Be Happy -House Prices are Still Falling

The Land Registry has announced that house prices fell 1.3% in 2011.

This is great news for people struggling to buy their first house. It is also great news for existing home-owners who are trying to move, because it will help them sell their house and buy another – provided, of course, they recognise the drop and are prepared to cut their prices. If they get less for their old house, they will also have to pay less for their new one.

There are only two groups of losers from this. First are those with huge mortgages compared with the value of their houses. That is why it is so stupid for the government still to be dreaming up schemes to encourage the provision of mortgages with high loan to value.

The second group of losers is the banks, and that is frankly just tough. They should not have provided those reckless loans in the first place.

Overall though, for most of us – and certainly for the overall economy – it is good news. Not that the media will paint it as such.

Latest Inflation Figures Leave Mervyn King’s Credibility in Tatters

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The Hapless Sir Mervyn

The latest inflation figures show the CPI rate rising to 5.2% – a jump of 0.7% in a single month. This is the equal highest the rate has ever been since the CPI measure was introduced in 1997.

On the older RPI measure, inflation rose from 5.2% to 5.6% – the highest rate for 20 years.

The Bank of England Governor, Mervyn King, expects inflation to “begin falling” next year.

Do we believe him? I certainly don’t.

The truth is that Mr King’s record on forecasting inflation is atrocious. His forecasts have been all over the place, and only had two things in common – they have borne no relation to the actual outcome, and they have always been for a fall soon – but not yet.

Apart from a blip in 2009 after the credit crunch, inflation has been rising since about 2004. Even more worrying is the fact that the rise has shown signs of accelerating in the last two years.

You can see that policy was much too loose in 2008, allowing inflation massively to overshoot its target, that it fell as the credit crunch hit in 2009, and that it has since shot back up to 2008 levels.

And here is the catalogue of shame, listing what Mr King has been telling us over the last couple of years, during which inflation has been rising ever faster:

13th May 2009: The Bank of England forecasts that inflation will fall to 0.5% by the end of the year, before picking up to 1.2% by May 2011.

6th August 2009: Mervyn King argues at the Monetary Policy Committee that the proposed level of quantitative easing was too small, and would mean inflation staying below its 2% target for “a sustained period of time”.

15th September 2009: Mervyn King tells the Treasury Select Committee that inflation is “likely to be volatile” over the next six months.

19th January 2010: Mervyn King warns that inflation is likely to rise sharply in the first half of 2010. He says it is “likely to rise to over 3% for a while” but “should return to target in the medium term”.

16th February 2010: Mervyn King says that the rise in inflation is temporary and largely caused by January’s VAT increase to 17.5%.

18th May 2010: Mervyn King promises that inflation will fall to below 2% by the end of 2010.

18th August 2010: Mervyn King says he has been “surprised” by the recent strength of inflation, and says the factors pushing it higher are temporary.

20th October 2010: Mervyn King warns that it may be some time before inflation falls to 2%.

25th January 2011: Mervyn King warns that inflation is likely to rise to 4 – 5% in the coming months before falling back in 2012.

16th February 2011: Mervyn King warns that “Inflation will rise sharply in the first half of this year before falling back next year.

11th May 2011: Mervyn King warns that inflation “may not fall back as strongly as expected” and is expected to hit 5% this year.

10th August 2011: Mervyn King says again that inflation “may reach 5% in 2011″.

18th October: Inflation jumps to 5.2% on the CPI measure. (It is even worse, 5.6%, on the older RPI formula.)

Back on 17th February 2011, a member of the Monetary Policy Committee spoke out against all this. Andrew Sentance asked:

Why has the Bank of England done such a poor job [at forecasting inflation]?

(Mr Sentance left the Monetary Policy Committee in May.)

Well, Mr King is at least consistent. He is consistent in underestimating inflation. And this matters. Mr King, after all, is the Governor of the Bank of England. His main job is to keep inflation at the target rate of 2%. He has utterly failed to do so.

He would no doubt argue that the risk of low growth or recession is worse than the risk of inflation. However, worrying about economic growth is expressly not his job. He has been expressly tasked with controlling inflation regardless of growth.

Indeed, the whole point of giving the Bank of England independence in setting interest rates was supposedly to ensure that decisions on rates were not coloured by short term political considerations about growth.

Inflation robs savers, encourages profligate borrowing, encourages consumption at the expense of investment, damages the country’s economic credibility, and ultimately can devastate the economy. Mr King should not be writing letters to the Chancellor explaining why inflation has remained above the 2% target. He should be writing a letter of resignation instead.

