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Dave Beans

William Rees-Mogg: Interest Rates Have To Rise - And Quickly

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http://www.dailymail.co.uk/debate/article-1349403/George-Osborne-Interest-rates-rise-quickly.html

Inflation is back, not to its most serious level, but as a global experience and a global threat. Those who can remember the inflationary decade of the Seventies thought all governments had made resistance to inflation their first priority. If that were ever true, it is true no longer, knocked on the head by the recession of 2008 and the bankers' panic that preceded it.

The latest monthly figure for the Consumer Prices Index in Britain has risen to 3.73 per cent. That is almost twice the Bank of England's target figure of two per cent. There will have to be yet another letter of apology from the Bank of England to the Chancellor of the Exchequer. It is surprising that the Chancellor's fiscal discipline has not been accompanied by a firmer monetary discipline on the part of the Bank of England (above with the Chinese Vice Premier Li Keqiang)

In the Seventies, the oil price was the trigger for the rise in the rate of inflation; in Britain the general rise in prices produced a decade of trade union militancy that was only brought under control by the determination of the Thatcher Government.

The oil price is again an important factor, with the price for a barrel of oil remaining obstinately above $90 (£56). Oil has, however, been reinforced by another inflationary influence: the rise in price of the main foodstuffs. The best way to look at the present threat of inflation is to see it as part of a worldwide shift of purchasing power from Europe and North America to Asia, and particularly to China. This shift is not yet finished. It took China almost 40 years to move from the disastrous poverty under Chairman Mao to the extraordinary development of the present decade.

The Chinese are far richer than they used to be, but on an individual basis the Chinese are nothing like as wealthy as the populations of Japan, Europe or North America. In the Seventies many politicians, including Harold Wilson and Edward Heath, thought we could control inflation by direct control of wages, prices and foreign exchange. In wartime, these physical controls can help to stabilise prices when production has been shifted from peacetime to defence purposes. The attempt by governments to apply these controls 30 years after the end of the Second World War was a damaging failure that impoverished the British economy.

The lesson most economists accepted was that inflation is a monetary phenomenon. Even those who have re-read the works of the British economist Maynard Keynes have discovered that his analysis had a far more important place for monetarism than they had supposed. There was a controversy between Keynes and the American economist Milton Friedman, but it was more an argument about how a monetary policy ought to be run than whether there should be a monetary policy at all.

Margaret Thatcher took the view that 'there is no alternative' to her policy, and no alternative has, in fact, been found. Although there are many trade union leaders who are again trying to pretend that Labour does have an alternative, there is no evidence to justify their claim. In the past, inflation has only been brought under control by a determined stabilisation policy of monetary discipline. Fortunately, the Coalition Government has adopted a policy of monetary discipline in the Chancellor of the Exchequer George Osborne's austerity budget. It is surprising that the Chancellor's fiscal discipline has not been accompanied by a firmer monetary discipline on the part of the Bank of England. Fiscal and monetary policy work better when they are working together.

Today the Chancellor is holding a tight rein on the budget, but the Bank of England's Governor, Mervyn King, is holding a loose one on interest rates. The two policies need to be brought into line by an increase in interest rates, which is the Bank's responsibility. It is unusual to have a central banker on the side of low rates and a Chancellor facing the unpopularity of stringent budgets; one would expect it to be the other way round. Most economists and the bond markets are now assuming there will have to be a relatively early rise in British interest rates; that will probably prove to be a correct forecast.

Yet the experience of financial history is that changes should be made early rather than late. There is no advantage in delay. Delay results only in an increase in the momentum of inflation. For the past 150 years it has been understood that strong governors of the Bank act early and decisively. It is easy to delay further rate increases if they are not needed, but difficult to recover the ground lost to inflation if the delay is too long.

Timing is crucial. One of Friedman's discoveries was that the average time lag between a change in rates and the corresponding change in markets was two years. The Bank has now to decide the correct rate of interest for 2013, not for 2011. It is time to counter-attack inflation now. Another lesson of the Seventies was that inflation caused great social suffering. Inflation is particularly damaging to retired people on fixed incomes.

It appears to be the soft way of adjusting an economy; it is, in fact, a device for switching money from the poor and the elderly to debtors and the Government. Whatever else may be said of inflation, it is a swindle that always hits the weakest people in society.

Edited by Dave Beans

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"It appears to be the soft way of adjusting an economy; it is, in fact, a device for switching money from the poor and the elderly to debtors and the Government. Whatever else may be said of inflation, it is a swindle that always hits the weakest people in society."

Which is why they will not raise interest rates until the markets force the issue. Until then rates will remain low irrespective of inflation and the long-term needs of the economy.

I shouldn't worry about the elderly. worry about yourself when you reach their age then you will think they had it lucky. The elderly have got it sorted wait till the s**t storm hits us.

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Timing is crucial. One of Friedman's discoveries was that the average time lag between a change in rates and the corresponding change in markets was two years

So he'd have raised rates end 08 into 09 to prevent the inflation we're now eperiencing?

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"It appears to be the soft way of adjusting an economy; it is, in fact, a device for switching money from the poor and the elderly to debtors and the Government. Whatever else may be said of inflation, it is a swindle that always hits the weakest people in society."

Which is why they will not raise interest rates until the markets force the issue. Until then rates will remain low irrespective of inflation and the long-term needs of the economy.

I totally agree with you.

Grand larceny by HMG

They will never be forgiven when the sheeple awake and realise evrything has been stolen from them.

And all this from a Tory Govt. Shame on them.

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So he'd have raised rates end 08 into 09 to prevent the inflation we're now eperiencing?

No he wouldn't have.

Firstly he was talking bull. There is no way you can show a proven link between one isolated factor (among many other influences) and an economic position you find yourself in a full two years later.

Secondly, even if he was right, you would have to accurately predict the effect of today's rate on the two years hence economy for that theory to be of any use. As nobody can make that call, the theory is useless. In fact it almost becomes a reason for doing nothing and that may be why he came out with it in the first place.

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All of this talk in the media about rising IR makes me believe it may actually happen soon

Of course it will. That's why there's all this talk. The Journo's didn't suddenly all become economics experts in favour of an IR rise overnight. They are being briefed. We are being softened up for the blow. Though it won't be much of a blow to me as I don't carry any debt.

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  • 311 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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