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Mervyn King Has Answered My Letter

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You may recall that after the announcement of the CPI rise to 3.7% a couple of weeks ago I encouraged everyone to write a letter to MK telling him how badly he’s doing his job. As a reminder this is what I wrote...

Mervyn King

Governor

Bank of England

Threadneedle Street

London

EC2R 8AH

<Dear Sir>

I write to you as a member of the public extremely concerned about the rate of inflation in the United Kingdom. I note today’s publication of December’s CPI rate at 3.7%. This is 85% over the target of 2%. The target itself is excessively lax.

You have failed to keep CPI at or under 2% for most of the last four years. Your continual assertions that inflation will fall in the medium term are no consolation, both because you were saying the same two years ago and it has not happened, and because even if inflation did fall in the future the current inflation would be locked in and the fall in my standard of living would be permanent.

To control inflation you must increase the bank rate, probably to around 5% in the first instance. We are already seeing stagflation in the UK economy. Personally I am finding food and petrol especially expensive and my pay is not keeping up with price rises. Raising the bank rate would boost sterling and make food and oil cheaper.

You may have a covert aim of mitigating public and private debt by allowing inflation to erode its true value. This was done in the 1970s but cannot work in the modern globalised world. Wages will not rise in line with price inflation. UK wages cannot rise unless the rest of the world also increases its wages. Jobs will move abroad if we attempt to raise wages unilaterally. A policy of allowing some inflation is therefore futile and will harm the UK economy for no gain. The only option is to control prices.

Other countries control inflation successfully. Inflation in France is 1.6%, in Germany 1.5%, in the USA 1.1%, in Switzerland 0.5% and in Japan 0.1%. These countries put you to shame.

Please read this letter to your colleagues on the Monetary Policy Committee and advise them that I, and increasingly the public generally, are of the opinion that you and they are failing to exercise proper stewardship of the UK economy. Unless you are able rapidly to gain control of this situation you should consider making way for others who can.

Yours faithfully,

<Signed>

This is what he wrote back...

Dear <Nationalist>

Thank you for your letter of 18 January. I am always very grateful to people for taking the time to share their thoughts with me and others on the Monetary Policy Committee. You note that inflation is currently above target. As I outlined in my speech on 25 January, almost all of the increase in prices over recent years can be accounted for by three factors: a rise in world commodity prices, higher import prices (reflecting a fall in sterling in late 2007 and 2008) and the rise in the standard rate of VAT to 20% from 17.5%. Taken together, those three factors by themselves would account for a 12% addition to the price level over four years. Since the consumer price index as a whole rose by not much more, the contribution of domestically generated inflation over that period was close to zero, and obviously well below the target – and much closer to the rate of inflation in some of the countries you mention in your letter, which have not experienced significant shocks to VAT and import prices.

I can fully understand that people are unhappy about the high rate of inflation, and the squeeze in living standards that implies. As I note in my speech I fully sympathise with those people that have behaved prudently and saved carefully. But it is wrong to say that the committee could have prevented the squeeze in living standards by raising interest rates over the last year to bring inflation below its present level. If the Committee had raised Bank Rate significantly, inflation might well have started to fall back this year, but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now. The erosion of living standards would have been even greater.

The Committee’s aim is to keep inflation on track to meet the target of 2.0% in the medium term. As I note in the speech, in coming to its judgement on the right level for interest rates the Committee will consider the risks to inflation over that horizon. So far the Committee has judged that, on balance, Bank Rate should be 0.5%. There are differences of view on the Committee. But these are relatively small. The big picture is one where, in order to the meet the inflation target in the medium term, it has been necessary to maintain a simulative policy stance. I should add that all of the Committee looks forward to reaching the point where the strength of the recovery allows us to raise interest rates back to more normal levels.

With all best wishes.

Yours sincerely

Mervyn King (signature)

The first thing I have to say about MK’s letter is: I can see why we have a deficit as large as we do. The letter is written on thick yellow (almost gold!) note paper so stiff it hardly bends and embossed with the seal of the Bank of England. Merely to hold the letter is to realise just how wise and benevolent he is. But as for the content, well, weasel words...

He blames inflation on three things:

1) The rise of the VAT rate to 20%. Fail! The CPI number for December is in no way influenced by the VAT rate going up the month afterwards. (Maybe the standard excuse template has already been updated to reflect the CPI rise in January!)