Another Cunning Plan from the Fed

Ben Bernanke: I Have Another Cunning Plan
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The Federal Reserve has announced Operation Twist, whereby they will buy long term gilts and sell short term, to the tune of $400 billion.

That will obviously drive up the value of long term gilts (i.e. cut long term interest rates on US government debt) and cut the value of short term (i.e. increase short term interest rates on US government debt).

The Fed says it believes this will drive down mortgage rates.

How they work that one out I have no idea. All it will do is encourage investors to buy short term gilts rather than long term. (It could be, of course, that the real purpose has something to do with financing the huge US government debt, with the Fed expecting to save interest payments by the switch.)

What’s more, $400 billion sounds like a lot, but is peanuts in comparison with the size of outstanding US government debt, so the effect is likely to be small anyway.

And what’s even more is that it is far from clear that it is interest rates that are putting off housebuyers.

Mortgage interest rates are already lower than they have ever been in my lifetime – in fact, MUCH lower. My first mortgage was at 12%, if I remember rightly – roughly double the current rate.

What is putting off buyers is that they cannot get mortgages with decent loan-to-value multipliers, and even more, that they and the banks expect house prices to fall.

Meanwhile, the Bank of England is contemplating more “Quantitative Easing”, almost openly admitting that the aim is to get some growth by stoking up inflation.

What could possibly go wrong?

Who Will Deal with Mervyn?

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Time to be On Your Way, Mervyn

Mervyn King’s excuses for the resurgence of inflation in Britain are becoming more and more desperate.

He has now warned that higher fuel bills may push inflation up to 5% this year. He is announcing his excuses in advance now!

The Bank remains statutorily responsible for ensuring that inflation remains as close as possible to 2%, remember. Fat chance.

Mr King said there is:

a great deal of uncertainty about the outlook for inflation

He said that inflation

may not fall back as strongly as expected

He said these were “short term” and “volatile” factors, and that:

Our medium term judgement about inflation and growth is broadly the same as in February.

He yet again said that inflation would “begin falling” next year closer to the 2% target.

This time last year he was telling us inflation would fall this year. Now it’s next year. With Mervyn, it’s always jam tomorrow and never jam today.

Gordon Brown’s decision to make the Bank of England responsible for setting interest rates was hailed as a master stroke, and also supported strongly by the Tories. It was supposed to take political considerations out of the process. And yet it seems that political considerations have never been taken account of more strongly than now. The Bank of England has openly been worrying about economic growth in its setting of interest rates, rather than worrying about controlling inflation.

It is just that now, with the Bank responsible for rates, the government can wash its hands of the matter.

The Bank of England’s record on getting interest rates right has been utterly disastrous. They have lurched from too loose money, to too tight, and back to too loose again. The reason seems to be that they are targeting economic activity rather than inflation. This was the tendency that Bank of England independence was supposed to tackle!

They are, under Mervyn King, taking us down a road we have travelled before, in the 1970s. “Just a little bit of inflation will help the economy grow.” “Just a little bit more can’t hurt, can it?” “We need to think about jobs! Inflation is just a number.”

And before you know it, inflation is out of control, there is a Sterling crisis, interest rates get rammed up into the teens and economic collapse follows.

The European Central Bank, of course, is made of sterner stuff, and has already begun increasing interest rates. But then the ECB is dominated by Germany, whose monetary authorities have a record that puts ours to shame.

Mervyn King and the others on the Monetary Policy Committee need to be reminded that if they do not intend to meet their responsibilities to keep inflation low, then they should resign. Maybe the Chancellor is the man to remind them?

George Osborne, the Boy Chancellor, read Modern History at University, spent some time as a data entry clerk for the NHS and then on the shop floor at Selfridge’s, then worked at Conservative Central Office, the Ministry of Agriculture, and the Political Office at 10 Downing Street. He followed that up with a stint as William Hague’s speech writer and political secretary, before becoming an MP. Eminently qualified to be Chancellor of the Exchequer then.

Meanwhile, the Tories have John Redwood, a former Merchant Banker and a former cabinet minister, who most certainly does understand economic policy, languishing on the back benches because David Cameron prefers the company of Liberal Democrats to that of real Conservatives.

I guess Mervyn King is safe then.

Time the Bank of England Was Brought Back Under Democratic Control

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The Bank of England: Unelected, Unaccountable and Plain Wrong

I commented yesterday about the nasty new inflation figures.

