Oh Dear

Oh dear….

It was right that liquidity should be reduced. The Fed has resisted cutting its interest rates to help America\’s tottering banks keep off the casualty list. We should go further. Inflation is roaring ahead, as yesterday\’s figure of 4.7 per cent (a 16-year high, and some way below the real figure) showed. For all the talk of "meltdown" there is still cash out there. The Bank of England\’s monetary policy committee has been split between those who would cut, hold, or raise interest rates.

It would seem blindingly obvious, given the weakness of both sterling and the savings ratio and the rate at which borrowing is soaring, that rates should go up. But we lack a leader who will confront that reality.

Indeed – and the irony of this is so vast I can hardly compute it – the only prominent politician even heading towards the right set of economic values is Nick Clegg, the leader of the Lib Dems. They have at last owned up to something that the Tories, to their shame, refuse to acknowledge, that some of Labour\’s public spending is wasteful. Mr Clegg wants £20?billion off public spending, and tax cuts. This suggests that he at least has understood what, at root, is wrong with our economy: that we, in common with much of the western and capitalist worlds, are living beyond our means.

The supply of money has to be tightened and a correct market price put upon it.

Umm, no Mr. Heffer, no. When we\’re undergoing a massive deliveraging, when the greatest risk is deflationary, no, we really don\’t want to raise the price of money and thus reduce the money supply. That\’s what Hoover and his bubbas did way back when and what led to the Great Depression.

We really, really don\’t want to do that.

Pleasse, read a little more Milton Friedman. Or give Tim Congdon a call.

12 thoughts on “Oh Dear”

  1. monetary conditions in terms of the price and availability of credit are already extremely tight and boe is making it worse not better since our floating rate system makes interest rate hikes equivalent to tax increases. Unfortunatley the BoE seems as ignorant as Mr Heffer about this

  2. john b, anyone who believes the government inflation figures should be stabbed in the dangly bits until dead. For the greater good.

    It’s an arbitrary thing, plucked out of the air and chosen for purely political reasons. It has no meaning in the real world. Inflation as felt by normal people, and especially the poorest, is significantly higher than 4.7%.

  3. Bollocks. It’s weighted according to actual spending on goods and services.

    Yes, that probably means that in an economy where tins of beans and prepaid meter bills are rising in price, while hotel rooms, meals out and plasma TVs are falling in price, average RPI is less than the rate faced by the poor and more by the rate faced by the rich.

    But that doesn’t stop RPI being the correct average measure of how much prices in aggregate across the economy are rising.

  4. John B, if the price of tinned beans etc was rising, would this not mean that the only conclusion you could draw would be, there would be less spending on tinned beans? Even if you were to estimate what the spending on beans would have been, were it not for the price rise, for the purposes of drawing up your weighting, this estimate would still be an arbitrary opinion, and by no means necessarily correct.

  5. Fair-ish point.

    However, we know that in the UK, an individual’s total consumption of food and energy is not highly price- or income-elastic in the medium term. We also know that prices of all cheap-ish food types and all energy sources are up (a relative rise in baked bean prices might lead to significant shift towards tinned spaghetti, but if both rise equally then the mix isn’t going to change much).

    Therefore, the effect is unlikely to be substantial.

  6. makes interest rate hikes equivalent to tax increases.

    I would be happy for them to cut my taxes to compensate for any hikes in the interest rate I get on my savings.

  7. (to comment 6) – Of course there’s a limit to how much one can reduce spending on essentials like food & accommodation. But this suggests that if you were to switch to substitutes that were cheaper for whatever reason, including loss of quality, that loss of quality wouldn’t necessarily show up in the statistics, although it would probably rankle personally with the Telegraph reader – possibly this is what Heffer is wanting to convey?

  8. RPI was dumped by Brown in the early part of the decade partly, so I think, to put the UK into line with the euro zone in how inflation gets measured. Of course, if you want to be a cynic, you could argue that this was also a subtle loosening of monetary policy, since setting CPI as a target – it excludes mortgage bills – is less onerous than the RPI measure.

    But I would not of course accuse GB of being a naughty boy on inflation, oh goodness me no!

  9. “But that doesn’t stop RPI being the correct average measure of how much prices in aggregate across the economy are rising.”

    Doesn’t the Chancellor insist that the Bank of England use CPI as the measure? Ironically, RPI has just fallen slightly and the 2 measures are now at about the same level.

  10. It depends on what you’re measuring – and as you note, they’re currently the same anyway (and at the time they switched targets from RPI to CPI, they also cut the target IIRC).

  11. The target was reduced from 2.5% to 2.0%, which was in line with historical differences.

    Let’s be clear about one thing. The GDP deflator, which converts monetary GDP into real GDP, has been very similar to the CPI (or RPI if you wish). So if the Heffers, and those even madder (UKIP types) believe inflation has been 10% or higher (as I have seen) for the last five years, then they are claiming our standard of living is about half what is claimed, i.e. we it is below that of Hungary or similar. This would be an historic shift and one I just don’t believe.

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