Monday, 13 October 2008

Inflationary tolerance

Here is a rather telling quote from a recent speech from Andrew Sentance of the MPC:

"The experience of the UK economy in the 1970s and early 1980s, and also in the late 1980s and early 1990s, highlights the danger of relaxing monetary policy when it is not consistent with price stability. The length and depth of the early 1980s and early 1990s recessions – and the rises in unemployment which followed as a consequence – were greatly aggravated by a previous surge in inflation which became deeply embedded in wage and price setting processes. So the superficial idea that being more tolerant of inflation will help to sustain economic growth and jobs in the longer term is profoundly wrong."

That is exactly what the MPC just did; they relaxed monetary policy when prices were not stable.


dearieme said...

Maybe the government told them that it wasn't just Iceland that anti-terrorist legislation could be misapplied to?

CityUnslicker said...

the recessions he uses were not preceded by credit crunches; rather critical difference.

Inflation will drop, if not then rates can go back up.

Why take the risk. Inflation eats the excess debt too. There is little downside.

economicsinterpreted said...

Nice article Alice, by the time the consequences of big government spending has hit it will be to late to lift interest rates to stop inflation hitting double figures.

I see from Cityunslickers comments that there is a definite disconnect between half of all commentators currently writing on economics. Some like me believe that inflation will hit the economy like a ton of bricks, others believe 1/2 a Trillion in government spending can only lead to deflation. No prizes for guessing where I stand on this issue.

Rather interestingly on tonight edition of the BBC's Newsnight, Peter Mandleson's old friend Jeffery Robinson (doing the govt.'s media bidding) was directly asked one of the best questions I've seen hit a politician in months:
'What affect will the £500 Billion of government spending have on inflation?'

As a true politician he made all the right platitudes about these nationalisations being the right short term move, but pointedly refused to describe the impact on inflation or any medium term affects on the economy.

This is because inflation will rise very high and on the best day for the markets in months, and after a great weekend for the Prime Minister he didn't want to bring the mood down with a much needed reality check.

Unlike Uncityslicker I don't think inflation will be our friend, nor are we in a win:win situation. If this rescue package was a consequence free move, we would have not been so reluctant to go there.

John McClane said...


Inflation eats savings too. That's the downside.

Anonymous said...

john mcclane: "inflation eats savings too. That's the downside."

It's reactionaries like you that got us in this situation in the first place, you independent thinking, savings accumulating economy saboteur.

Get with the program, it's debt you should be accumulating, not savings.

Soon, I will have direct access to all you financial details in the National Bank of New Britain, coupled with my Identity card program.

It will be so secure, if there is a single anomaly on the card database, you will be refused access to your cash - to prevent Identity theft of course. And to stop you reckless people from trying to access your money. No more Bank runs, no more Tory Boom and Bust in New Britain.

Get with the program, or you will be re-educated.


Nick von Mises said...

"Why take the risk. Inflation eats the excess debt too. There is little downside."

Spoken like a true borrower.

Mark Wadsworth said...

@ Cityunslicker, I beg to differ:

The last three recessions (mid 1970s, early 1990s and now) follow a simple pattern.

Low interest rates -> house price inflation -> credit bubble -> credit crunch -> house price crash -> recession.

As things stand today, the MPC can cut interest rates all they like, it has not and will not feed through into lower interest rates on mortgages, it will not lead to inflation, the plan is

(a) to try and recapitalise banks via a hidden subsidy (which might work) and
(b) to prop up house prices (which won't work)

CityUnslicker said...

I don't want inflation out of control; but let's look at a good historical example where there was an asset bubble. Japan in 1990.

Was inflation an issue Asset bubbles destroy real value and real money. Credit is constrained, the value of money increases becuase of this.

Increasing money supply helps the liquidity, but is only at best, replacing the value that has been destroyed ($25 trillion wiped off investments this year, the size of the collective bail out is less than $2 trillion).

Fiat currency is after all a confidence trick. Inflation is caused by perceived over-supply of money. This is not the case at the moment, hence little inflationary threat above real prices increasing in commodities etc - of which the opposite is now set as trend.

Mark Wadsworth said...

@ CU, Asset bubbles destroy real value and real money.

Not if you unwind them sensibly via debt-for-equity-swaps! These bubbles are just random transfers of wealth (with an unhealthy amount of transaction costs).

And don't forget, in the medium term, wages, share prices and house prices rise in tandem.

So today's shareholders' loss is jsut tomorrow's shareholders' gain!

Nick von Mises said...

Asset bubbles destroy wealth because they give false signals to entrepreneurs and investors, leading to malinvestment.

Inflating the currency is usually the cause.

dearieme said...

"random transfers of wealth": oh no, Mark, they are haphazard transfers of wealth. "Random" would be less of a worry.

Mark Wadsworth said...

NVM, I agree, much too much energy has been dedicated to 'property investing' and 'finance' rather than proper stuff like building cars or power stations, but hey.

(e.g. Those 60,000 people in the City who might lose their jobs obviously could have been better employed in something productive).