Where exactly will the political will for interest rate rises come from?
If politicians take the counsel of those with wiser heads than they (not likely before the election, unless things start to unravel badly..) they will learn that keeping interest rates too low for too long is a recipe for calamity.
With interest rates suppressed, there is currently insufficient interest in Gilts, so much so that the QE program is not only buying the entire budget deficit, but more besides. If this continues for much longer, the attraction of sterling investment will falter, and the markets will start to believe that the UK has no option but to hyperinflate its way out of trouble.
If interest rates are allowed to rise in a steady orderly fashion, market confidence can probably be maintained; but I believe this needs to start now, and not after the election.
Unfortunately, Brown and Co. will probably reckon that hell is not likely to freeze over before next June, if rates are kept low; so will leave the next government with a far worse mess to deal with, than needs be...
8. chrisa said...
Paul in the original posting has got this about right I think. When inflation kicks off they will be extremely slow to raise interest rates knowing that it would depress the stock market, any supposed 'recovery' and result in hundreds of thousands more people not being able to pay their mortgages on their overpriced houses. The history of Sterling over the decades is one of progressive devaluation and there is no difference this time. Inflation through excessive money printing is all they know how to do. Asset price deflation is the only deflation they worry about and the masses have been scammed into going along with QE which is being used to buy UK government debt because hardly any foreigners will buy it. Note how quick King was today with his comments to beat the pound down again after it rose yesterday. They are quite happy to trash the currency. QE will no doubt continue for at least the next few years at around 200 billion/yr because if not who is going to fund the budget deficit?
9. tyrellcorporation said...
'They are quite happy to trash the currency. QE will no doubt continue for at least the next few years at around 200 billion/yr because if not who is going to fund the budget deficit?'
Zimbabwe in all but name!
10. refusetobuy said...
BANK OF ENGLAND
You are lent two cows.
You give two pieces of paper to the lender, each promising a cow
You sell 10 more pieces of paper, each promising a cow
You say each cow is now worth an imaginary cow
You return the original cows
You sell 10 more pieces of paper, each promising an imaginary cow
You now have no cows, and lots of money.
You are happy.
You vote for whoever will keep this going.
All the cows die
The government needs more cows
You give the government 150000000000 pieces of paper, each promising an imaginary cow
(http://sabbah.biz/mt/archives/2007/01/07/politics-explained-with-two-cow-analogy/)
11. jackas said...
We can keep printing money until the CPI goes up, then we'll stop.
Similar logic: I can keep smoking until I get a smoking related disease, then I'll stop.
The government will always take the politically easier route of money illusion.
Thieves.
I'm going to buy a house to protect myself against the hyperinflation that is so surely on its way now.
12. fubar said...
Chrisa @6 I think you're being a bit hard on "the masses". Nobody has been scammed into going along with QE. No one was offered a choice. No one I know thinks it's a good idea and hopefully this will show at the next election.
13. little professor said...
High or hyperinflation is the only way out of the current debt-fuelled mess the UKUSA are in. It's coming, sooner than you think.
14. smugdog said...
Buy that house now and let good old Gordon burn away your debt, what a decent chap he is.
15. need-a-crash said...
@14. Smugdog... er... I would if I could afford one! Aren't you forgetting the reason for the existence of this site?
16. matt_the_hat said...
14. smugdog - which fool is going to give you capital and want less back in 25 years - if you know who please let me into your secret!!
17. jackas said...
Matt.
The governement will through the nationalised banks.
Remember : "At any cost".
18. smugdog said...
Particularly the cash rich, sitting nervously counting, watching their pile dwindle away, whilst assets catch the wave.
Yes, as sweet Merv and Alistair so nicely put it, "At any cost".
19. jack c said...
If we do end up with little professor's scenario of high or hyperinflation then it will (IMO) be different to that of the 1970's because I cant see wages keeping pace - indeed I think with pay cuts, short time/part time working etc... earnings are going backwards. So the idea of inflating away personal debt as per smugdog's suggestion (currently at 14 - Thursday, September 24, 2009 12:13PM) isnt going to mirror whats gone on in the past.