2) The fall in sterling. Fail! If he’d kept interest rates a bit higher sterling wouldn’t have fallen.

3) The rise in world commodity prices. Yes, well, “world commodities” are not generally priced in sterling so it’s back to the value of sterling again. Sterling would not be trading at 25% below normal if the base rate was 5% rather than 0.5%.

He doesn’t address or attempt to refute my suggestion that he actually wants some inflation to reduce the real value of debt.

But he is distinguishing imported inflation from domestically generated inflation as though we somehow don’t feel the imported variety.

Then he goes on to talk about maintaining a simulative policy stance. What the dickens is a “simulative” policy stance?

Anyway, I hope some of you have also written to him. It will take more than one straw to break this camel's back.

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You may recall that after the announcement of the CPI rise to 3.7% a couple of weeks ago I encouraged everyone to write a letter to MK telling him how badly he’s doing his job. As a reminder this is what I wrote...

This is what he wrote back...

The first thing I have to say about MK’s letter is: I can see why we have a deficit as large as we do. The letter is written on thick yellow (almost gold!) note paper so stiff it hardly bends and embossed with the seal of the Bank of England. Merely to hold the letter is to realise just how wise and benevolent he is. But as for the content, well, weasel words...

He blames inflation on three things:

1) The rise of the VAT rate to 20%. Fail! The CPI number for December is in no way influenced by the VAT rate going up the month afterwards. (Maybe the standard excuse template has already been updated to reflect the CPI rise in January!)

2) The fall in sterling. Fail! If he’d kept interest rates a bit higher sterling wouldn’t have fallen.

3) The rise in world commodity prices. Yes, well, “world commodities” are not generally priced in sterling so it’s back to the value of sterling again. Sterling would not be trading at 25% below normal if the base rate was 5% rather than 0.5%.

He doesn’t address or attempt to refute my suggestion that he actually wants some inflation to reduce the real value of debt.

But he is distinguishing imported inflation from domestically generated inflation as though we somehow don’t feel the imported variety.

Then he goes on to talk about maintaining a simulative policy stance. What the dickens is a “simulative” policy stance?

Anyway, I hope some of you have also written to him. It will take more than one straw to break this camel's back.

what makes you say sterling is trading 25% below normal, over the last twenty years its traded between 1 and 2 dollars, what makes 2 dollars normal, 2 dollars may be an anomoly

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thats good.

He is clearly a genius...in that he points out that we have price inflation because...and here is the genius of it...we have rising prices.

impressed.

(This post is on recycled electricity at a screen near you)

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Can I just check? You actually think that Mervyn King personally replied to your letter?

Yes, personally, he lavished care and attention on a personal reply.

Alright, no. A flunky replied but I'm sure MK approved the template and general tenor of the reply.

But the paper is real nice though, I'm fondling it now as I type.... :ph34r:

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Yes, personally, he lavished care and attention on a personal reply.

Alright, no. A flunky replied but I'm sure MK approved the template and general tenor of the reply.

But the paper is real nice though, I'm fondling it now as I type.... :ph34r:

Frame it. It may be worth some money in years to come.

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what makes you say sterling is trading 25% below normal, over the last twenty years its traded between 1 and 2 dollars, what makes 2 dollars normal, 2 dollars may be an anomoly

Try comparing with an actual strong currency such as CHF. In 2007 £1 = 2.2 CHF, now £1 = 1.5 CHF.

(I should know, my STR fund is in CHF!)

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what makes you say sterling is trading 25% below normal, over the last twenty years its traded between 1 and 2 dollars, what makes 2 dollars normal, 2 dollars may be an anomoly

.

Edited by Constable

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I think Merv is trapped. There is ONE REASON and one reason only why he is fearful of raising IR--the housing market is already falling of the edge of the cliff and he wants to make it as soft a landing as he can.

A HPC of severe proportions will devastate this nation for a generation, perhaps more. Our banking system cannot handle mass repossessions and defaulting borrowers on a scale that will be measured in millions. It cannot handle a 4 grade drop in our credit rating and the ensuing Bond market reaction. It cannot handle an overnight drop of 20% in the value of Sterling. It cannot face an IMF takeover of our government and financial institutions.

