After wondering recently about the sums of money spent on the UK football premiership I would just like to point out that Chelsea and Manchester United put on a magnificent show last night and even opened up the title race as the result turned into “A Bridge Too Far” for Manchester United. Earlier in the day we saw an event which did provide briefly some investment diversification. Talk of Saudi tanks heading to help the government in Bahrain had the effect of pushing up the price of oil whilst the US Dow Jones equity index fell by 168 points to 12,058. As the Libyan regime is also trying to rally against the rebel forces the price of a barrel of Brent crude is now above US $115, although the price for the same amount of West Texas Intermediate oil has failed to hold over US $100. The talk particularly affected the Saudi stock exchange which fell by just under 7% yesterday and is down by a further 2.5% today.
As there is obvious unrest in Arabia it came as no great surprise to see the gold price close at an all-time high of US $1435 per ounce. Although some care is needed here because if you allow for inflation the surge in the early 1980s was higher in real terms. Silver is looking if anything even stronger as it heads towards US $34.50 per ounce. The theme is clearly one of uncertainty and inflation fears which is one of the reasons I was interested in what central bankers in the UK and US would say as they were interviewed by their respective legislators. The first group (UK) are open to the charge that they have let inflation into the UK system and the second represented by Ben Bernanke that their total purchases of around US $2.3 trillion of assets has contributed to a destabilisation of world markets and indirectly to higher commodity prices.
The Bank of England and the Treasury Select Committee
An extraordinary statement from Mervyn King (Governor of the Bank of England)
The projections that we published in the inflation report a couple of weeks ago have the characteristic that the inflationary pressures are pretty much back to target by around the middle of this year.
When this statement was uttered I hope that there were gasps around the room and I mean gasps of incredulity. Let me explain exactly what the Governor means. When the latest Inflation Report was issued I pointed out that there needed to be a heroic fall in inflation (of which so far there are only signs of exactly the reverse!) for the Bank of England’s forecast for 2012 to be even remotely realistic. This has been updated in “Bank speak” to the view that annualised inflation right now is approximately 7% and that this is a peak from which inflation will fall. Put in this way and applying the usual Bank of England view that inflation in the future will be lower than it is now then the view expressed by the Governor is that inflation will be on target in the third quarter of 2011 at 2%. And no this is the beginning of March and not the first of April in case you were wondering!
Returning from this statistical manipulation the Governor then gave his view on what would happen to the headline inflation numbers which are published each month. He felt that year-on-year comparisons meant that the headline inflation rate would remain high “until well into 2012”.
As this blog has developed I have found myself watching the Monetary Policy Committee use statistics in the way that a snake writhes in the grass as it twists and manipulates them. This has been necessary because the statistics it is judged by such as the inflation target have not been met with the current level of Consumer Price Inflation being 4% which is double the target. But in some ways just as bad has been the Bank of England’s appalling forecasting record in this area which for newer readers is highlighted by the fact that in February 2010’s Inflation Report we were told that inflation today would be around 1% and if you stare hard at their chart around actually means under! There have been many other examples of an inability to make even remotely realistic forecasts in the post credit crunch era. Even worse there has been a theme to this and the theme is to consistently expect lower inflation that what the outcome turns out to be. Any person should going forwards modify their forecasts accordingly to prevent systematic errors.
Having read the preceding paragraph please now re-read Governor King’s quote again. Yet again he forecasts an extraordinary fall in inflation! One day inflation will fall but one would hope for a better strategy from the Governor than in effect keep buying a lottery ticket for this event. The only indicator that is near to zero is his forecasting credibility! Worse than this is that policy is set on the basis of these forecasts and one can only conclude that it has been set as incorrectly as the original forecasts.
Written Evidence From Charlie Bean
Whilst the Governor gave oral evidence the written evidence came from Charlie Bean and my eyes were drawn to the following excerpts.