20. Ads said...
@ Matt the hat- i would give you capital and except less back in 25 years, if the deflation of the goods exceeded the deflation of the capital i gave you- there is an awesome article about deflation and how it can work on the blog called Cynicus Economicus.
21. 51ck-6-51x said...
jack c,
I was going to post the same, but could not give concrete reasoning for inflation not feeding into wages, so could you elaborate on this?
22. timmy t said...
666 - I know an HR Director who has just implemented a 25% pay cut across a 600 person business, stopped all bonuses and taken away car allowances. As a business they don't want to lose anyone because they have enough business on to keep everyone fully utilised and don't want to turn business away, but their customers are demanding lower fees. I know this is acecdotal evidence rather than concrete reasoning, but it's pretty common I'm sure.
23. mr g said...
51ck-6-51x said... "could not give concrete reasoning for inflation not feeding into wages, so could you elaborate on this?"
Possibly because private sector employers, (still employing more people than the public sector despite Brown's efforts over the last 12 years), simply won't be able to afford pay increases.
International firms in the real economy, (as opposed to financial services), if pressurised to increase pay, will relocate to a lower wage environment and small firms will simply cease trading.
As regards the public sector, no government will be able to fund pay increases for years to come without cutting jobs.
In other words, pay will be kept under control by the old adage: "One man's wage increase is another man's job loss"
24. Jallan said...
I know that I am not jack c, but I would like to comment if I may. The reason (IMO) that inflation will not feed into wages is down to three reasons. The Unions in this country have lost almost all of the power that they had in the 1970's. The little power they do have will be ignored by the likely Conservative government next year as the Unions have no hold over them, because they don't give them any money. This allows the Conservatives to conduct horrific cuts in the Public sector and wage freezes, which I believe will happen. Most Private sector workers are not members of unions and will simply be refused a pay rise, or worst still paid off. Of course wages will rise at some point, but only when it suits the Government and employers to raise them.
25. jack c said...
666 - I'll attempt to briefly elaborate (broad brush)
The balance of power has swung massively away from the workers as the unions carry far fewer numbers and indeed the larger employers who employed tens of thousands of people no longer exist on a large scale. In the 70's there was a much larger manufacturing base filled with workers who would withdraw their labour to effectively force through a pay rise year on year. The 1979 election brought an end to this as Mrs T diluted (if not eradicated) over the following decade those who she thought were holding the country to ransom - 300,000 coal miners down to pretty much zero as of todays date as an example.
In its place comes a more service based economy with approx 70% of GDP relying upon spending in the high street - if little professor's scenario of high or hyperinflation kicks in then the workers (generally) wont have the clout to demand pay rises to keep pace - the employers hold the balance of power which backed up by the fear factor and ever present (if not continually rising) unemployment will (IMO) hold wages down. The Public sector will be forced to take the same medicine and will face cut backs.
In the current environment most people will settle for keeping their job whilst forgoing a pay rise - after the next election when the real decisions have to made it's going to get a whole lot worse and hence I can see people (generally) being forced into working for less rather than more.
26. letthemfall said...
Is it possible to have high inflation without corresponding wage growth? Given that inflation is too much money chasing the goods and service available to buy, I would have thought zero wage growth would put some sort of lid on inflation. In the 70s, the problem, as far as I understand, was weak productivity along with rising money supply and wages. Present QE money isn't finding its way into the general economy, debt levels remain high, and we are told there is an oversupply of production; hence deflation is still hovering. Back in the 70s wage restraint was considered the right response to inflation. Now that workers have very little clout, thanks to globalisation, we are seeing wage falls. So what will cause the inflation, assuming rampant borrowing doesn't make a comeback? Collapsing sterling will have an effect (as in the 70s), but people will get poorer and inflation will be self-moderating. Complicated.
27. house said...
