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Boe's Broadbent On Depreciation, Rebalancing And Cpi

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http://www.bankofengland.co.uk/publications/speeches/2011/speech520.pdf

I've not read this but it looks of interest.

Quick scam reveals it focuses on 'rebalancing' the economy towards tradeable goods, the need for sterling depreciation and allowing CPI to rise above mandate in the short term as part of that.

Fill yer boots.

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Sterling depreciation : check

CPI above target "in the short term" : check

Rebalancing economy towards tradeable goods : In a global recession, who is going to be buying these goods?

I think I see a flaw in this plan.

Edited by efdemin

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Sterling depreciation : check

CPI above target "in the short term" : check

Rebalancing economy towards tradeable goods : In a global recession, who is going to be buying these goods?

I think I see a flaw in this plan.

A few years of depreciation and inflation don't seem to have really helped the balance of trade or export business ... Perhaps trying to devalue your currency to stimulate exports isn't a great idea when you need to import so much (including food and energy) and when your manufacturing base isn't nearly as strong as it used to be?

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So how long is it going to sufficiently rebalance to tradeable goods :rolleyes: .

Even if the UK were able to rapidly equip to produce the goods with current housing costs etc so high causing high labour costs the UK couldn't be competitively priced until that worked itself out of the pipeline. Decades with current housing policies even if house prices fell a good bit from 2011 prices. The UK lost the opportunity (admittedly weak opportunity) to do that quickly when they opted in recent years for a wholesale dumping of the UK population to offshoring and debt etc.

He's just spouting more hot air to try to justify his inflation linked package.

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Correct me if I'm wrong, but isn't the BoE's mandate to keep inflation within the defined boundaries and nothing else?

They have no control over the taxation and employment landscape that is required to "rebalance" the economy. They are deeply mistaken if they think that trashing the currency will somehow create a spontaneous manufacturing renaissance after 20+ years of giving it little or no support.

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A few years of depreciation and inflation don't seem to have really helped the balance of trade or export business ... Perhaps trying to devalue your currency to stimulate exports isn't a great idea when you need to import so much (including food and energy) and when your manufacturing base isn't nearly as strong as it used to be?

+1

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Correct me if I'm wrong, but isn't the BoE's mandate to keep inflation within the defined boundaries and nothing else?

They have no control over the taxation and employment landscape that is required to "rebalance" the economy. They are deeply mistaken if they think that trashing the currency will somehow create a spontaneous manufacturing renaissance after 20+ years of giving it little or no support.

He appears to answer you in broad terms here

Third, though real (relative price) shocks needn’t have any impact on aggregate inflation, rigidly sticking to the inflation target through this period would have involved significant economic costs, costs that the MPC’s remit explicitly tells it to avoid. Given the scale of the adjustment going on underneath, stabilising the aggregate CPI would have required outright declines in prices of many non-tradables and, because their production is labour-intensive, declines in nominal wages as well. This in turn would probably have meant much higher unemployment. What the MPC has effectively done, therefore, is to employ the flexibility in its

remit to accommodate part of this shock as a higher aggregate price level. And although these first-round effects have been significant and uncomfortable, contributing to a prolonged period of above-target inflation, it’s hard to detect any real sign of second-round effects on either wage growth or medium-term expectations of inflation. With the relative price adjustment now largely complete, that is very reassuring.

Which I take to be the 'one off' (impact from the original huge drop in sterling) argument.

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Sterling depreciation : check

CPI above target "in the short term" : check

Rebalancing economy towards tradeable goods : In a global recession, who is going to be buying these goods?

I think I see a flaw in this plan.

As Mr T would say on the World's Craziest Fools, "I hope that wasnt the plan, because if that was the plan, it wasnt a good plan".

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So how long is it going to sufficiently rebalance to tradeable goods :rolleyes: .

Even if the UK were able to rapidly equip to produce the goods with current housing costs etc so high causing high labour costs the UK couldn't be competitively priced until that worked itself out of the pipeline. Decades with current housing policies even if house prices fell a good bit from 2011 prices. The UK lost the opportunity (admittedly weak opportunity) to do that quickly when they opted in recent years for a wholesale dumping of the UK population to offshoring and debt etc.

I so totally agree. We have had very bad governance and seems that we shall be getting even more. My dog couldn't have done a worse job <_<

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Sterling depreciation : check

CPI above target "in the short term" : check

Rebalancing economy towards tradeable goods : In a global recession, who is going to be buying these goods?

I think I see a flaw in this plan.

By "tradeable goods" he means mobile phone numbers of people involved in road traffic collisions....

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So how long is it going to sufficiently rebalance to tradeable goods :rolleyes: .

Even if the UK were able to rapidly equip to produce the goods with current housing costs etc so high causing high labour costs the UK couldn't be competitively priced until that worked itself out of the pipeline. Decades with current housing policies even if house prices fell a good bit from 2011 prices. The UK lost the opportunity (admittedly weak opportunity) to do that quickly when they opted in recent years for a wholesale dumping of the UK population to offshoring and debt etc.