But I have become rather more concerned that the period of elevated inflation may persist for somewhat longer than I originally thought
A rather odd claim when you remember that inflation according to Bank of England forecasts is supposed to be 1% right now! We also get the usual Bank of England mantra which involves abuse of the definition of the word temporary.
I have concurred with the consensus on the Committee that the influence of the factors presently boosting inflation should prove temporary
I will spare you the sections which blames the current rise in inflation on everything except the Bank of England as it is rather long and frankly makes me wonder how he thinks he should do his job and why he thinks he is there. But in a contradictory section he admits by default to an error.
In addition, the downward force from spare capacity appears to have been less than I originally judged
I will leave Charlie to explain in future speeches how he can simultaneously have made an error and yet be responsible for nothing!
The Bank of England view on the success of Quantitative Easing
Charlie Bean has been busy on the speech and report writing front as he found the time to tell an audience this.
A recent study for the United Kingdom carried out at the Bank found that the total impact on gilt yields was to lower them by an average of about 100 basis points. As some of the purchase announcements may have been anticipated, that should provide a lower
bound on their impact. Corporate bond yields also fell, with investment-grade bonds declining 70 basis points and non-investment grade bonds falling 150 basis points.
This sounds excellent and hurrah for the Bank of England! Plainly there is no moral hazard at all in Bank of England research declaring Bank of England policy to be a success! However reading on I spotted this.
And while the overall rate of nominal demand growth has been satisfactory, the split between inflation and activity has certainly not been everything we would wish, with our target measure of consumer price inflation reaching 4% in January.
So reality intervenes on the back slapping. However I raise this point because it refers directly to a theme I have been arguing for ever since I started this blog and that is that asset purchases or what is called QE was always likely to have a patchy result and was always likely to lead to a rise in inflation. I have a section on QE in this blog where such views were and are regularly represented but would like to point out again that the doppelgänger of QE called “overfunding” had exactly such patchy effects when it was tried some 20/30 years ago. Accordingly it was and is my view that the Bank of England either did not know this which leads to charges of incompetence or deliberately ignored it which leads to charges of misrepresentation….
The world’s most powerful central banker Ben Bernanke also speaks
In an accident of timing the Chairman of the US Federal Reserve Ben Bernanke was also speaking to legislators yesterday. His published report stretches to some 61 pages but I have decided to view it as he would.Accordingly we need refer to inflation briefly.
FOMC participants see inflation remaining low
But for future policy we need to look at unemployment and likely future unemployment carefully as this is now the deciding indicator for US monetary policy in Ben’s view.
the job market has improved only slowly. Following the loss of about 8-3/4 million jobs from early 2008 through 2009, private-sector employment expanded by only a little more than 1 million during 2010, a gain barely sufficient to accommodate the inflow of recent graduates and other entrants to the labor force…………..Even so, if the rate of economic growth remains moderate, as projected, it could be several years before the unemployment rate has returned to a more normal level. Indeed, FOMC participants generally see the unemployment rate still in the range of 7-1/2 to 8 percent at the end of 2012. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.
Some of this section is rather chilling as the admittal that the loss of nearly 9 million jobs in the credit crunch recession has been followed by the creation of only just over one million new jobs means that “net” just under 8 million jobs have been lost. Tucked away in there must be a criticism of the headline unemployment numbers if you think about it as how can they co-exist with such a loss of jobs overall? In my view,there is plenty of food for thought there.
For those wondering about what Ben Bernanke will vote for going forwards in terms of US monetary policy I see the phrase “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established” as crucial. Accordingly I expect US monetary policy to remain extraordinarily accomodative until there is such an improvement in unemployment. I have seen recently talk that the current asset purchase programme where around US$75 billion of US Treasury Bonds are purchased each month in what has become called QE2 might be stopped early but frankly what is being set out here could more easily be seen as an advance justification of what would be called QE3.
Just to reinforce the point I am saying what I think Ben’s report tells us about what he thinks and is likely to do not what I think. I am much more concerned about US inflation than he is.