@23 and 24
Very re-assuring comments. High inflation is my biggest fear, you have argued the case well. My understanding was similar but there are others who feel that inflation is going to be a problem. I did experience the 1970's inflation problem but survived it because the employers were willing to give pay increases in as they were able to pass it on to their customers. It became an accepted culture that everything goes up every year. Because of that people use to go to the shops and buy the required goods if they could afford it, otherwise they knew that in the next few months it may have gone up and cost them more. To be fair at the time it was part of life and it did not really matter. To be fair I cannot remember what the interest rates were but a 1 bedroom flat in Southmapton cost me £8500 and today the same flat costs around £85000 ie.10 times.Our joint income was £3500p.a. This is why the government wants inflation.
Anyone on this site has experienced the 1970's inflation problem.
28. uncle tom said...
Letthemfall,
Inflation is indeed a complicated beast, especially as the current QE experiment is an exercise in unchartered waters.
However, simple maths comes back to the principle that if you increase the sum total of money with the same amount of goods to trade, then everything will get more expensive. But that doesn't necessarily happen striaght away.
Reduced economic activity makes an argument for pushing money into the economy. However a problem arises when economic activity resumes, and you need to reverse that stimulus. That is not so easy, especially when the government is running a massive budget deficit.
29. letthemfall said...
uncle tom
Yes indeed, but first the extra money has to get into people's hands, rather than sitting in banks' reserves. So either wages will rise, or higher borrowing will make a comeback, a frightening thought and would mean some calamity ahead presumably. As you say, unchartered waters. I've really no idea what will happen.
30. timmy t said...
letthemfall - I agree that too much demand and not enough supply causes inflation, but a falling pound also pushes up the costs of everything we import (which is quite a lot), without an increase in demand. Look at Zimbabwe... If employers don't have it to give then wage rises ain't happening resulting in a lower std of living.
31. refusetobuy said...
@letthemfall
"Yes indeed, but first the extra money has to get into people's hands, rather than sitting in banks' reserves. "
What if the money has already gone into people hands, and that's why the banks reserves need replenishing.
What if the inflation has already happened.
32. 51ck-6-51x said...
jack c,
I guess it's the delay in the effect that may be different this time around then.
- If inflation picks up and the workers have no power to demand a higher wage, then their wage will not be enough to buy the inflated goods and the velocity of money decreases; leading to less inflation / deflation. Could we see some kind of jackknife in inflationary terms in the next decade? ( A spike in inflation followed by deflation, that could be very nasty indeed. )
33. letthemfall said...
timmy t
Zimbabwe is a special case though, where there has been destruction of the means of production leading to economic collapse. Such a scenario is highly unlikely here, and if it were to occur I doubt it would be just the UK affected.
34. timmy t said...
letthemfall - yes, but my point was that it's not just an increase in demand that drives inflation - an increase in the cost of goods we import does the same but is outside of our control. I can't see demand for much increasing but the cost of supply will.
35. uncle tom said...
I think it is too easy to sucked into deep and complex theorising on this subject.
A simpler outlook is to reason:
1) The government is now spending about £8,000 p.a. per household more than it claws back in taxation.
2) It is raising the money by printing it - and a fair bit more besides. The new money is not backed by any tangible asset.
3) Therefore, sooner or later, something bad is going to happen..!
~~~
Incidentally, the more I think about it, the more I like the idea of a new currency that has a fixed and unvarying circulation.
It would require some conventions of the banking industry to be re-written, but that wouldn't hurt too much.
Maybe we could re-invent the Guinea or the Shilling..
..think about the concept..!
36. 51ck-6-51x said...
UT
- Is this still with a central bank model? How do you plan to control the circulation? Sure you could keep the quantity fixed, but the velocity is in the hands of the crowd.
Surely multiple competing currencies ( whether state backed or private ) would allow market forces to determine both, hence self-stabilising circulation ( sure there would still be bubbles, and runs, but that's just a natural side effect of freedom IMO and without the power structure in place they would, no doubt, be smaller. ) The problem as I see it is: we built a state to protect ourselves, but now it imprisons us.