Our housing market is worth 40-50% of UK Plc (ONS data) and a hike in IR will result in trillions of £ worth of damage.

That is what will happen if we get a severe HPC and Merv will not be at the helm to see this happen. He will probably be resigning before this year is out.

Edited by Realistbear

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well done nationalist, something to tell your grandads. you did your bit in this fight against the robber barons.

yeah, great letter. I can't believe he included the VAT rise as a reason. write back and point out all his errors (and ask him to resign) - you won't get another reply, but at least he may read it.

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Try comparing with an actual strong currency such as CHF. In 2007 £1 = 2.2 CHF, now £1 = 1.5 CHF.

(I should know, my STR fund is in CHF!)

and it was 8 to 1 back in the 80s, i know all about the CHF cos i live here but comparing it to one currency is pants Switzerland prefers a naturally deflating/flat currency, it is small govt, the UK is not because it prefers big govt, so you are not comparing like with like, otherwise you might as well compare to gold, compared to a basket its about 25% down as you initially highlighted, but thats after continuous strengthening up to 2007, its pointless picking a multiyear high for a currency and then calling that the norm.

Edited by Tamara De Lempicka

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TBH, I'm with Merv on this one.

1. VAT was increased from 15% the year before, which would have had an effect.

2. The connection between high interest rates and currency strength are tenuous too. Did Sterling have a high price ($2) due to high interest rates? The USD has strengthened against Sterling, despite having an even lower base rate. Consider that demand for a currency may be higher, if more people want to do business with it - if business suffers, so might demand (and therefore price). In short, it's not as simple as you make out.

Furthermore, a strong currency is not always good for export. If the value a developed country adds is from skilled minds and machinery forging it, the import cost will remain relative to the export cost, with the extra value added in the middle - this extra value will have become cheaper, due to the currency depreciation. This makes them more competitive, at the expense of savings being worth less.

3. Commodities have been rising in many currencies. This much should be obvious, when there were food riots in the developing world a couple of years ago (and maybe making a return soon).

Finally - if the economy isn't growing faster than inflation, why do you expect a return on your cash which is higher than inflation? Where is it being invested to get this magical return? If you are expecting little growth in the future (as many here do), then why do you expect your money to return a high yield?

EDIT: P.S. Good on you for writing the letter, btw! I may not agree with your points, but we all have our opinions and it's always good to see someone acting on them.

Edited by Traktion

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and AUD, JPY.

GBP to USD 1.6266 +0.0081

GBP to EUR 1.1738 +0.0013

GBP to JPY 132.8936 +0.8813

GBP to TRY 2.5694 +0.0144

GBP to THB 50.2021 +0.2574

Sterling is on its strongest bull run in a long time. Up against a wide range of majors again today as the above shows. The thought that Merv will raise the rates is offsetting all the other bad news fofr the economy. It wont last long IMO.

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and it was 8 to 1 back in the 80s, i know all about the CHF cos i live here but comparing it to one currency is pants Switzerland prefers a naturally deflating/flat currency, it is small govt, the UK is not because it prefers big govt, so you are not comparing like with like, otherwise you might as well compare to gold, compared to a basket its about 25% down as you initially highlighted, but thats after continuous strengthening up to 2007, its pointless picking a multiyear high for a currency and then calling that the norm.

I should add that most of the sterling fall had happened by end of 2009 so has already fallen out the back of the CPI number. MK still using it as an excuse is being massively disingenuous to put it mildly.

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Funny that he wasn't talking about this 'imported' inflation when Ipods and Chinese tat were dragging the figure down to 2% a few years ago. If that was the case we should have had interest rates to give us inflation of about minus -10% during those years.

He's just a crook, and a liar. And he's now cramming his pension fund with as much taxpayer cash as he can before he's shown the door.

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I think Merv is trapped. There is ONE REASON and one reason only why he is fearful of raising IR--the housing market is already falling of the edge of the cliff and he wants to make it as soft a landing as he can.

A HPC of severe proportions will devastate this nation for a generation, perhaps more. Our banking system cannot handle mass repossessions and defaulting borrowers on a scale that will be measured in millions. It cannot handle a 4 grade drop in our credit rating and the ensuing Bond market reaction. It cannot handle an overnight drop of 20% in the value of Sterling. It cannot face an IMF takeover of our government and financial institutions.

