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Keeping The Pedal On The Uk Metal, With Merv

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http://ftalphaville.ft.com/blog/2010/07/28/300226/keeping-the-pedal-on-the-uk-metal-with-merv/

GDP surprising on the upside; sales trading up; sterling on a rocket — the British economy’s looking pretty good at the moment.

Unless you govern the Bank of England.

Here was Governor Mervyn King’s written testimony before the Treasury Committee on Wednesday, for instance.

Speaking on the risks of deflation from increasing the national savings rate – versus the risks of already-high inflation becoming baked into future inflation expectations – to say nothing of financial volatility, the Governor had this to say (emphasis ours):

The MPC faces a difficult challenge in balancing those risks. To do so, we judge that at present it is right to keep our foot firmly on the accelerator in order to stimulate the economy. As you would expect, there is a debate about quite how hard we should be pressing on the accelerator. In the months ahead it may be that the MPC judges that the inflation outlook warrants pushing down even harder or that we should ease back somewhat. The debate is about the appropriate degree of stimulus, not about applying the brakes.

Of course, there will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels. I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word “normal”.

First — it’s worth asking if this actually is what the debate should be about. As Monument Securities’ Stephen Lewis argues, ahead of next week’s MPC meeting:

[High G2 GDP growth] will not necessarily lead MPC members to temper their pessimism on Q3 growth but it does raise a presentational problem for those who would favour further policy easing. How could they justify taking that risk when GDP is progressing so far above forecasters’ expectations?

…in the light of price trends up to 2010Q1, nominal GDP in the first half of this year could have grown, in annualised terms, from the second half of 2009 at well over the 5% rate that is consistent with sustainably meeting the inflation target. Mr Trichet is fond of saying that price stability is the only needle on the ECB’s compass. It might seem the Bank of England had no needle on its compass at all, if it resorted to monetary easing when inflation was well above target, and likely to stay there at least to the end of 2011, and when output was, to all appearances, growing robustly.

While on the supposed danger of inflation expectations…

As for the MPC’s upside risk, inflation expectations, the committee is inclined to attach more weight to long-term expectations than to short-term. This is on the seemingly reasonable grounds that economic agents are less likely to react to expected increases in inflation they believe will be temporary than to those they think will be permanent…

The MPC’s emphasis on the long term may be misplaced, however. The wage/price spiral of the mid-1970s was not set in motion by rising long-term inflation expectations in the late 1960s but by short-term worries engendered by inappropriate policy responses to price shocks. In this regard. Keynes’s perception that the long term is no more than a succession of short terms is apposite.

Second — imagine the toys being chucked out of prams in the US if Fed chair Ben Bernanke had been quite as forthright as Governor King in his rather somnolent recent testimony to Congress.

Although of course, it sounds like Bernanke has inspired the BoE here — the earlier Bernanke, writing in 2004 on the virtue of a strategy of cautious warning in central bank expectations management, that is.

Extra points for the extended metaphor, however, Mr King.

The normal recovery appears a long way off...

Is Mystic Merv guessing over how hard to put his foot down and just hoping it doesn't end in a hyperinflationary bust?

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How blind can these people be?

The entire model of decreasing interest rates in order to stimulate the economy is out of date and dangerously wrong. At one point in history, lower interest rates increased business investment and productive capacity, but now all that decreasing interest rates does is increase asset prices. 75% of bank lending during the boom went into property -- a completely non-productive use of capital. Lowering rates isn't going to grow the economy -- it's just another lame attempt to create an asset bubble. Economists are completely blind to the development of the consumer lending industry over the past 50 years, meaning that lower interest rates are now mainly funneled into increased asset prices, and increased asset prices are nothing but a zero-sum game where the benefits to older, wealthier people are extracted from younger people who need to buy those assets.

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How blind can these people be?

The entire model of decreasing interest rates in order to stimulate the economy is out of date and dangerously wrong. At one point in history, lower interest rates increased business investment and productive capacity, but now all that decreasing interest rates does is increase asset prices. 75% of bank lending during the boom went into property -- a completely non-productive use of capital. Lowering rates isn't going to grow the economy -- it's just another lame attempt to create an asset bubble. Economists are completely blind to the development of the consumer lending industry over the past 50 years, meaning that lower interest rates are now mainly funneled into increased asset prices, and increased asset prices are nothing but a zero-sum game where the benefits to older, wealthier people are extracted from younger people who need to buy those assets.

+1

Lower tax rates for industry, less red tape, abolishing the minimum wage if necessary, reform of the financial system, LVT, where to start eh? First two would be good.

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Bank of England's Mervyn King warns over inflation
13:15, Wednesday 28 July 2010
Bank of England Governor Mervyn King has warned that high inflation will continue to erode earnings power through next year as the economy faces the threat of 'stagflation'.
Prices rises have consistently defied the
Bank's expectations of a slowdown,
adding to pressure on households as wage growth remains weak and the Government introduces a strict austerity package.
The Bank's rate-setters are charged with keeping inflation at 2% but the Consumer Prices Index benchmark has been above 3% throughout the year.
However, addressing a committee of MPs, Mr King suggested that they will be reluctant to try to curb the problem by raising borrowing costs from 0.5 per cent any time soon because of the
weakness of the economy.
There will come a point when we will certainly need to ease off the accelerator and return Bank Rate to more normal levels, Mr King told MPs today.
I look forward to that time because it will probably be a signal that there is a smoother drive ahead, with the economic outlook improving in a durable way. But I fear there is some considerable distance to travel before we can begin to use the word normal.
The Bank of England's Monetary Policy Committee (MPC (A050540.KQ - news) ), which slashed interest rates to a record low of 0.5pc during the depths of the recession, faces an acute dilemma on when to begin raising them. Not everyone on the MPC agrees with the Governor that the threats to the recovery present a greater danger than that of rising prices.
And despite "encouraging" 1.1% growth for the economy in the second quarter, the governor warned that we
"cannot be confident" the recovery will be sustained
, raising the spectre of 'stagflation' - high inflation and stuttering growth.

Merv is simply saying that there is a danger of inflation therefore IR must be kept low.

There is a danger of slowing growth therefore IR must remain low.

He is between the rock and the hard place courtesy of his former controller Mr. Brown.

Surprising strength in sterling must be either based on lower IR ahead or lower growth ahead. In other words it makes no sense at all. All we should be concerned with is the direction of house prices as that is number 1 indicator and far far above anything else. 2% drop MOM and sterling is back down 10%.

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People with savings obviously have too much money; we need to confiscate it from them…

Since savings = debt, and since there's way more debt than can be repaid ... yes, the above statement is correct.

The first in line for the losses should have been those who chose to take the higher risk/reward profile of buying the bonds of banks like NR. The previous government decided otherwise.

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He is between the rock and the hard place courtesy of his former controller Mr. Brown.

He's also in this position because of Eddie George as well, plus he was 2nd in command during the George rein so I'm afraid some of this mess is of his own making.

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  • 245 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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