He's just spouting more hot air to try to justify his inflation linked package.

Broadbent can't see the forest for the trees (rather conveniently for himself).

The economy isn't balancing to the tradeable sector because the BoE is hellbent on protecting the non-tradeables sector at all cost. This man is an IDIOT!!!

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The difference in this case, I believe, is one of scale. To have stuck rigidly to the inflation target, while a relative price adjustment this large was taking place, would have required a sizeable drop in the price of non-traded output not just in relative terms but in absolute terms as well15. Because the non-traded sector is labour-intensive that, in turn, would probably have meant a decline in nominal wages and, in order to produce it, a significant increase in unemployment. This is especially true if (as the evidence suggests16) the Phillips curve flattens out at low levels of wage inflation.

In other words, the MPC could have kept inflation closer to target through this period (the impact on inflation was not unavoidable). It’s just that doing so would have meant an unacceptably high cost in foregone output and employment17. Instead, and in order to prevent nominal wages from falling, a part of the relative price adjustment was allowed to feed through to aggregate prices.

So he's basically saying they let CPI do some of the heavy lifting rather than falls to nominal wages and higher unemployment.

i.e. by supporting non-tradeables prices. e.g. Housing.

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He appears to answer you in broad terms here

Which I take to be the 'one off' (impact from the original huge drop in sterling) argument.

Though, of course, it means that the blame for the boom falls upon them, since they had explicit instructions apparently (presumably "economic stability") to deal with underlying problems, whatever the value of CPI,

Peter.

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Though, of course, it means that the blame for the boom falls upon them, since they had explicit instructions apparently (presumably "economic stability") to deal with underlying problems, whatever the value of CPI,

Peter.

One can only conclude that the out of control, unbalanced, booming bank sector, house price bubble, misallocation of resources, excess govt. consumption (via tax bonanza) etc etc weren't considered a 'problem'. Only the aftermath.

Edit: The chart of sterling trade weighted index shows it's pretty much back to the mid-nineties level. Did that lead to some sort of automatic rebalancing and sudden re-invigoration as a trading and exporting nation? Err no. It led to the biggest housing boom of all time. Perhaps they'll give this 'rebalancing' lark a couple of years then decide it's rather easier just pumping up the housing market again.

Edited by Red Knight

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One can only conclude that the out of control, unbalanced, booming bank sector, house price bubble, misallocation of resources, excess govt. consumption (via tax bonanza) etc etc weren't considered a 'problem'. Only the aftermath.

Of course. To be fair to them, the whole world was involved, and it would have been hard for them to stop it. Still a few attempts to take away the punch bowl would have been appreciated.

Edit: The chart of sterling trade weighted index shows it's pretty much back to the mid-nineties level. Did that lead to some sort of automatic rebalancing and sudden re-invigoration as a trading and exporting nation? Err no. It led to the biggest housing boom of all time. Perhaps they'll give this 'rebalancing' lark a couple of years then decide it's rather easier just pumping up the housing market again.

The flaw in the plan (as pointed out on here by someone) is that they're treating it as a difficult period to get over and then back to....without ever specifying what we're going back to, but implying it's something like 2006. We don't seem to have anything to get back to? Are we going back to the 1990s? Or the 1960s? Does anyone have any idea apart from a misty dream of "growth"?

Peter.

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After four years of extraordinary economic volatility, the Great Moderation (as it’s now known) seems a distant dream.

"The Great Moderation" :lol:

Oh how they fooled people with their sound bites and at the same time encouraged the Great NOT Moderation.

If we'd had "the Great Moderation" then we might not be having to endure "the Great Contraction" now.

Edited by billybong

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Strong demand for non-tradables had, over a period of years,and via a strong exchange rate, “crowded out” the economy’s traded sector; as the prospects for that demand suddenly weakened, the exchange rate fell in order to crowd it back in.

:lol:

Yes it's so helped to CROWD it back in :lol:

He's certainly right to say whatever relatively small amount of traded sector there had been was "crowded out" and I dare say there might have recently been a very small uplift in the traded sector but as for CROWD it back in well that's just a laugh.

In that connection his chart 9 doesn't inspire much confidence.

Edited by billybong

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The UK has a floating exchange rate and monetary independence. It can, over any reasonable period of time, choose its own

inflation rate.

If it's so easy (for the BoE) "to choose its own inflation rate" then why not choose a target that can be met "over any reasonable time" instead of generally failing to meet it over the last 14 years.

Then we might have had a chance of avoiding "the Great Contraction".

Second, inflation expectations have actually remained pretty well anchored over the past three years.

:lol:

He seems to be just making stuff up. He's not even looking at the BoE's own published fan charts.

Edited by billybong

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Incredibly although there were plenty of references to interest rates and inflation there didn't seem to be a single mention of all the QE in recent years and it's impact on the economy. That must just come under "monetary policy".

As for the BoE's credibility :lol:

These speeches must be free for anyone attending. I can't imagine anyone paying good money for them.

Edited by billybong

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  • 285 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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