Posts Tagged ‘sentance’


Blip, blip, beeeeeeep

January 20, 2010

David Blanchflower, right again on the Bank of England’s ‘independence’:

The claim was that [central bank independence] would help bring macroeconomic stability and it seemed to have worked for a while, because inflation remained low for most of the next decade. But that was driven by cheap imports from China. When Tony Blair was asked recently in an interview at Columbia University what had driven the Great Moderation [ie the decade-long boom] he replied, “Luck”, and that seems about right.

It turns out that countries without an inflation target did just as well as those with one. And it didn’t protect us from the greatest economic shock of our lifetimes.

It’s not been clear, over the last year or so, that the Bank has exercised any meaningful ‘independence’ in any case. The Bank, and the Monetary Policy Committee, certainly gave the impression of being brought under the Treasury’s thumb. Not in itself a bad thing: the monomaniacal inflation-hunters on the MPC needed a sharp kick up the backside. It’s pity it had to be the nice people at HMT to do it; well, them and a recession so big that even the most myopic of latter-day monetarists managed to spot something was up.

The merest whiff of a glimmer of a faint hope of a recovery has, however, given at least one Committee member the excuse he needed to get straight back onto the inflation mainline, threatening interest rate hikes ahead of any meaningful improvement in the state of the economy. It’s not just as if the Great Depression never happened. It’s as if the last two years never happened.

The blip in prices upwards this month is likely to be nothing more than that: a blip, caused particularly by the reversal of the VAT cut. The biggest single risk to the UK economy remains that of deflation, with falling prices dragging down economic activity and pushing up the real burden of debts. But at least some of the MPC remain oblivious. Markets panic about inflation. And the MPC follows the markets.

Time to clip their wings. Close down the MPC, and put the Bank of England under democratic control; and, whilst you’re at it, why not do the same for the other nationalised banks?


Chasing inflationary ghosts?

January 15, 2010

Andrew Sentance, of what his former Monetary Policy Committee colleague Danny Blanchflower rather cruelly referred to as the ‘feeble six’ of MPC members, appears to have learned very little from the last 18 months:

A Bank of England policy maker has said that Threadneedle Street has done enough to lift Britain out of its deepest post-war slump and will need to consider raising interest rates this year if a recovering economy poses a threat to inflation.

…he warned that while the early stages of the recovery would feel “fragile and uncertain”, the MPC needed to be vigilant about the risks of igniting inflation.

“There will be quite a lot of spare capacity and slack to take up [as the economy recovers] but that is not the only influence on inflation. There are global influences such as oil and commodity prices and the impact of the exchange rate which can lead to speed limits for the rate of growth. The inflation outlook is not entirely driven by the level of the output gap.”

Formally, he is correct: the ‘inflation outlook’ is not entirely driven by the amount of spare capacity in the economy. It can be imported through a falling value of the pound, pushing up the price of imports. Or it could come in through rising prices of raw materials, like gas, oil and steel.

This is all true. But it severely understates three factors: first, the truly colossal, global scale of the deflationary pressures unleashed by the credit crunch. The losses for the banks were so huge that, even with the eye-watering dimensions of the government bailouts offered, they couldn’t have anything other than a major depressive effect on the economy. It is simply too optimistic to assume that this drag on the economy has now been overcome; banks are still essentially sitting on their bailouts, with US lending depressed and liable to choke off further in the UK.

Second, whilst there has been much hurrahing of late about an improvement in UK manufacturing orders from their depressed level, and some return, in some places, to growth in the housing market, the services sector – accounting for over 80 per cent of UK employment – remains depressed. The picture, at best, is too murky to make chirpy pronouncements like Sentance’s.

Third, and perhaps most fundamentally, the characteristic monetary feature of the last decade has been – away from asset prices, like the housing market, and some raw materials – not inflationary pressures on economies, but deflationary, as a transport and communications costs slumped, and the price of manufactured goods crashed through the floor. Central bankers, like Sentance, have persistently underestimated this, chasing inflationary chimeras – until, as in Sentance’s case, the debacle was upon them.

Inflation may yet return: we are in uncharted economic waters; the twin effects (amongst others) of quantitative easing and the appearance of China as an economic superpower are deeply uncertain. But a rerun of the bad old days, of central banks paranoiacally lurching after the ghosts of past inflation, will do little to help.