The Bank of England has now released the minutes of its latest meeting of the Monetary Policy Committee, at which the Committee again voted to keep interest rates on hold. Again, only three members of the committee voted for a rise.

The Bank says there is a “significant risk” that inflation could exceed 5 percent over the next few months. (By inflation, they mean the Consumer Prices Index – the older Retail Prices Index is already well over 5 percent.)

The Bank itself said:

It was not yet clear that the weakness in output growth seen in the latter part of 2010 would prove temporary, particularly in light of the latest indicators of a further weakening in consumer spending.

And the BBC quotes Ross Walker, of RBS Financial Markets:

We didn’t expect any more dissenters this month. It’s the same dilemma, weighing up competing risks of rising inflation versus still weak activity numbers.

All of this really misses the point. The Bank of England was given its independence to set interest rates, and expressly given the legal responsibility to keep inflation as close as possible to 2 percent. Note: it was expressly not asked to consider prospects for growth, except as far as they might impact on the inflation rate.

The Bank of England is now trying to manage the economy in its entireity, via interest rates, and has clearly abandoned the idea that its target is the inflation rate. Quite apart from being an error of policy, that is a departure from its legal responsibilities.

This matters, because if inflation is allowed to let rip, as it is currently being allowed to do, then we all know from the past what the result will be – a wrecked economy, unemployment, destroyed savings and much misery.

It also matters for our democracy itself. The Bank is completely unaccountable. We cannot exercise democratic control over it. At least in the old days, before Labour (with the support of the Tories) made the Bank independent, it was clear that the government of the day was responsible for interest rates. And we could vote them out at an election.

It is now obvious that the independence of the Bank of England has been a complete disaster, like most of the rest of what Gordon Brown did. The Bank needs to be brought back under political and democratic control, so that its decisions on interest rates are part of an overall economic strategy that is accountable to the electorate.

Inflation and the Deficit

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Eric Pickles – Showing the Way

The latest economic figures make gloomy reading – and a wake-up call for the Coalition.

The Retail Prices Index (RPI), the older and trusted measure of inflation, last month hit the highest level for 20 years, at 5.5 percent.

Meanwhile, the newer Consumer Prices Index (CPI) is now at 4.4 percent. “More than had been forecast by economists”, notes the BBC, as usual.

Clothing, footwear, toys, books and financial services all contributed to the increase, along with transport, which was pushed up by higher fuel prices. The only bright spot was alcohol, which fell by 1.1 percent – so we can all drown our sorrows.

The British Chambers of Commerce, predictably, are keen to encourage the Bank of England to hold down interest rates even in the face of the steadily rising inflation. Their Chief Economist is quoted by the BBC:

The MPC must be careful before it takes action that may threaten the fragile recovery, particularly in the face of a tough austerity plan.

The fact is though, that the tough austerity plan is not yet, at least, in evidence. The same BBC article notes:

The ONS also announced that public sector borrowing last month was £11.8bn, a record for the month of February.

The official figure was nearly double the £6.9bn forecast by economists.

The present government have been in power now for nearly a year. They have talked tough on spending – and spending has grown signficantly. They have claimed to be instinctively in favour of low taxes – and have put taxes up significantly.

And despite the tax rises we have seen, spending has in fact risen so fast that borrowing levels are up rather than down. We are already a fifth of the way into the government’s programme to eliminate Britain’s deficit crisis – and so far, the deficit has gone up. All of which, of course, has not stopped Labour claiming the government have been imposing “savage cuts”.

There has been only one area where real cuts have been in evidence, and that is local government. Eric Pickles, as Local Government Secretary, has been conspicuously successful in restraining that part of public spending.

I suspect the reasons for Mr Pickles’ success are two-fold: first, that he himself is personally committed to cutting back local government spending, and probably more importantly, that there is no love lost between the national civil servants in his department and those local councils. Most government ministers have no doubt been struggling to get support from their departments for the necessary cuts, whereas Mr Pickles has probably had sterling support from his department.

The deficit is destroying our country, and it simply must be brought down. So far the Tories and Liberal Democrats have had little success doing that. They still have time – but the clock is ticking.

Stephanie Flanders – Puzzled

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Here, from Stephanie Flanders, the BBC Economics Editor, is a great example of the nonsense I was talking about in my last post.

Stephanie’s article is about the “puzzle” (sic) of why food prices are going up faster in Britain than in other countries.

Here’s one juicy quote from her:

The “macro” puzzle … is why British companies – including food retailers – have been able to pass on higher input costs to consumers, despite the subdued state of domestic demand.

