David Blanchflower: The Inflation Nutters Are On The March Again – And They Are As Wrong As Ever

[interestrateripoff]

http://www.independent.co.uk/news/business/comment/david-blanchflower-the-inflation-nutters-are-on-the-march-again--and-they-are-as-wrong-as-ever-9690002.html

So two external members of the Bank of England’s Monetary Policy Committee (MPC), Martin Weale and Ian McCafferty – whom I call the irrelevant minority (IM), having been one myself throughout much of 2008 – ludicrously voted for a rate rise at the 7 August meeting. The remaining seven voted to sit pat, arguing, sensibly, that any rate rise would be dangerous.

This is what the seven said: “It was possible that, given the strength of the headwinds faced by the economy, even the current extraordinarily low level of Bank rate was not providing a great deal of stimulus to activity. A premature tightening in monetary policy might leave the economy vulnerable to shocks, with the effectiveness of any further necessary stimulus being limited by the effective lower bound on Bank rate. In addition, increases in Bank rate well ahead of any pick-up in wage and income growth risked increasing the vulnerability of highly indebted households. Finally, an unexpected increase in Bank rate might cause sterling to appreciate further, bearing down on inflation and further impeding UK economic rebalancing.”

It is hard to disagree with any of that. But the IM did, arguing: “These members noted that the continuing rapid fall in unemployment alongside survey evidence of tightening in the labour market created a prospect that wage growth would pick up. They noted that it was possible that wages were lagging developments in the labour market to some extent. If that were true, wages might not start to rise until spare capacity in the labour market were fully used up. Since monetary policy, too, could be expected to operate only with a lag, it was desirable to anticipate labour market pressures by raising Bank rate in advance of them.”

The vote for a rate rise was apparently because inflation is set to rise because wage inflation is going to rise, even though it is moving fast in the opposite direction. The claim is that even though there hasn’t been any wage inflation for years, believe us, it is about to spiral out of control. They also seem to have forgotten that there is a secondary objective of ensuring growth and employment. The remit of the MPC, as set out by the Chancellor in a letter dated 19 March 2014, is to “maintain price stability” and “subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”. The IM appears to have lost the plot.

Apart from the fact a rate increase was only voted for in the full knowledge there wouldn't actually be one and was done to create the charade that there is genuine discussion.

Ah yes "price stability" where prices only go up. Yep it's an amazing stability!

[nnails]

If the inflation figures included house cost and rent cost we would have run away inflation.

[Venger]

If the inflation figures included house cost and rent cost we would have run away inflation.

As on that R4 multi-series radio show that's going out at the moment, which I keep catching when in the kitchen, with some wise old voice, but should have been broadcast 10 years ago, so now against circumstances of the situation and no hpc, sounding oh-so-hackneyed rather than wise... questioning house prices and 'whether there is a bubble'

Buyers paying more for higher house prices, via schemes/FLS - instead of a crash like one of their guest said should have happened - paying more for rents, is sucking money out of the economy, and it going to a smaller group of special and protected interests.

And debt going to unproductive sectors, funding the fun of forever hpi,instead of loans into productive sector...emerging tech, stuff we can sell to the world. Lower/stagnant wages, seeing as many companies kept staff on instead of shedding if we'd have a deeper recession. Wage inflation? There is just mostly a debt economy.

[shindigger]

Will always be an utter **** in my eyes.

[billybong]

At least voting in favour of the rise helped to give Blanchflower an excuse to write such an article criticising the idea of a rise.

[EUBanana]

If the inflation figures included house cost and rent cost we would have run away inflation.

Exactly.

What a load of BS Blanchflower utters.

Rigged inflation figure shows low inflation shocker.

[billybong]

And They Are As Wrong As Ever

"Wrong As ever"?

They weren't wrong in the 1970s, 80s and 90s - and in many years of the "noughties" when inflation went well above the BoE's so called target (and then some).

Edited August 26, 2014 by billybong

[Venger]

In addition, increases in Bank rate well ahead of any pick-up in wage and income growth risked increasing the vulnerability of highly indebted households.

Last report I read had personal debt hit a record high, and also spun as a good thing, for a sign of recovereh.

That must include investors buying more BTLs. How about, you know, with these low interest rates, the debt-victims pay down some debt.... ?