37. tenyearstogetmymoneyback said...
uncle tom wrote @7
"Unfortunately, Brown and Co. will probably reckon that hell is not likely to freeze over before next June, if rates are kept low; so will leave the next government with a far worse mess to deal with, than needs be..."
Something interesting that I was thinking even before reading that is What are the chances of the next Government taking back
control of Interest Rates. After all:
... Letting the BoE MPC do it was Gordon Browns idea.
... While they were doing it we have had "the worst economic crisis in 100 years"
... The Conservatives have already said they would abolish the FSA so why not the MPC as well.
... Finally a new Government can blame everything on the old one and claim that their new ideas are far better.
38. uncle tom said...
666,
Yes, a currency managed by a central bank, but one that could only be referenced electronically, and not exist in electronic form. The actual currency itself would be purely notes and coin, although some notes would carry very large denominations for banking purposes.
Larger value notes (and possibly lower value ones too) could carry chips that identified the note in an encrypted form. If notes were reported stolen, the readers for the chips could be informed via the web that any bearer of the note did not have a lawful title to it.
The notes and coin should be re-designed and re-issued at set intervals, and if any forgeries or counterfeits failed to be detected, the central bank would be liable to buy out the excess, thereby re-setting the amount in circulation at the original figure.
The issuance of the currency, and the amounts of each denomination, should be in the public domain, with complete transparency.
As the cash itself would not bear interest, the cost of creating and administering the currency would be covered by that benefit to the exchequer.
One advantage of having two currencies is that the more awkward state liabilities, such as public sector pensions and old sovereign debt, could be denominated in Sterling, which could then be quietly allowed to devalue; while the new currency became the money of everyday use.
The politically difficult issue of unaffordable index linked pension promises to the public sector, could be side-stepped by using the new currency to calculate the inflation indices, while paying the pensions in Sterling..
39. titaniccaptain said...
Why would a government that has already promised public sector cut backs start increasing public sector wages? Is anyone expecting the money in the banks to remain there when QE is over? or do you think it will go back into the gilt auctions?.....what if the banks need a further bailout and there is no money?....
40. uncle tom said...
TC,
The problem is the reckless pension promises that have been made, coupled to people living ever longer than before - a massive unfunded liability..
41. shipbuilder said...
This is probably no more than has already been pointed out, but as I see it unless the QE money actually enters the economy, inflation can't happen. The government can't raise wages unless they use QE directly to do so, businesses can't raise wages until they start making some money, but no-one is spending. Inflation-related HPI cannot happen unless wages rise - it is a mistake to think that current price rises are directly from QE - they are more a result of 'confidence' as a knock-on of QE (possibly from it feeding into the stock market).
The only inflation that can then happen from QE is a result of what the banks pump it into - perhaps they are buying their own shares, causing the current market rally?
My questions are then if the QE money is going into shares, who is spending it after that? There is still a lot of money made in the boom waiting in the wings - but how much?
My own feelings are that QE is surely still much less than the debt destruction and so the environment is still deflationary, however what I don't understand is this - all the money lent into the economy during the boom is sitting somewhere, only the ability to pay that money back is destroyed, not the money itself, so surely what we have is a situation where the total money is swelled, but it is not swelling further, so is this inflationary or not?
42. titaniccaptain said...
@UT
That goes both ways....it could mean that these unrealistic pension promises will suck alot out of the economy or the governments are not going to lose the grey vote and will prop it up by any means possible.
43. uncle tom said...
Shipbuilder,
How much bad debt has actually been written off so far? I don't think it's on anything like the scale of QE, although I don't have a good source of data readily to hand.
That the QE money has not actively entered the economy is probably true, but stopping it from doing so looks effectively impossible, while the budget deficit is so extreme.
I'd be a bit wary of the tales of QE supporting the equity market boom - I thinks that's down to Joe Public's money, not the BoE printing machine..
44. alan_540 said...