Our housing market is worth 40-50% of UK Plc (ONS data) and a hike in IR will result in trillions of £ worth of damage.

That is what will happen if we get a severe HPC and Merv will not be at the helm to see this happen. He will probably be resigning before this year is out.

Actually RB, just to update you, on latest ONS numbers housing accounts for 61% of the net worth of the UK.

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Actually RB, just to update you, on latest ONS numbers housing accounts for 61% of the net worth of the UK.

thats good, a fast reduction of half the value of houseing will make the rest of the economy 57% of the net worth.

69% growth!...in non housing!

Statistics....marvelous tools

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Funny that he wasn't talking about this 'imported' inflation when Ipods and Chinese tat were dragging the figure down to 2% a few years ago. If that was the case we should have had interest rates to give us inflation of about minus -10% during those years.

He's just a crook, and a liar. And he's now cramming his pension fund with as much taxpayer cash as he can before he's shown the door.

Which shows you why the 2% CPI target is a nonsense. It was wrong both before the crash and after.

EDIT: To add, in a global economy, targeting price indexes to some how keep prices level is a fools errand.

Edited by Traktion

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TBH, I'm with Merv on this one.

1. VAT was increased from 15% the year before, which would have had an effect.

2. The connection between high interest rates and currency strength are tenuous too. Did Sterling have a high price ($2) due to high interest rates? The USD has strengthened against Sterling, despite having an even lower base rate. Consider that demand for a currency may be higher, if more people want to do business with it - if business suffers, so might demand (and therefore price). In short, it's not as simple as you make out.

Furthermore, a strong currency is not always good for export. If the value a developed country adds is from skilled minds and machinery forging it, the import cost will remain relative to the export cost, with the extra value added in the middle - this extra value will have become cheaper, due to the currency depreciation. This makes them more competitive, at the expense of savings being worth less.

3. Commodities have been rising in many currencies. This much should be obvious, when there were food riots in the developing world a couple of years ago (and maybe making a return soon).

Finally - if the economy isn't growing faster than inflation, why do you expect a return on your cash which is higher than inflation? Where is it being invested to get this magical return? If you are expecting little growth in the future (as many here do), then why do you expect your money to return a high yield?

EDIT: P.S. Good on you for writing the letter, btw! I may not agree with your points, but we all have our opinions and it's always good to see someone acting on them.

+1

total agree. If people are unhappy with the yield on their money. They should just pop out and start a business that yields more simples

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Sterling didn't fall 'cause rates were falling, it fell 'cause the banks were collapsing, asset prices were plummetting, GDP fell off a cliff and we were thrown into deflation.

Not quite sure why hiking rates to 5% in that context would magically save the economy or sterling. Quite the opposite in fact.

One of our good fortunes is that Merv can still manipulate our currency unlike the hapless Irish, Greeks, Spanish etc etc.

Before long I suspect the more pressing problem will be the zero bound.

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Of interest to me is his comment that: "There are differences of view on the Committee. But these are relatively small." It chimes with David Blanchflower's comments on leaving. I get the feeling that Mervyn King brooks no dissent and that rate rises will be over his dead body. :(

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+1

total agree. If people are unhappy with the yield on their money. They should just pop out and start a business that yields more simples

Banks are delighted on the yield of their money.

Then again, thats what the BoE Lifeboat is for...no point in having a risky job in a bank..banks are safe, banks are strong, banks are proberty personified.

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Funny that he wasn't talking about this 'imported' inflation when Ipods and Chinese tat were dragging the figure down to 2% a few years ago. If that was the case we should have had interest rates to give us inflation of about minus -10% during those years.

But he was, and this is what is so damning about current BoE policy which is once again being shown to be asymmetric.

King used to discuss ‘imported deflation’. He said that natural productivity gains, coupled with a strong pound, were pulling down imported goods prices, and therefore in order to meet the 2% CPI target, domestic inflation (predominantly in services) had to be above 2%.

However, since we’ve been experiencing imported inflation, there’s been barely a murmur from the Bank about the need to offset this – rising commodity prices have been talked about as an exogenous factor that’s beyond the MPC’s control.

Interestingly though, Charles Bean mentioned this issue yesterday for the first time in a long while. He said:

“We may well have to respond to [high commodity prices] by keeping domestically-generated inflation lower.”

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  • 284 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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