Yesterday evening the Governor of the Bank of England gave a speech at my alma mater the London School of Economics on inflation targeting over the last twenty years. Upon reviewing this I was reminded of the question I put to Channel Four when they interviewed him on live television recently.
Governor what happened to the economic re-balancing you promised after the pound sterling’s 20/25% fall in value in 2007/08?
This was on my mind after reviewing the UK’s latest trade figures of which the details are below.
In the three months ending August 2012, the deficit on trade in goods was £27.2 billion, compared with a deficit of £26.6 billion in the three months ending May 2012. Total exports fell by £2.3 billion (3.1 per cent) to £73.9 billion…
Even adjusting the numbers only helps a little.
Excluding oil and erratic items, the volume of exports was 1.2 per cent lower in the three months ending August 2012 compared with the preceding three months.
If we dig deeper into the figures we see that compared to the same three months in 2011 our exports are 1.3% lower and that includes oil exports which were higher than a year ago.
Not much sign of the much vaunted re-balancing in those figures is there? To which we could add the UK’s industrial production and manufacturing figures.
The seasonally adjusted Index of Production fell by 1.2 per cent in August 2012 compared with August 2011
The seasonally adjusted Index of Manufacturing fell by 1.2 per cent in August 2012 compared with August 2011
Not much sign of re-balancing there either is there? Unless of course you are talking of a re-balancing away from production! And for those interested in the excuse section we are told that there were longer summer closures this year than in the past. Due to the nice weather? Oh wait a minute, it can’t be that as that weather has to be ready to take the blame for falls in agricultural production. Can it multi-task?
If we look for a longer perspective we see that the industrial production index is at 100.2 where 2009=100. Just to give a bit more perspective the index was at 113.1 in 2007 and 110 in 2008 if one was looking for context for claims of re-balancing.
Manufacturing has done slightly better now being at 104.6 on the same basis but this compares to 113.6 in 2007 and 110.8 in 2008.
Still Mervyn King has by now familiar excuse
When events turn against him Mervyn King has shown himself to be something of a fan of the popstar Shaggy as translating his words into English I regularly hear.
It wasn’t me
It wasn’t me
It wasn’t me
These days this category includes such matters as his day job of targeting UK inflation. This has been above its 2% target since December 2009 when as discussed above the UK economy has been performing disappointingly. I do not think that this issue- above target inflation in an economic slowdown- gets the airing in the media it should. Mostly I think this is happening because the media in general bought the inflation is “temporary” press release. Indeed the inflation performance has been so poor that the recent peak of 5.2% for Consumer Price Inflation or CPI is as high as it was at any time since 1997.
Mind you Mervyn doesn’t always think that he has no power over inflation
Governor King is careful to name check himself in the story of the introduction of inflation targeting in the UK in 1992 and so bathes in the reflected glory of.
And the results in terms of low and stable inflation have been impressive. There have been pronounced reductions in the mean, variance and persistence of inflation in Britain and elsewhere. During the past twenty years, annual consumer price inflation in this country has averaged 2.1%, remarkably close to the 2% target and well below the averages of over 12% a year in the 1970s and nearly 6% a year in the 1980s.
This is somewhat odd on two counts. Firstly Mervyn is telling us that low inflation “was me” which is somewhat at variance with his claims that in the last few years it has been outside his control. Secondly I believe that inflation targeting has a role but as we review five years of economic pain calling its past record “impressive” involves yet more credit taking for the good bits and ignoring the bad ones.
Mervyn the misleader
Another common theme when one analyses the speeches of Mervyn King is that details are presented but relevant parts are (deliberately) omitted. For example consider the sentence below.
The improvement in credibility of policy is shown by the fact that whereas in 1992 expected inflation, as measured by the difference between yields on conventional and index-linked gilts, was close to 6%, today the same measure is around 2½ %.
An interesting observation from the figurehead of an organisation who is the largest purchaser of UK conventional Gilts! So far the Bank of England has bought around £365 billion of them in an attempt to raise the prices and reduce the yields. It does not buy index-linked Gilts. So according to the logic above Mervyn appears to be arguing that more Quantitative Easing would reduce inflation expectations! He is also forgetting/ignoring the implications of his own actions.
Also we get this and the emphasis is mine
Even if inflation deviates from target – as will often be the case – it is expected to return to target, and so inflation expectations are anchored
By whom Mervyn?
If you consider our existing economic situation then this is a rather disturbing view of the last few years (assuming he actually believes this fantasy)
So the framework has been tested and has proved its worth.
According to Mervyn nothing could have been done about the boom
Governor King reviews the discussion around the fact that dampening the pre credit crunch boom by for example raising interest-rates and concludes that those who have argued this (me for example) are and were wrong. However there are familiar attempts to manipulate the debate in his language.
One was that by setting interest rates at a much higher level,
Much higher Mervyn? He seems to have forgotten that back then quite small moves in official interest-rates were considered to have an effect. And if we look back trying to do something would have been better than the intellectual vacuity presented below.
At the time, the MPC argued that the rise in the ratio of house prices to incomes in the years leading up to 2007 reflected a fall in long-term real interest rates – in other words, an adjustment to a new equilibrium house price to income ratio.
As some members of the MPC from that era are being proposed as possible future Governors of the Bank of England I would suggest that the sentence above should be attached to their claims. Although of course according to Sir Humphrey Appleby and Sir Frank this makes them perfect candidates.
Mervyn King on Gambling
Not a subject you might think is the staple of central banker discussions as their thoughts should major on stability! But we did get a view as a contra-cyclical strategy against the boom -taking away the punchbowl as the party gets going- is discussed thus and the highlighting is mine.
To have deviated from our statutory remit in a direction that would have imposed real costs to output and employment would have been a big gamble
Interesting do you not think from a man who has spent £365 billion and rising on a policy which has no recorded history of ever working? Also if raising interest-rates was such a gamble we have to conclude that cutting them by 4.5% to 0.5% was one too.
I was about to write that on this basis of his thoughts I hoped that he would never take a big gamble with my money and at the same moment I recalled that he already has.
So to sum it up Mervyn thinks that those who were right did not know what they were doing and were dangerous gamblers and those that were wrong like him and were in fact taking a dangerous gamble had a perfectly reasonable basis for so doing!
Sharon Bowles MEP
I note that Sharon Bowles has thrown her hat into the ring as a potential Governor of the Bank of England. I would like to point out that I emailed her -she is a London MEP and is on the European Parliament’s finance committee- with my concerns over the balance sheet of the European Central Bank around 18 months ago. I never received a reply and I will leave it to readers to decide whether she is discourteous or did not understand the points I was raising or both.
Negative Interest Rates
One of my central themes and they continuing to spread as this from Bloomberg points out.