I wonder what makes Stephanie think that domestic demand is subdued?! Well of course she thinks that because output is subdued, then demand must be too. In her Keynesian world, you can’t have subdued output but booming demand.

And another, talking about the recent UBS study on British food prices:

Their “killer” conclusion is that the cost of retailer inputs has risen by about 3.5% in the past year, while the average price of processed foods in the shops has risen by 6%. As the authors suggest, that is likely to cause some bother for the supermarkets.

She seems to have forgotten that prices in the supermarkets are set by supply and demand and NOT by input prices. So if demand is booming, it doesn’t matter what happens to input prices – those supermarket prices will boom as well.

And another:

British manufacturers are just as subject to global competition now as they were in the mid-noughties. When you consider the subdued state of the economy, you would think they would be even less able to pass on cost increases in 2010 than they were in 2006.

It’s that “subdued state of the economy” again. In truth, demand (in cash terms) is booming in Britain. That is partly because we have a huge fiscal deficit, and partly because interest rates are too low. And that is why we have soaring prices and rising levels of imports (despite the fall in the pound).

We don’t have a subdued economy. We have an economy with overheating demand.

But Stephanie, just like all those others, just can’t get her mind around the idea that we might have excessive demand in the economy at the same time as sagging production.

Vince Cable’s Quantum Theory of Economics

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Vince Cable, Father of Quantum Economics

Vince Cable has come up with a new branch of economics, to explain why interest rates must be kept low. The new economics are being hailed as his “Quantum Theory of Economics”, and are expected to have profound implications for policy-makers everywhere.

Inflation rose again last month to 4 percent on the CPI measure, or 5.1 percent on the RPI measure. That, of course, is double the Bank of England target rate. The conventional wisdom is that this will force the Bank of England to increase interest rates.

Mr Cable’s new theory, though, suggests that this could be a mistake.

As an outsider looking in, I take the view of the doves. Although you have inflation, it’s almost entirely imported. There’s not very much evidence of British inflation taking place. It’s virtually deflation.

In conventional economics, inflation means generally rising prices. Generally rising prices mean that there is more money that people want to spend, than goods and services available to buy with it. The way to prevent this is to increase interest rates, which reduces the money supply and holds prices down.

But in Mr Cable’s new theory, inflation consists of domestic prices and imported prices. Obviously the Bank of England needs to control “domestic price” movements. But “imported prices” don’t matter because they are not under our control.

This new theory has profound implications for economic policy, and indeed for the study of logic and metaphysics. If Mr Cable is right, then you can have prices that are rising and falling at the same time.

In Quantum Physics, a particle can be in two places at the same time. Similarly, in Mr Cable’s Quantum Economics, the price of a loaf of bread can be both lower than it was last week and higher than it was last week. (The layman will have seen examples of this effect in their local supermarket – if you stare long enough at the till receipt, eventually it starts to seem blurred and indistinct, often causing outbreaks of nausea and nostalgia for a distant past when “you could get a week’s shopping for ten shillings”.)

Quantum Economics implies that interest rates should be increased and reduced at the same time, in order to cure the simultaneous inflation and deflation being experienced by bewildered shoppers.

Mr Cable’s theory should more properly be called Cable’s Special Quantum Theory of Economics. He and other advanced economists at the Bank of England are currently rumoured to be working on a more powerful General Quantum Theory of Economics.

If you can have imported inflation and domestic inflation, then obviously you can have imported growth and domestic growth. The General Theory would combine all these measures of the economy, cancelling them all out and rendering them all meaningless.

Clearly such a Theory would allow politicians to set interest rates and public spending at any level they liked, and completely ignore the consequences.

Some economists are still sceptical of Mr Cable’s novel new approaches. They maintain that reality has a way of interrupting such rosy scenarios.

Mr Cable is having none of it. Tightening monetary policy would be “potentially very difficult”, he says.

And if his bold Quantum Theory is right, then we never will have to do anything difficult ever again.

[Update: it seems never a truer word has been spoken then in jest!]

If the Policy Isn’t Working, Is the Answer More of the Same?

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Inflation – On the Way Up

The Bank of England seems to be inching towards agreeing an interest rate rise. In January, two members of the Monetary Policy Committee voted for a rise in rates.

While the Bank sits on its hands and thinks about this, inflation rose yet again in December, with the CPI measure rising to 3.7 percent. And the Bank of England governor, Mervyn King, is forecasting that it will rise further, to between 4 and 5 percent, in the coming months.