@uncletom
Are people really living longer? Obesity rates are increasing cf. USA. Yes, the postwar generation are living well into retirement with nice final salary pensions. I think talk of us living longer is just an excuse to justify abandonment of final salary pensions and "generous" state pensions because the economy has been run into the ground by the useless pratts that are Labour. Just an idea.
45. uncle tom said...
TC,
We live in an age where the under 35's have a very poor voting record, while the over 60's turn out dutifully - so grey rules.
It wasn't always that way - in the sixties the young got very political - it could well happen again..
46. uncle tom said...
Alan,
There are quite good stats on life expectancy if you go a googlin' - yes, people are living quite a lot longer, if they take care of themselves.
If you don't get obese or over-stressed, avoid drugs and fags, but drink in moderation; you probably have an evens chance of hitting a ton if you're under fifty today.
47. alan_540 said...
uncletom
I'm no actuary, but found this :
http://www.ssa.gov/OACT/STATS/table4c6.html
2005 actuarial table for USA, life expectancy as follows :
Newborn = 75yrs
20yr old = 76yrs
40yr old = 77yrs
60yr old = 80yrs
This kinda bears out my supposition I think?
48. shipbuilder said...
43. uncle tom said...
"Shipbuilder,
How much bad debt has actually been written off so far? I don't think it's on anything like the scale of QE, although I don't have a good source of data readily to hand."
Most of the opinion on the web seems to suggest the opposite, that QE is struggling to keep up with deleveraging, although I can't find figures either. I think that bellwether first made this point a wee while ago and had figures at the time.
49. phdinbubbles said...
@alan_540
I could be wrong but,...... I think you're wrong (in respect of the figures you show)
If you are 99 years and 364 days and 23 hours old then what's the probability of living until you're 100 years old? Quite high.
If you're 1 year old then what's the probability of making it to 100? - it's less than the 99 year old just mentioned.
I don't think the figures are showing what you think they are - what they're showing is life expectancy for someone that's already reached that age as oppossed to life expectancy for someone born in one year compared to someone born in another - at least I think that's what they represent.
However, I suspect you may be right with regards to comparing life expectancy for people born recently compared to people born decades ago - i.e. that we've reached a plateau owing to peoples' unhealthy life-styles/diets, but you can't measure these figures accurately until we're all dead!
50. alan_540 said...
phd,
The ages I listed are obtained from the table by adding age (in 2005) to the life expectancy left (check out the pre-amble at the top of the page - it does say that this is the case).
Yes, i agree that the numbers are not 100% accurate for the reason you specify! but they are best guestimate and are used to formulate policy decisions.
I'm sticking to my guns that we're being fobbed off by the government re. pension affordability - the life expectancy argument is just a smokescreen to hide their fiscal mismanagement.
51. uncle tom said...
Most of the opinion on the web seems to suggest the opposite, that QE is struggling to keep up with deleveraging
Shipbuilder,
De-leveraging and bad debt debt are different beasts - it is one thing to have to provide cover for funds being withdrawn from the UK by overseas investors, and another to cover bad debt write-downs.
It's complicated to explain in few words, but when someone who has previously bankrolled levered positions wants their money back, it does not shrink the money supply, whilst bad debt write-downs do.
52. uncle tom said...
Alan,
phd is correct - the day you are most likely to die is your very first..!
On the same theme, the day you are most likely to be murdered is also your first, and the person who is most likely to murder you, throughout your life - is your mother..;(
53. alan_540 said...
Oooooh Errrr.... Help mummy...!
54. uncle tom said...
PS,
That US table is a 2005 snapshot - it does not indicate trends in life expectancy, merely the statistical status quo at the time it was compiled.
There's plenty of UK data available online if you look for it BTW..
55. 51ck-6-51x said...
that all reminds me of a piece of graffiti reported by Nigel Rees which was found under a large poster at a hospital.
The poster had a picture of a newborn and read "The first three minutes of life are the most dangerous".
Someone had written underneath, "The last three minutes are pretty dodgy too".