Today’s menu includes half-baked Spud

Looking at context first, with regard to wealth the impact of inflation is unusually predictable. Inflation erodes the sum a debtor owes to the person who has lent to them. Deflation increases the sum owed to a lender. In quite straightforward terms inflation reduces the financial wealth of those who own debt and increases the net financial worth of those who owe money. Since the owners of debt are, by definition, wealthy it is very easy to see why inflation has come to be seen as the curse that it is usually represented to be. Low inflation preserves financial wealth so low inflation is good is the logic,

Thus Spud argues for higher inflation.

Spud also argues that we should all be saving for our pensions using bonds.

Sigh.

The second is that inflation is woefully inadequately measured because it ignores asset price changes and so, by implication, one of the biggest costs of living in the form of house prices.

Sigh, RPI includes cost of housing, CPI does not.

This contrasts with controllable inflation arising from situations capable of being influenced by the government of the state whose currency is inflating. These might be wage inflation; excess demand in the economy or a shortage of taxation to counter the level of government spending

Amazingly, the thought of reducing the government spending does not occur to him….

Excess demand is an absolute and a relative term: absolutely it indicates an unjustified exuberance beyond the capacity of the economy to meet demand. Relatively it is an exuberance of demand relative to the capacity of people in the economy to pay. The responses are quite different. The first needs interest rate rises; the second pay rises.

That’s a Nobel winning insight. Excess demand comes from low wages.

As for inflation due to insufficient taxation, we have seen the exact opposite for a long time: the inflation rate has suggested over taxation.

Says the man who wants to increase taxation by reducing the tax gap. As the Spuddie argued only yesterday:

I well remember Jacob Rees Mogg arguing against Michael Meacher in the House of Commons on one of the Private Member’s Bills I wrote for Michael. The aim of the Bill was to tackle tax evasion, which is money that is already due to HMRC. Rees Mogg’s argument against the bill was that it would result in more tax being paid and that was undesirable as a matter of absolute fact, so it must be opposed. I was shocked but in a moment realised the true agenda.

Yep, there it is:

It is my suggestion that this is where the UK finds itself now. It is true that there is too much debt, but to control that with interest rate increases will exacerbate the true crisis, which is a shortage of labour income within the economy as a whole.

It is also true that most of the current inflation is uncontrollable, unless Brexit us cancelled and OPEC respond by increasing oil supply, both of which are incredibly unlikely.

In that case, let’s be clear; the UK does not need an interest rate rise now. But labour markets are in need of fundamental reform to support and improve long term lay rates, and there is no sign of that happening. That’s the big issue around inflation that needs addressing. And there is no one to address it. And that may be the biggest failure in UK political economy right now.

We should reduce inflation by increasing pay for everyone. Truly a Nobel winning idea.

34 comments on “Today’s menu includes half-baked Spud

  1. I thought he had reached the upper limit of stupidity yesterday with his nonsense about Scotland. Clearly there is still more stupidity to come

    it is an exuberance of demand relative to the capacity of people in the economy to pay.

    So inflation is now too little money chasing too many goods?

  2. So according to The if I borrow tons of cash and use it to buy a house, inflation will make me poorer? Not quite what’s been happening.

  3. I’m going in large that in the next 6 months OPEC increases production and the UK keeps free movement of honest workers with the EEA.
    It’s called the contra-Ritchie betting system. I’ve back tested it and it has a good record.

  4. So according to R if I borrow tons of cash and use it to buy a house, inflation will make me poorer? Not quite what’s been happening.

  5. “Since the owners of debt are, by definition, wealthy”

    No, that’s the kind of biblical reasoning that has made multiple religions consider interest to be a sin and moneylenders to be scum. That’s the narrative of the poor people needing loans from rich people who then go on to take their sheep/land/wives when they cannot pay.

    These days middle class people save their money in the bank. They are the owners of debt. Rich people (the Donald Trumps and George Soroses of the world) then borrow money from the banks to build hotels, casinos and other stuff. They are the debtors.

    So Ritchie wants to devalue my life savings so Donald Trump can build the next tower more cheaply.

  6. On the news yesterday it was reported that inflation was “above the BoE’s 2% target”. So, it’s met the target and exceeded it? Well done, trebles all round.

    The 2% figure is a limit, not a target. Otherwise, those circular red road signs with a number on them must be a speed target, and I should be congratulated for managing a steady 85mumphs.

  7. Spud is like a latter-day Prometheus: every day an Eagle tears out what little brain he has been able to regenerate since the eagle’s previous visit.

    And yet he bravely burbles on starting every day afresh with no reference to truths and insights he proclaimed previously.

  8. Not so, at least as I recall it. ECB target is up to 2% inflation, as you say, BoE is “around” 2% inflation I think? They’ve got to write to the Chancellor explaining matters if it’s below 1% or above 3%…..

