UK economy: ‘Living standards to plunge’ says BoE’s Mervyn King

26th January 2011

The Bank of England Governor Mervyn King is talking about the 1920s but perhaps it is more like a case of Charles Dickens' Hard Times.

King speaking in Newcastle upon Tyne on Tuesday warned that wages were likely to be no higher this year than in 2005

He said: "One has to go back to the 1920s to find a time when real wages fell over a period of six years.  The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies," he said.

It might be observed that the last thing King wants to see is wage inflation given the incredibly tricky economic situation he is facing of falling GDP and increasing prices.

However, it sparks a by now familiar interest rate argument on the message boards.

robby12345 writes: "Mr King, it's pretty simple. Rising inflation is caused by a devalued currency and a belief by speculators that you will try and steal money by printing money. You are reinforcing this behaviour. The more you resist fighting inflation, the more it will happen as people move out of worthless paper into real hard assets."

lastorders has a retort for Robby12345 and his ilk.

He writes:  "You are wrong. Raising interest rates will kill the economy, push thousands on to the dole queue (taxpayers pick up the bill remember), and the real possibility of deflation on the horizon. Inflation is the lesser of the two evils, unless you want a 1930s style depression with soup kitchens and abject poverty on a wide scale, then opt for deflation. There is only so much the BoE can do in the current climate, the government and boy George should take the brunt of the blame for the continued failure here. They were warned of the damage tax increases would have."

Elsewhere the Daily Mail provides some neat figures of how wages had slowed and prices soared.

The Mail report also turned to history comparing Mr King's bleak speech to Prime Minister Harold Macmillan's in 1957 when he told Britons 'most of our people have never had it so good'.

Amid the anger on the Mail comment boards, King finds an ally.

David James of Everdon comments:

"Don't shoot the messenger: the Governor is doing a good job. What we are experiencing are the effects of a managed re-balancing of the economy. The alternative is a strict monetarist approach which would cause much greater suffering and would benefit only those very rich people with big cash balances."

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