Wednesday, 26 January 2011

It wasn't me says the Governor

A sign of genuine leadership is a willingness to accept responsibility. Sadly, Mr. King's recent speech in Newcastle was an unconvincing exercise in blame displacement.

As Governor of the Bank of England, his primary task is to ensure a stable price level. However, UK inflation is spinning out of control. So how does Mr. King deal with this seeming contradiction.

In his speech, he offered three explanations for the recent rise of inflation. The UK economy has suffered from three shocks; higher import prices, higher energy costs, and higher VAT rates. He implies that neither he, nor the MPC, bear any responsibility for these developments.

Of course, this isn't quite correct. Let us start with import prices. The reason that import prices are higher is because sterling has depreciated. The exchange rate is the relative price of a currency. If a central bank increases the supply of its currency, then the price will fall.

This is exactly what the Bank of England did, and explains why Sterling is worth so much less than three years ago. Therefore, the Mr. King and the MPC are directly and uniquely responsible for higher non-fuel import prices.

What about fuel prices? Surely, Mr. King is innocent. Sadly not. He must bear some responsibility here. While it is true that the monetary policy of the UK has only a minimal effect on world energy prices, it is not true of the aggregate behaviour of all central banks. If each of the major central banks decide to loosen monetary policy and inject massive amounts of cash at a global level, then world energy prices will rise.

The Bank of England, along with the Fed, the ECB, and the BoJ, all simultaneously loosened monetary policy in the autumn of 2008. This wasn't an innocent coincidence; this was a coordinated effort. Two years later, inflation is picking up, just as monetary theory would predict. The BoE, along with other central banks, are therefore responsible.

Mr. King's responsibility for the VAT hikes is more indirect. The Bank of England was negligent throughout the decade prior to the crisis. It acquiesced to a massive asset bubble, that eventually burst and nearly brought down the financial system. Unwisely, the government responded to this crisis with wide, short-sighted changes to VAT rates. While Mr. King was not directly responsible for these policy vacillations on VAT, he was responsible for creating the permissive environment that allowed politicians to behave so badly.

Whatever excuses Mr. King may furnish for past mistakes, one thing is clear, the jig is up. Inflationary momentum is increasing, and there is only one way to pierce the boil - higher interest rates. The time for excuses are over. The time for leadership has arrived. Mr. King needs to step up and do what has to be done.


Stevie b. said...

"Mr. King needs to step up and do what has to be done"

Ha ha ha!!! You're having a laugh of course. Mr king has decided that workers and savers must suffer whilst the banks, their employees and bank bond-holders get off scot-free. How else can you explain the re-diculous spreads that allow the banks to print their way out of bankruptcy? At least make the bondholders suffer and get the national suffering back into some sort of balance. Most of us should be very angry.

Anonymous said...

Alice you and Stevie b are both right .As usual an excellent post on a morning when I received a round robin email asking me to boycott the two leading petrol retailers to force them to reduce prices.

Weekend Yachtsman said...

"If a central bank increases the supply of its currency, then the price will fall"

You got it in one.

Why do the so-called experts find this so hard? Are their memories really that short?

I suspect not. They are trying to balance the books by robbing savers and pensioners blind, and paying as much as possible of the country's debts off in debased and worthless currency.

Time was, when clipping the coinage was a capital offence; but even then, I think, not when done by the King.

Electro-Kevin said...

We are told by politicians that tax on petrol is in the order of 60%.

So a pump price of £1.20 when the tanker price is 40p means a tax of 80p. (rounding my figures here, of course.)

That's 200% tax by my reckonning.

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