  9. Every other post is about how government should issue MOAR gilts for pension funds to buy. This means that people saving for pensions are wealthy and want low inflation, boo hiss. But more people should be in pension schemes because pensions are good. These schemes really need higher interest rates to be viable but our economy does not need higher interest rates.

    It is like watching a baby trying to work out how to stand up. But the baby is not a professor, paid for his knowledge and experience.

  10. http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.aspx

    The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment. Price stability is defined by the Government’s inflation target of 2%

    The inflation target of 2% is expressed in terms of an annual rate of inflation based on the Consumer Prices Index (CPI). The remit is not to achieve the lowest possible inflation rate. Inflation below the target of 2% is judged to be just as bad as inflation above the target. The inflation target is therefore symmetrical.

    If the target is missed by more than 1 percentage point on either side – i.e. if the annual rate of CPI inflation is more than 3% or less than 1% – the Governor of the Bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.

    A target of 2% does not mean that inflation will be held at this rate constantly. That would be neither possible nor desirable.

  11. synp said:
    “That’s the narrative of the poor people needing loans from rich people who then go on to take their sheep/land/wives when they cannot pay.”

    Wait a minute – if I borrow lots of money, blow it all on speedboats, and default, someone will take my wife away?

    Where do I sign up?

  12. ‘Deflation increases the sum owed to a lender.’

    Nope. It can change ability to repay. Amount of loan is unaffected. Is English a second language to Murphy?

  13. The Spud is a modern day snake oil salesman.

    He preaches to a group things they want to hear and desperately hope are true. “Use this ointment and your amputated leg will grow back” or “there are trillions in tax we can collect, not that we need to anyway as we can just print all the money we need”.

    The desperate audience laps it up until it becomes obvious that he’s talking shite.

    He wanders off to find another audience.

    Because people will always want to hear that their missing leg will grow back.

    Of course, Spud suffers in that he has none of the charm of a snake oil salesman. In fact, he’s an obnoxious cunt. Even when the audience wants to hear the message, they soon tire of the messenger.

  14. this is very odd – I have twice now tried to post a link to a blog post hosted elsewhere which is extremely rude about Murph – both times the comment has been deleted. Any offers why this may be happening?

  15. We should reduce inflation by increasing pay for everyone. Truly a Nobel winning idea.

    Paul Krugman might have advanced this at one time, but he already has a Nobel. He’s probably too modest to want a second.

  16. From that blog:

    Suggesting the term “estimate” is somehow synonymous with “no data” shows that – frankly – he’s either an idiot or that he assumes the people following him are.

    Both can be true.

  17. I notice that recently he is saying economic statistics are wrong. GRES in Scotland and now inflation. Could it be that he is so diverging from anything based on evidence he needs to try to diss the facts. Very post truth.

    Murphy is Trump. Discuss

  18. The inflation we are seeing now is due, in a large part, to the devaluation of the £.
    Unless the £ keeps falling this inflation will work its way through and disappear.

    Exiting the Eu and removing free movement will cause the available labour supply to shrink and wages will be forced up.

  19. @devonchap on the other hand, estimates of tax avoidance are wonderful, rigorous and fit for purpose

  20. “Relatively it is an exuberance of demand relative to the capacity of people in the economy to pay.”

    I think he might mean a supply-side shock. No, bollocks to that. He means pencil-up-nostril-wibble.

  21. “Inflation erodes the sum a debtor owes to the person who has lent to them…. In quite straightforward terms inflation… increases the net financial worth of those who owe money.”

    Does it? Does it really? All by itself? The real debt decreases even as the nominal principle stays the same does it? Without even he help of a compensatory pay rise to make the borrowers relative debt position reduce?

    Aah, I hear you Richard. Of course, that is what you meant all along. Well Richard, you should have written that. Because you wrote so very muchbesides, so very many words. On and on you droned. .. and yet somehow missed the most important part of the process. You are as much a writer as you are an economist.

  22. What’s even more amusing is that he’s a chartered accountant, does he not know the basis of which accounts are produced, or is estimating only bad when it’s the government Statistics office doing it

  23. What’s even more amusing is that he’s a chartered accountant, does he not know the basis of which accounts are produced, or is estimating only bad when it’s the government Statistics office doing it.

    I fail to see the humor.

  24. Dennis

    I’ve pondered.
    1) He shares Trump’s faith in alternative facts.
    2) He is an arsehole just like Trump.
    The comparison does have itswrits.

  25. Thanks for clarifying the 2% inflation thingy. It still sounds very wrong to call it a “target”. “We have a sales target of 2 million units, we’ve sold 6 million, well done”.

  26. Thanks for clarifying the 2% inflation thingy. It still sounds very wrong to call it a “target”. “We have a sales target of 2 million units, we’ve sold 6 million, well done”.

    We have a sales target of 2 million units, we’ve sold 6 million, write a letter to the board explaining why.

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