Dear Paul Krugman:

20th October 2011

Hi Paul

Actually the UK has several inflation measures which allow for the effects of indirect taxes. It looks like your graph has quoted CPI-Y which is currently at 3.7% and allows only for the direct effects of indirect tax changes (mostly VAT) which even if you take your logic and ignore the headline figure of 5.2% is still 1.7% over the official UK inflation target of 2%.

However the UK has another measure of inflation which many including me believe to be a better measure of UK inflation…(read more)


20 thoughts on “Dear Paul Krugman:”

  1. The_forbin_project says:

    lower borrow for whom ?

    well its not us plebs !

    for the banks – again

    the emergency interest rate of 0.5% is still in place after , what 4 years , some emergency

    no one else comments on this – why is that ?

    oh, I forgot , the banks run this country !!

    no growth either – no growth in energy inputs – oil – no growth  therefore no solution – again for the plebs – seen the rich list ?  follow the money……


    1. Hi Forbin

      Actually it has surprised me to some extent that the current UK Monetary Policy Committee has not taken our official interest-rate closer to zero. Tucked in there is an implicit admittal I think that we have elements of a liquidity trap in operation. Which I felt started in the 1.5 to 2% range which is why I would plan to get us back up there.

      Put another way the RBA has about 2% of effective interest-rate cuts left in my view.

  2. Kinda sounds like they’re trying to avoid a housing price collapse by making it cheaper to finance a home. 50bp is a pretty strong move, and likely not the last one. I’m hoping our cousins in Oz have a better time avoiding a housing collapse than we did. 

    1. Hi Mr.K and welcome back.

      They have cut interest-rates at a level which I feel still has an effect ( as I have explained in my reply to Forbin I think the US and UK are in a liquidity trap). However they have been behind the curve I think and could do with perhaps another 50bp fairly quickly.

      However I was intrigued to see the reference to “confidence” in the Sydney Morning Herald and think that the best outcome would be a controlled fall rather than what happened in the US and some of the UK. If they manage that there may still be a way out. It doesn’t look easy..

  3. Robert S says:


    Off topic, but did you see yesterdays Telegraph’s article (, which reported that the head of equities at Standard Life said that, “The current appointment in my view has been a disaster…”.  Interesting read and not from a journalist, but a figure from the City.


    1. The_forbin_project says:

      like they’ve only just noticed ?  oh dear – years too late for the economy

      the BoE is being run a comedy show – 

      Merv the Swerve in “It ain’t ‘alf Hot Mum! ” comes to mind  🙂

    2. Hi Robert

      Thanks for the link. I think Mervyn King has been a disaster at what is supposd to have been his main job controlling inflation. Ironically that doesnt get a mention! Has there been a worse Governor of the Bank of England? I guess after we are long gone historians will decide.

  4. Drf says:

    To paraphrase: “We can’t be left out!  Let’s join the race to the bottom of the pit” said the Governor of the Reserve Bank of Australia.

  5. Jan says:

    The Halifax mortgage rate increase is apparently because of a rise in the LIBOR rate according to this morning’s Radio 4 “Today” programmme so the BOE rate no longer matters.  It seems there is a disconnect between the 2 rates and has been for some time. As I understand it the LIBOR rate is decided at a morning get-together between the banks who decide what the rate should be. Another way to screw the little man and help restore bank balance sheets perhaps??

    1. Hi Jan

      The BBC does tend to get the wool pulled over its eyes on quite a few financial matters doesnt it? As I wrote only last Thursday I have questioned this and the Bank of England implicitly agreed with me in its Quarterly Report.

      “spreads over swap rates on these quoted fixed-rate mortgages have widened. Spreads over Bank Rate on some quoted floating-rate mortgages have widened in the past six months”So to your last question the answer is yes.

  6. ChrisRick says:

    Just leant up against the ball a little on your candidacy for Governor at the Telegraph

    1. Anonymous says:

      Thank you, all support is appreciated..

  7. Anonymous says:

    Hi Shaun,

    The RBA policy is still contractionary after the rate cut, so I’m not sure about a race to the bottom. The Aussie dollar is uncomfortably strong for firms like Holden ( GM Australia ). I’d give the RBA the benefit of doubt as Australia has not been badly affected by recession. It helps that their politicians can exercise budget discipline and their banks kept conservative LTV mortgage requirements.

    1. Anonymous says:

      Hi Expat

      Australia starts from a stronger position than either the UK,US or Europe. It will be interesting to see how quickly their economy weakens and how quickly they make further interest-rate cuts.

      My contention is that some early is much better than a lot late! After all look what even savage interest-rate cuts did in the UK and US when there was dithering first…

  8. ChrisLongs says:

    The Oz government has been castigated by Oz MMT economist Bill Mitchell for attempting to meet its political target of a budget surplus despite increasing unemployment, debt deleveraging with only the mining sector showing growth. Bill predicts economic slump if the gov. continues with its mantra of achieving a budget surplus as automatic stabilisers kick in with increased unemployment etc.

    1. Anonymous says:

      Hi Chris I wanted as ever to stay away from a more politicised debate. But I did wonder how Australia had got into  a heavy fiscal debate when it has had over the credit crunch era reasonable economic growth.
      A subject for another post I think

  9. JW says:

    Hi Shaun
    The South China territories ( sorry Oz), are going to suffer a lot with the downturn in the mainland.  Housing in Oz is one of the last ‘bubbles’ to burst. RBA will be taking their rate down all the way.

    1. Anonymous says:

      South China territories I like it… 🙂

      However the Aussies do not seem to be so keen I remember reading that they plan an expansion of their submarine fleet. But with such a big country and small population it would be very hard to defend.

      Will they copy us ? It sadly seems quite possible that they will.

  10. Anonymous says:

    Hi Shaun

    Many thanks for your AAA blog which I’ve been following on a daily basis from here in Sydney downunder since your Notayesmaneconomics days. I appreciate the insight and care and compassion in your analysis and also the intelligent contributions from your readers.

    I don’t envy RBA Governor Glenn Stevens his job. The RBA cut rates 50 points at the end of last year but there has been incredibly heavy pressure in the media and from the politicians for a rate reduction this month – even though he is on record saying one can’t expect to generate wealth from house price appreciation and he wants housing to be affordable for his own kids. Perhaps the real the worry is our banks with over 50% of their assets in residential housing and with at least some of their lending at high LVRs. I know people who borrowed over 100% of the purchase price and others who are already in negative equity – they bought when prices peaked after the government offered grants of up to $21,000 (GBP 13300) to first home buyers. Like Walt, I am hoping we don’t have a housing crash. At the same time, can any nation afford to keep prices at levels where the average household can’t afford the average home?

    Perhaps the only thing that provides me with some reassurance – in line with your theme on the price of oil – is that Australia is an energy exporter (natural gas and coal). I see that many nations suffering the most in Europe have a high level of energy dependency (eg. Spain, Greece, Ireland, Portugal – see ). It must make it so much harder when a lot has to be spent on importing fuel.

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