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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.