The FT notes:
Inflation rose to 3.2 per cent in October, prompting Mervyn King to write a letter to George Osborne, the chancellor, to explain why prices have been rising more quickly than the Bank of England’s 2 per cent target for a prolonged period.
There are real problems with inflation now:
a) It is in pricing, not earnings, so hits the poorest hardest;
b) It is being fuelled by speculation in commodities because there is a critical shortage of gilts (yes — I mean that — a real shortage of government debt) in the market place.
c) It is being policy driven — which just says the target is wrong.
Let’s embrace the reality. This is:
1) we need more government debt — it’s the only thing people want to but, so for heaven sake start spending to meet demand.
2) The next round of QE cannot buy up gilts — it has to be real spending.
3) We need inflation — it’s the only way to get rotten money out of the system;
4) We need house building whilst we have inflation to rebalance the pricing of property in the UK and restore sanity and hope to our economy;
5) Inflation is good right now — we could easily topple into deflation so strong is saving — and that would be a disaster.
Or to put it another way — the fiasco of setting a 2% inflation policy has to be recognised.
The fiasco of controlling the value of money when what we need is employment is madness.
And the desire to maintain the value of money when current money values are shot to bits is crazy.
We need inflation — but the right sort — that’s in earnings, not assets. Then we’ll have hope.
Now deliver it, is what I say.
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How can you have earnings inflation without asset inflation?
Surely the former leads to the latter?
@Martin Phillip
No, not if supply of housing increases
“the fiasco of setting a 2% inflation policy has to be recognised”
Of course this and the silly letter writing policy was introduced Gordon Brown. Certainly time to do away with both.
@Richard Murphy
I just lifted this from another thread.
Surely you realize that low interest rates are not possible with high inflation.
Or if they are this means that net savers are getting hammered, incl. the many pensioners who are among the most vulnerable members of society.
You need to burn every Keynesian economics book on your bookshelf and study Austrian economics
Then you will understand why QE, or ‘money printing’ or ‘wage rises’ can only end in catastrophe.
There is no ‘pain free’ way out of this mess
We aren’t just going to pay for the financial crisis of 2008, we are going to pay for 65 years of socialism, welfarism, deficit spending, wars and other assorted madness.
The bottom line is, wealth and prosperity have to be created by genuine enterprise, genuine wealth creation, industry, manufacturing, adding real value to raw materials.
Wealth cannot be created by printing money or the inflation of assets such as property and hoping the problem is going to go away.
The only reason why Keynesian economists have the upper hand in how to deal with our situation is because it keeps the ponzi scam of debt based money going for a little longer.
The whole rotten system is going to collapse.
QE will destroy the money system altogether
Deflation will cause abject misery for million but the money system will remain intact.
Deflation and liquidating all the bad debt in the system is the only solution, only marginally better than hyperinflation but still better than the complete destruction of the monetary system.
The way things are heading, Keynesian textbooks will be good for nothing, except for the fires you will need to stay warm
Richard: Jeremy Grantham agrees with you and with your long held opinion that investment in the stock market is not real investment at all.
http://georgewashington2.blogspot.com/2010/11/jeremy-grantham-fed-has-spent-most-of.html
Or if they are this means that net savers are getting hammered, incl. the many pensioners who are among the most vulnerable members of society.
Give me a break, what percentage of pensioners derive any significant income from savings?
The most important point richard makes is that we need wage inflation, the object of central bankers real hatred.
I see no conflict between this kind of inflation and low interest rates. Higher wages would obviate the need to use credit to sustain living standards, and would reduce demand for it, thus lowering its price.
@Matt
Ah, the warm embrace of Austria
Let the people starve but preserve the value of capital, come what may
Wrong on every score
No wonder no one tries it
Of course money does not create value – we know that
But you can’t create value without it in an exchange economy
And without liquidity the economy grinds to a halt
U guess that’s what you want
@Colman Stephenson
He’s right
@paul
“Give me a break, what percentage of pensioners derive any significant income from savings?”
Well, given that base rate is 0.5%, not many I suspect.
You are completely out of touch Paul. The difference in income for pensioners when interest rates are c. 6% and when they are next to nothing is enormous – about 12 times in fact.
I am not out of touch and showing off your formidable command of mathematics (I fully agree 6 is 12 times 0.5) does not answer my question.
If you look at table 5.1 in this IFS report the median figure for net wealth is less than 5K so @ 6% thats up to £300 a year (if all wealth is in savings).
Is that significant income?
@ 0.5% its £25, £275 is a large proportional difference, but its not significant to the annual income needs of a pensioner.
How current generations, who seem to require debt throughout their working lives because they do not earn enough, are going to become wealthy retirees, I fail to see.
@paul
The issue is not just about current pensioners, but about future ones as well.
If the return on one’s retirement account is not well in excess of inflation, then this retirement account will not be sufficient to provide a living income during retirmene years.