29 November 2013

UK household debt hits record high

Household debt in the UK has reached a record level, according to figures from the Bank of England.

Individuals now owe a total of £1.43 trillion, including mortgage debt, slightly above the previous high.

The previous record was set in September 2008, just before the effects of the financial crisis and the recession began to bite.

But the government said that relative to household income, debt had actually fallen.

The rise may reflect the willingness of consumers to borrow more, as a recovery comes into sight.

more... http://www.bbc.co.uk/news/business-25152556

[wonderpup]

If ultra low interest rates are sustainable indefinitely why were they not always kept low? There must be a downside at some point, a downside that has nothing to do with employment or inflation but one that is baked into the system itself.

The fact that rates have not historically been so low despite the apparent 'benefits' this brings implies that there is some systemic consequence to keeping them low.

So the idea that central banks set rates may in fact be an illusion caused by too narrow sampling of the data- they think they are in control but in reality over the longer term rates set themselves- and all the central banks are doing is building up the pressure in the system that will force those rates up.

[billybong]

Last report I read had personal debt hit a record high, and also spun as a good thing, for a sign of recovereh.

That must include investors buying more BTLs. How about, you know, with these low interest rates, the debt-victims pay down some debt.... ?

+1

Indeed - otherwise how can they be debt victims.

[Venger]

If ultra low interest rates are sustainable indefinitely why were they not always kept low? There must be a downside at some point, a downside that has nothing to do with employment or inflation but one that is baked into the system itself.

The fact that rates have not historically been so low despite the apparent 'benefits' this brings implies that there is some systemic consequence to keeping them low.

Got to agree. There's been serious malinvestment going on with 0.5%, yield hunters.

Was just thinking earlier, if we are going to see more companies vocally pushing against this situation. Those not winning with stimulus measures vs, for example, the VI HTB housebuilders/shareholders (etc inc banks getting another mortgage tied up, at high price, and interest upon it), paying "what it is worth".

And so having less money/good credit/demand, to buy other company's products/services.

Determined reflation, points to a deeper depression coming - direct debt liquidation, and one which might bring down everything (inc savers). There is a limit to the creditworthiness of countries too; with risk of currency crisies, as it becomes evident things are tipping out of control, or force interest rates up and perhaps trigger that consequence. Wider markets must be tolerant for a reason - seeing signs of wealth accepting lower rates and safety, and maybe US QE has wrong footed many yield chasing investors, perhaps QE being more of a buffer for when Gov allows more of a correction - and fresh volume lending at lower prices.

For past few years, with house prices, wider stockmarket investing... new BTL investors even... it's just been a repeat of boom years. A bit like that Battlestar Galactica episode where everyone in the casino comes out a big winner, having great fun.... until things turn, and they discover there is a sinister price for many participants to pay. I hope some yield chasers are forced to pay it, and those still laughing their London homes go up by 20% a year, celebrating HPI... giving it every excuse for forever hpi.

[crashmonitor]

If ultra low interest rates are sustainable indefinitely why were they not always kept low? There must be a downside at some point, a downside that has nothing to do with employment or inflation but one that is baked into the system itself.

The fact that rates have not historically been so low despite the apparent 'benefits' this brings implies that there is some systemic consequence to keeping them low.

So the idea that central banks set rates may in fact be an illusion caused by too narrow sampling of the data- they think they are in control but in reality over the longer term rates set themselves- and all the central banks are doing is building up the pressure in the system that will force those rates up.

We seem to have hit a deflationary phase and I have virtually given up on the idea that interest rates will rise for at least a year.

I found this article this morning and I think it sums up the situation very well....for all the QE and low interest rates nothing has found its way into the pockets of the workers....no wage increases, no increased spending power.....where is this inflation going to come from?

It is very backward looking to point to the five year increase in asset prices.........a doubling in equities, a rise off the bottom in house prices in certain micro markets. But there really isn't much juice left in either market and once these top out where is the growth in money going to come from.

It feels like for the first time in my lifetime we could be looking at deflation or someting pretty close. Terrible for house prices, ball crunching for those that have taken on mortgage debt.

Deflation is a most particular type of hell for the indebted then we will see the wailing and knashing of teeth with no reprieve.

http://howestreet.com/2013/12/deflation-coming-with-vengeance-in-2014/

Edited August 30, 2014 by crashmonitor

[Killer Bunny]

Most countries' bond yields are at record lows.

