The last 24 hours have seen a very significant speech on the UK economy. And no I do not mean the one given by the Prime Minister David Cameron this morning who appears to be trying to kick the can of what to do about the UK’s relationship with Europe past the next election. Instead I mean the one given by the Governor of the Bank of England last night in Belfast where he was kind enough to confirm my suggestion of earlier in the day that he would make a pliable Governor of the Bank of Japan!
Mervyn King rewrites history one more time
At first we get an explanation of the state of the UK economy with a revealing and in some ways shocking statistic on the state of real wages.
On average, real take-home pay is no higher than back in 2004.
After writing about Japan yesterday the concept of a lost decade in real wages immediately comes to mind and we are nearly there. This has led to economic weakness as described below.
That has been responsible for an unusually weak recovery in consumer spending which, after falling initially by some 7%, is still more than 4% below its peak.
So far he and I agree but we part company below as Mervyn omits to point out that the fall in the value of the pound in 2007/08 where it fell by around 25% was something which he told us would help “rebalance” our economy rather than ignite the fires of inflation.
And higher energy and food prices, as well as tax changes and a lower exchange rate, passing through to the level of consumer prices, have all contributed to the squeeze.
You may note the way that “lower exchange rate” is hidden away in the middle of the sentence! You may also note that he omits to point out that loose monetary policies such as the £375 billion of Quantitative Easing that the bank of England has applied under his Governorship have contributed to commodity inflation as the cash has splashed around the world economy.
But never fear the rebalancing has only been “delayed” . I await his update on how the effects of a currency depreciation take five years or more to impact on the economy!
Policy has been wise
We have another echo of the Bank of Japan here.
The Bank of England has played its part by administering a powerful combination of medicines.
So powerful in fact that this has happened.
In fact, according to the official figures, there has been barely any growth at all over the past 2 ½ years.
So not that powerful then! In fact it is empty rhetoric. And I guess he felt that a little more empty rhetoric might help.
Monetary stimulus is already very powerful
The UK’s banks
Let us have some more rhetoric
Much has already been done to fix the banking system in this country. And there has been a real improvement in the position of UK banks.
But unfortunately people do not seem to believe you Mervyn.
Yet there remains anxiety in markets about the resilience of UK banks.
It is almost like a Christmas pantomime.
What about inflation?
Inflation too has disappointed recently
It has indeed although many will argue that it has done so for a bit longer than just recently. For a moment Mervyn may have been tempted to take the credit for finally finding something on his watch that is above target! But of course the realisation that it is supposed to be his job to keep it on target would have then hit him like a cold shower.
What to do? Oh yes blame somebody else!
It is set to remain above target for much of this year – in part because administered and regulated prices, such as those for electricity and gas, rail fares and university tuition fees, will put unusually strong upward pressure on inflation.
Odd that the effect of the currency fall he supported on electricity and gas prices seems now to be nothing to do with him. Also rather than looking for excuses he should be arguing against instances of institutionalised inflation rather than washing his hands of them.
Is it time to change UK monetary policy?
We get an interesting suggestion here.
It would be sensible to review the arrangements for setting monetary policy.
We then get a paragraph discussing the speech Mervyn gave last October which argued that we did not need a change,after all according to him it has all been going so well.Oh dear! Especially if we think about how little has changed since then. Also we then get a confession that policy has already changed.
The remit overall has become known as ‘flexible inflation targeting’.
Well flexible upwards anyway as even the prospect of any downwards move in prices seems to cause outright panic at the Bank of England. Also we see a confession of this.
The horizon over which inflation should come back to target is effectively delegated to the MPC
Whereas in public they have continually claimed this.
and the Committee believes that it is likely to come back to the target over the next two years.
However this includes the period when rather than doing that this happened.
Inflation rose to over 5%
And as Mervyn seems to forget let me remind him and you that this higher inflation via its impact on real wages (as discussed above) has been a contractionary influence on the UK economy. So we have had inflation above target and little or no growth which is exactly the opposite of what we are being told is the objective!
In his suggestions Mervyn becomes increasingly inconsistent and loses the plot. For example he tells us this.
To drop the objective of low inflation would be to forget a lesson from our post-war history.
Odd that he has just confessed in this speech to doing exactly that! Or more subtly he is saying that it is an objective more honoured in the breach than the observance. Also he makes a confession of failure over his whole career.
First, the primary responsibility of any central bank is to ensure stability of the price level in the long run.
The Retail Price Index was re-based at 100 in 1987 and is now at 246.8 . I will leave it to Mervyn to explain how this represents long run price stability.
Inflationary expectations
These are given a glowing review.
The anchoring of inflation expectations has been the most successful aspect of the inflation targeting regime and it has allowed the Bank to avoid an unnecessarily damaging tightening of policy in response to short-run movements in inflation.
Odd then that the Bank of England ‘s latest survey tells us that expectations of inflation a year ahead have risen from 3.2% which is already above the official target to 3.5%. I think he need to tell us “anchored” to what?
Still if you are saying something that is not true repeating it will apparently help.
It is precisely because inflation expectations have so far remained firmly anchored that the MPC has been able to respond flexibly to weak demand.
My “rebalancing” is your competitive devaluation and their currency war
This verb seems to decline oddly. Only last Wednesday I quoted Mervyn King giving a very strong hint at a November press conference that he would like the exchange rate of the pound to fall.
the effective exchange rate of sterling has risen by 8 per cent and against the euro by 12 per cent. That is not a welcome development.
But what is good for the UK is a bad idea for everyone else.
an increasing number of countries are coming to the view that only a lower real exchange rate will provide the stimulus to demand that their economies require. Several have taken action to achieve that end. That is a recipe for competitive depreciations, what some have called “currency wars”.
Comment
So on his way to suggesting that the UK should consider changing its inflation targeting regime the Governor of the Bank of England has confessed that it had already changed! Also his speech is riddled with the results of the inconsistencies of his policies and accordingly contradicts itself regularly as he tries to swerve responsibility for the many failures.
This morning has seen the UK employment report which adds yet more weight to the issue of falling real wages. If you use the Consumer Price Index they are now falling at an annual rate of 1.2% and 1.6% if you use the Retail Price Index. So a further contractionary influence is being applied to the UK economy.
Last night on my way home I bought a cooked chicken from a supermarket which had risen in price by 10% in a fortnight and it somehow seemed symbolic. Thanks Mervyn!