Most commentators seem to be saying that the poor growth figures that were issued yesterday tell against a rise in rates. Stephanie Flanders, the BBC economic correspondant, was again betraying her unrecontructed Keynesian instincts on radio 4 this morning, saying that the poor growth figures vindicated the Bank’s decision so far not to raise rates.

Those same commentators, including Ms Flanders, have also been citing the poor growth figures as evidence that the planned government spending cuts may be unwise.

So last quarter we had:

• Record low interest rates
• Record high government borrowing
• A shrinking economy.

And Stephanie Flanders and others think that is evidence for keeping rates low and borrowing high.

Come again? The economy is shrinking again and that is a vindication of the current policy?

If the current policy is not working, that is an indication that the policy is wrong, not a vindication of it. The policy must change.

The Coalition, to its credit, has so far held the line on spending cuts (although its planned cuts are extremely mild, with few planned cash cuts, the NHS and International Aid given cash increases, and only cuts in “real terms” overall).

The Bank of England is still sitting and waiting, on the interest rates part of the picture.

The current policy has not worked, and we therefore need to resist the nonsense from Ms Flanders and Ed Balls (architect of the failed policy) and change it. And that means cutting government spending and raising interest rates.

Ms Flanders would have a fit at such an idea. After all, as she again said a couple of days ago, where would the growth come from if government spending was cut?

We know that excessively low rates cause inflation. And we know from experience over and over again through history, and in country after country, that holding rates low does not create growth. Indeed, inflation has frequently been accompanied by recession – as in Britain before the Thatcher government put a stop to the discredited policies that had led to the 1970s economic disaster.

Yet more evidence of the need for higher rates comes from the news on mortgage approvals, which fell by 10 percent in 2010 from an already low level the year before. This credit desert is not restricted to the housing market. Unsecured credit is also falling. The British bankers Association said:

Mortgage demand was weak throughout the year. Unsecured credit demand was also weak during last year, with net lending reducing by £2bn as households adopted a lower appetite for credit due to the uncertain environment for employment and the economy.

In fact, banks have been very reluctant to lend. Anyone who thinks the low level of mortgage approvals is due to lack of demand should look at the stringent conditions that banks are attaching to mortgages now. Unless you have a large deposit, forget it.

The reluctance of the banks to lend is partly because of the increased capital requirements being demanded of them by government, and partly because of the very low interest rates. Low rates discourage savers from using bank savings accounts, thus starving the banks of funds, and discourage banks from lending what funds they do have, because the profits are low.

And we know from experience over and over again through history, and in country after country, that Keynes was wrong – government borrowing does not create growth. In fact, government borrowing destroys growth by grabbing money that companies could be investing to generate wealth in the future. The £180 billion of government borrowing this year means £180 billion that is being invested in gilts, that would otherwise be invested elsewhere – and some of that would otherwise have been invested in businesses.

An additional reason why businesses can’t find the funds they need to invest, is that government is grabbing too much of the available funds.

All the evidence therefore points in the same direction. Government policy of all kinds is directly responsible for the problems we now have.

• Interest rates are too low, keeping money out of banks, discouraging lending and causing inflation.
• Government borrowing is too high, robbing the private sector of the funds it needs to invest.
• And government has put up taxes, discouraging economic activity.

There is only one set of policies that will end the crisis we are now in. We need higher interest rates, much lower government spending and tax cuts.

But with people like Ms Flanders stubbornly clinging to their almost religious belief in the old failed policies, it is hard to see our rulers seeing sense any time soon.

More Bad News on Inflation

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The Bank of England – Asleep on the Job

Following the Bank of England’s decision this week to leave interest rates unchanged at a historically low 0.5%, we today have more bad news on inflation.

This time it is the producer price figures (“factory gate inflation”), which last month rose to a headline 4.2%. (In other words, prices rose by 4.2% over the last year to December.)

That figure, though, was due to an increase of 0.5% for the single month of December. At an annualised rate, that is 6.2%.

We shouldn’t read too much into one month’s figures, of course. Except that it isn’t just one month’s figures. Inflation figures have been “higher than expected” repeatedly for many months now.

It is becoming ever clearer that the Bank of England is asleep on the job. The longer they wait before raising interest rates, the harder will be the shock when they finally do go up – and go up they will, eventually.

Of course, the government will tell us that interest rates are not their business, that the Bank of England is “independent”.

How convenient. The truth is, our elected politicians are still responsible. They can’t simply opt out of running the economy. If inflation really does get out of control (and it nearly is already, in truth), the current government will bear its share of the blame as much as the last.