#TurningJapanese

Inflationistas have been wrong for many years.

The undoubted recent asset price inflation will likely reverse if yields are telling us anything. Which very likely they are.

[1929crash]

We seem to have hit a deflationary phase and I have virtually given up on the idea that interest rates will rise for at least a year.

I found this article this morning and I think it sums up the situation very well....for all the QE and low interest rates nothing has found its way into the pockets of the workers....no wage increases, no increased spending power.....where is this inflation going to come from?

It is very backward looking to point to the five year increase in asset prices.........a doubling in equities, a rise off the bottom in house prices in certain micro markets. But there really isn't much juice left in either market and once these top out where is the growth in money going to come from.

It feels like for the first time in my lifetime we could be looking at deflation or someting pretty close. Terrible for house prices, ball crunching for those that have taken on mortgage debt.

Deflation is a most particular type of hell for the indebted then we will see the wailing and knashing of teeth with no reprieve.

http://howestreet.com/2013/12/deflation-coming-with-vengeance-in-2014/

All that QE went to the banks - that's why it hasn't prevented deflation in the real economy.

QE might have worked if it had gone into financing productive investment, such as upgrading our electricity grid and our power generation capacity.

[silver surfer]

If ultra low interest rates are sustainable indefinitely why were they not always kept low? There must be a downside at some point, a downside that has nothing to do with employment or inflation but one that is baked into the system itself.

The fact that rates have not historically been so low despite the apparent 'benefits' this brings implies that there is some systemic consequence to keeping them low.

So the idea that central banks set rates may in fact be an illusion caused by too narrow sampling of the data- they think they are in control but in reality over the longer term rates set themselves- and all the central banks are doing is building up the pressure in the system that will force those rates up.

Good point.

If you stand back and look at the really long term, low inflation/low interest periods are much more prevalent. Oil price shocks, wars, strong unions, fast economic expansion, ultra low unemployment, all push inflation/interest rates up.

No one can predict the future but a future historian wouldn't find anything remarkable if interest rates were range bound between 1% and 3% for the next fifty years. This "new normal" is really the old normal. The few decades around the 1980's, which we tend to benchmark as somehow "normal", were really the oddity.

[crashmonitor]

Most countries' bond yields are at record lows.

#TurningJapanese

Inflationistas have been wrong for many years.

The undoubted recent asset price inflation will likely reverse if yields are telling us anything. Which very likely they are.

Another prediction that is looking on course (link)..............a collapse in asset prices followed by a brief rally and then the deflation/stagnation phase that will last years. A suggestion that gold might benefit.....not for the reasons that most gold bugs expected though......

http://news.goldseek.com/ClifDroke/1310933400.php

Edited August 30, 2014 by crashmonitor

[@contradevian]

If ultra low interest rates are sustainable indefinitely why were they not always kept low? There must be a downside at some point, a downside that has nothing to do with employment or inflation but one that is baked into the system itself.

I wish I knew. Back in 80's when I had several huge mortgages, the Tories were spinning the line that high interests were the good medicine to fix the economy and wring inflation out of the system!

Ashamed to say I fell for it at the time. Give me some more tough medicine please! And not it didn't prevent a house price bubble.

Edited August 30, 2014 by aSecureTenant

[billybong]

Base rate since 1694.

https://

docs.google.com/spreadsheet/ccc?key=0AonYZs4MzlZbcGhOdG0zTG1EWkVQTjBYWm9pWHVRWkE&hl=en#gid=1

The long term average seems to be about 4/5%. Since 1952 it's averaged about 8% with a peak in 1980 of about 17% and it started to divert up and away from the 5% average range in the early/mid 70s .

The current base rate is a record low of course but it's impossible to be certain that the last 64 years isn't the start of extremely volatile and high rates lasting many many decades into the future especially now not being on the gold standard.

It's impossible to predict and even the BoE hasn't a clue what they'll be despite what they claim.

Edited August 30, 2014 by billybong

[gf3]

If ultra low interest rates are sustainable indefinitely why were they not always kept low? There must be a downside at some point, a downside that has nothing to do with employment or inflation but one that is baked into the system itself.

The fact that rates have not historically been so low despite the apparent 'benefits' this brings implies that there is some systemic consequence to keeping them low.

