Mervyn King has apparently admitted in the introduction to the Bank of England's annual report that the Monetary Policy Committee
can have little impact on the path of inflation in the short term.
He's guilty of one thing: he understates the sheer impossibility of the Bank having any control on inflation right now when the only weapon in their armoury is the interest rate.
The reality of current inflation is that it is cost push, but the cost is not wage driven, as is the experience of most who have been around long enough to remember what inflation is about, as I am. In that case using interest rates to try to diffuse the cost pressure is entirely pointless, unless the objective is serious recessionary pressure through the creation of significant unemployment and massive social disruption. A side product will be the destruction of the financial system on this occasion, rather like Thatcher destroyed the manufacturing base in her own misguided effort to destroy inflation more than tenet years ago.
Why? The logic is fairly simple. Our banks are failing. Bradford & Bingley cannot survive, even with a £400 million injection. That's enough to cover a 1% right down in its mortgage loan book, and that is obviously insufficient to cover its risk. Alliance & Leicester has gone in acknowledgement that it cannot face that risk. And this trend will continue so long as interest rates in the UK stay at 5% base rate. That rate will mean many people have no hope of paying their increasing mortgage costs as low price deals are withdrawn and risk based interest rates increase way above the rates available only a year ago. This is no fault of those borrowers but it will lead to default, banking failure, rapidly falling house prices and disguised deflation. The latter, by the way is the simple reverse of the disguised inflation we've had for many years, which has been suppressed by ensuring house prices and housing costs stayed out of the RPI. The result is inevitable: it will be social turmoil, unemployment, the loss of many well known enterprises, the destruction of the some significant skill sets and further undermining of the core viability of the UK economy.
Now I agree that might at some time provide domestic compensation for external price pressure, but is that a price we are willing to pay for low inflation? I assure you, this is what will happen. It won't yet: Mervyn King knows it hasn't, which is why he says in the short term that inflation cannot be controlled. The pain, disruption and turmoil has to be imposed before that can happen. But is this a price worth paying to seek to stabilise an artificial measure of inflation? And is all this social disruption worth unleashing on our economy just to preserve the property rights of those with wealth? Because, make no mistake about it, the obsession with inflation is about preserving the property rights of those with monetary based assets.
Now, for one group of those with such rights I have real concern. They are pensioners. We're going to have to accept increased responsibility for providing for them if inflation increases, and thankfully the pension credit system provides a mechanism for doing that. For the small minority of others in society who control most of our cash based assets I regret to say that I have much less concern. Put bluntly, preservation of their spending power is not worth the cost that will be imposed on everyone else. It's a blunt choice we have to make, and an easy one to make. Inflation has to be allowed, interest rates have to fall and stability has to be returned to the housing and mortgage markets which underpin the wellbeing of millions more in this society whose well being will be shattered in the pursuit of stable money for a minority.
So, Gordon Brown has to end the absurd independence of th Bank of England to set monetary policy. He got away with this whilst growth let the economy manage itself. And the Bank pretended they were in charge whilst the upside managed things for them. But I'll tell you (because I have managed companies in downside situations), it's downturns that require real management skill, and real skill requires throwing away the rule book, relying on intuition and taking the action necessary, conventional or otherwise, that achieves results. In this case the result is an economy in which people can afford to live in homes, an economy with as full employment as possible, an economy where we have viable banks, and an economy where we can maintain our long term ability to function in the wider world. All of that is at threat right now because Gordon Brown said the Bank of England must control inflation using interest rates alone, and denied himself the right to interfere. Well, just repeal the legislation that gave that right away I say, get the Bank back under political control and get interest rates down to 2%. That way we have a chance. And given that the inflation is inevitable and quite beyond our control anyway, we'll have to deal with that later. At least with low interest rates we'll have the option to do so. With high rates we won't have the chance.