@Million Dollar Babe
you make the entirely false assumption that pensions can be and are paid out of capital. The truth is that pensions are a demand on the income of the younger generation.
and as I have shown in my recent research “Making Pensions Work” the reality, in the UK at least, is that all pensions are paid at cost to the state, and none out of private capital.
All your assumptions are wrong, as are your facts
but I am sure that will not get in the way of your argument
@paul
Paul, yes I would say that for someone who gets by on the state pension and a bit of bank interest, £300 is a lot of money. So you are out of touch.
The link is broken by the way so I’m not sure what the £5k net wealth figure actually means.
If the return on one’s retirement account is not well in excess of inflation, then this retirement account will not be sufficient to provide a living income during retirmene years.
Again, that’s moot if your retirement account is too small to generate a living income at any rate of interest
“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists and, insofar as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”
Jim Callaghan, Speech at the Labour Party Conference, 28 September 1976
@Tom Olver
Real interest rates of 6% are virtually unknown
You ignore inflation
Real rates are usually just a little above inflation
And there’s good reason – no one can make such a return on a sustained basis in our economy
@Jim Callaghan
And he was wrong
So?
In the mid 1970w this confusion was possible
We’ve learned a lot since then
Including that neo-Keynesianism is nothing like the real thing
Tom
Here is the link
And richard has already answered your point and I remain firmly in touch.
I’m always touched by the tenderness neo liberals profess for the vulnerable, but a little bewildered by how they classify them.
Let’s get a few things straight;
There is no shortage of government debt at the moment. There is a catch 22 where there is too much UK debt out there, which offers very poor real returns, but there is very little else to buy which is safe enough (people are rotating out of PIGS debt and there is not enough good quality corporate debt). Since the Coalition came to power UK Gilts have been seen as safer and have outperformed almost everything else….cutting about 8bn off the UK’s interest payments to 2015 in the same motion. Austerity – terrible, eh?
Commodities are rallying hard because of a combination of demand (copper, gold), scarcity (cotton, corn) and competative devaluation of currencies (through QE, everything). It’s pretty hard to devalue a commodity, especially if that commodity gets used up.
@Richard Murphy
That is the core of the problem, isn’t it?
Because of the demographic reality (longer life expectancy, lower birth rates, reduced immigration) there will simply not be enough active workers, irrespective of their tolerance to tax, to support pensioners.
So people need to accumulate capital to support themselves in older age. And the only way they can do so is if they can earn a positive real rate of return on their savings. That, I am afraid, is impossible to achieve in an environment where interest rates are low and inflation is high.
@Richard Murphy
I don’t think he was offering an opinion but rather more of an observation that, throughout time, inflation has delivered unemployment.
That’s not so much a question of what we’ve learned as what we’ve remembered. We forget these lessons at our peril.
Because of the demographic reality (longer life expectancy, lower birth rates, reduced immigration) there will simply not be enough active workers, irrespective of their tolerance to tax, to support pensioners.
There is no shortage of prople wanting to work here if we run out of them.
Our main problem is a reluctance to employ those already here.
@paul
It does not matter whether current unemployment is 1%, 5$, 10% or 20%. The demographic trends are such that the future ratio of pensioners to active workers can only go in one direction. And that ratio makes the pension system unsustainable.
@Tyler
sorry, but you’re wrong. I am told persistently by those who buy gilts that there is a shortage of them
We need more government debt, urgently
@Million Dollar Babe
You show absolutely no comprehension of the issue
The reality is that if there is a shortage of people to support the elderly and the elderly only consume, and do not create capital, then the system fails, whether they put capital aside or not, because there will be no one to buy it.
but of course you are wrong. The world is overflowing with people, most of them young. It is just the demographic is wrong and that the capital that we create is not the capital that the young in developing countries want
you take a micro-view of pensions and it is as stupid as a micro-view of banking
@Jim Callaghan
look, in 1976 Jim Callaghan was facing multiple crises – the collapse of fixed exchange rates, oil-price crises, and more besides
But the truth was as we now know Western economies have just been through 30 years of sustained growth without a single serious recession of any sort whatsoever and high unemployment throughout the period. That was Keynesianism. It worked. It can work again. It delivered real growth, real prosperity and astonishing social cohesion
Since then we have suffered neoliberalism. Successive financial pressures. Growing inequality. Failing social cohesion. No rise in real well-being as measured by any indicator of happiness.
Jim got his world view wrong because of the short-term situation. But actually, he’d delivered something little short of a miracle
@Richard Murphy
So Ronald Reagan and Arthur Laffer, the two men who kick-started these 30 years of prosperity, were Keynesians.
All right, that makes sense.
@Million Dollar Babe
I was referring to 1976, not now
@Richard Murphy
I now understand.
But even though the 30 years leading up to 1976 were overall a good run, they nevertheless ended up in tears. It took about a decade of stagflation and the Reagan-inspired purge of the Volcker recession in 1981 to restart the engine.