So the idea that central banks set rates may in fact be an illusion caused by too narrow sampling of the data- they think they are in control but in reality over the longer term rates set themselves- and all the central banks are doing is building up the pressure in the system that will force those rates up.

Gotcha

Found something you have said I don't agree with. When 2007 and the credit crunch came along it was very similar to the point in a game of monopoly where the winner is declared and all the pieces are put back in the box.

non risk returns where r>g cannot return again without the economy dieing.

[zugzwang]

We can't grow our way out of debt, 500% of GDP is insurmountable. We'll have to inflate it away and become dramatically poorer in the process.

As ever, Japan provides us with the clearest possible guide to any credible future: The money printing never stops!

Better believe it.

(Reuters) - Japan's economic outlook has dimmed further and inflation is stalling but analysts in a Reuters poll were split on whether the central bank would ease policy this year or wait until 2015 to try and revive growth.

While a gradual recovery looks likely, an April sales-tax increase which pushed the economy in the second quarter into its deepest fall since the 2011 earthquake and tsunami had economists downgrading growth forecasts amid an anaemic rise in wages and lacklustre exports.

All the analysts in the monthly Reuters survey, taken in the past week, said the Bank of Japan would fail to hit its 2 percent inflation target before April and most said the BOJ would therefore ease further - although they were unsure on the timing.

Half the economists said the central bank would add to its massive stimulus measures this year while the other half said it would wait until January at least.

http://uk.reuters.com/article/2014/08/27/uk-economy-poll-japan-idUKKBN0GR0IJ20140827

[Killer Bunny]

Another prediction that is looking on course (link)..............a collapse in asset prices followed by a brief rally and then the deflation/stagnation phase that will last years. A suggestion that gold might benefit....

When money no longer goes to Western stocks one of the alternative recipients will be P Ms

[Killer Bunny]

I wish I knew. Back in 80's when I had several huge mortgages, the Tories were spinning the line that high interests were the good medicine to fix the economy and wring inflation out of the system! Ashamed to say I fell for it at the time. Give me some more tough medicine please! And not it didn't prevent a house price bubble.

They were.

Vast debt levels now is obvious reason why economy can't take higher rates.

[Corruption]

Will always be an utter **** in my eyes.

If i could choose 10 people to be shipped to IS land to have their heads put on a stick, this piece of scum would be near the top of that list.

Nicest thing i wish him and his immediate family is cancer.

[billybong]

I wish I knew. Back in 80's when I had several huge mortgages, the Tories were spinning the line that high interests were the good medicine to fix the economy and wring inflation out of the system!

Ashamed to say I fell for it at the time. Give me some more tough medicine please! And not it didn't prevent a house price bubble.

Going back a little bit further beyond that time TPTB (like now) were touting inflation and regularly suggesting that moderate inflation (say around 5%) would be good for the UK's sluggish economy.

Then the inflation got to be totally out of control inflation and high interest rates were needed because low inflation was suddenly the best medicine to fix the UK's sluggish economy - and also to compete with low inflation Germany because during that high inflation period in the UK Germany's low inflation economy had progressed ahead of the UK's by leaps and bounds.

After they fluked reasonably low inflation upto the mid noughties they then (again) just as suddenly decided that what they call moderate inflation would be good for the UK's sluggish economy (obviously massive inflation disguised as moderate inflation for house prices, food and energy etc etc as they could inflate as much as possible).

Now that they are stuck (yet again) they're trying for even higher inflation wherever possible - and on top of that even trying to get Germany/the euro zone to do something similar. After it gets to be totally out of control inflation (yet again - how many times) then for sure they'll suddenly be punting high interest rates and low inflation again.

Of course in real terms the UK's economy is a dead beat economy totally reliant on extraordinary and massive levels of debt including hidden/off balance sheet debt (and now stuff like QE etc on top of that) and has been for a long time - but rapidly recovering Germany would be crazy to even contemplate following anything resembling the policies of the crazies running the UK's economy.

Edited August 30, 2014 by billybong

[1929crash]

If i could choose 10 people to be shipped to IS land to have their heads put on a stick, this piece of scum would be near the top of that list.

Nicest thing i wish him and his immediate family is cancer.

A disgusting comment. What has his immediate family doone to you?