Mark Carney confesses it is all about the debt burden

It was only on Tuesday that I discussed the propensity of the current Governor of the Bank of England for making U-Turns on policy. Well this time as it was on two days later when he made his latest U-Turn it is the equivalent of a handbrake turn which youngsters can sometimes be found doing in car parks.Let us remind ourselves of his words from Tuesday at the House of Parliament.

The thing that would be extremely foolish would be to try to lean against this oil price fall today.


This was designed to get the media reporting that UK Bank Rate cuts were off the agenda. Also there may have been a market effect as UK Gilt prices fell a little as bond prices in Europe powered ahead. Yesterday’s speech was about bringing UK inflation back to it annual target of 2% per annum from its current level of 0.3% or at least that was the title as there was precious little in the words about that! However tucked away was this and the emphasis is mine..

In an environment of low rates everywhere, even Bank Rate of ½% might look high-yielding. And the fear of a bad outcome abroad could trigger safe-haven capital flows into the UK that push the value of sterling
higher, making exporting more challenging, with knock-on implications for wages and prices here.


So how would you deal with a high yielding position driving the UK Pound higher Mark? Perhaps take away some of the yield by cutting Bank Rate? Actually this is then reinforced by a statement which tells us that such forces have in fact been in play.

That would come against the backdrop of a 5 ½ per cent sterling appreciation on a trade-weighted basis in the last year (Chart 9), which has extended the currency’s appreciation to around 17 per cent since its
trough two years ago.


Nice of him to confirm my numbers about the rise in the value of the UK Pound where I put the equivalent as being a Bank Rate of 2% compared to a year ago and 4% compared to two years ago. Of course he may never have heard of that formula.

There is so much flip-flopping happening that I am reminded of the words of another man in the news Marvin Gaye.

What’s going on?
Ya, what’s going on?
Tell me what’s going on?


Another problem for Mark Carney has emerged since Tuesday. From the Financial Times.

Mr Carney told the Lords committee on Tuesday that the BoE was “under advice then . . . to keep this investigation in confidence so as not to run any risk of prejudicing the investigation”.


And now.

the SFO (Serious Fraud Office), which accepted the unprecedented case for investigation after a dossier was passed to it by the central bank, said it had advised the BoE to go public once an official investigation was launched on December 16.


I guess that there needs to be a new entry for Mark Carney’s much trumpeted “transparency” at the Bank of England.

It is all about the debt

Central bankers usually avoid mentions of such a subject like an ordinary person would avoid the plague. However in his discussion of inflation targeting Mark Carney told us this.

In contrast, a little inflation ‘greases the wheels’ of the economy, helping it to absorb shocks.


We do not have to look far to see the wheels that it greases! The emphasis is again mine.

When a household takes out a mortgage or a firm secures a loan, the amount owed is denominated in cash
terms – that is, not adjusted for inflation. Unexpected, generalised, and persistently falling prices then mean the real value of debt increases: the same amount of money is owed, but that money now buys more goods and services. As a result, more consumption or investment needs to be foregone to service the debt.


So there you have a confession of the real driving force of UK monetary policy and the reason why I think that a Bank Rate cut is still in play. We have a private-debt situation which according to his words has improved but.

This is a concern across the advanced world, where private debt levels remain very high relative to history, including the UK.


This comes combined with what I consider to be an interest-rate cut warning especially if the UK Pound should continue its strength against the Euro which has pushed it into the 1.40s.

There would be, however, a more clear and present danger arising from the balance sheets of households and firms should deflation persist.


All this suggests a persistent period of low inflation globally is a possibility, and as I mentioned a few moments ago, could itself create a self-fulfilling fear of a bad outcome.


If we stick with the foolish theme then some argue that this was one of the best pop songs of its era. From The Doobie Brothers.

But what a fool believes he sees


The clear and present danger for Mark Carney is that not only markets but the general population decide this.

We don’t get fooled again
No, no!


The Delayed Consumption Myth

Mark Carney tries to give this a go but seems to lose heart along the way as he confronts this reality about modern life in the UK.

It’s fair to say that thus far there’s no evidence as yet of delayed gratification taking hold in the UK.


Actually as I wrote on the 29th of January the evidence has been exactly the opposite of the disinflation causing delayed consumption argument.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.


A Consequence of Past Policy Is Emerging

The Bank of England drove mortgage rates lower and hence house price higher with its Funding for Lending Scheme. Whilst there is no doubt some hype in the quotation from today’s Guardian newspaper there is solid truth behind the reality of higher prices being unaffordable.

High housing costs are forcing couples to put off having children and persuading some would-be buyers to consider taking part in medical research to raise funds for a deposit, it was claimed on Friday.

Two separate surveys of people aged under 40 found the high cost of renting and homeownership were having a big impact on their life choices.



The problems are building for Mark Carney and there is a large slab of irony with it. Inflation is low and the UK economy had a boost yesterday from much better than usual balance of payments figures. Sadly even much better figures leave us with a deficit but in addition to a gain from lower oil prices we saw stronger services numbers symbolised by them being revised up by £7 billion in 2014. Of course trade figures are unreliable but is makes a change for them to be unreliably good rather than unreliably bad.

The problems Mark Carney faces are mostly of his own creation. There has been the shambles of Forward Guidance and the continual policy flip-flopping. Although the flip-flopping has been of the open mouth operations variety as of course Bank Rate has been unchanged for 6 years now. As Governor Carney was pointing out that incomes depend on productivity I did enquire about this on twitter.

After 6 years of inactivity on interest-rates what is the productivity of the Monetary Policy Committee?


But if we return to the title it would appear that it is all about the debt especially for ex-employees of the Vampire Squid. Perhaps they should listen to and watch the sometimes inspired Family Guy.

Hey, do you mind paying for this? I don’t have any cash.
Sure, I’ll just put it on my credit card. I’m never gonna pay it back anyway.
‘Cause I have thirty thousand dollars in credit card debt.
When they call, I tell them I can’t pay it back yet.
Credit card debt.
Tomorrow, I may buy myself a dining room set
Or this Boba Fett!
Peter and Quagmire:
Credit card debt, credit card debt,
Credit card debt!






20 thoughts on “Mark Carney confesses it is all about the debt burden

  1. Hi Shaun

    Such mendacity from Carnage with his faux concern about debt levels.

    “falling prices then mean the real value of debt increases”

    What Carney really wants is inflation coupled with static wages. I’ve noticed some comment about a US rate rise in June? That could be a nice post election surprise. The pound getting hammered just after the election, and nice bout of convenient inflation for Carney?

    • Hi Anteos

      If we look at Canada we see that there are concerns over housing and debt levels in the private-sector. That of course was Governor Carney’s last job!

      As to the United States I think that just like Governor Carney the US Federal Reserve is trying to promise interest-rate increases hoping that subsequent changes mean that they do not have to do it. One consequence is that the Dollar has already risen a fair bit and has pushed even a relatively strong UK Pound £ (Euro 1.40+) down to US $1.47.Yet the recent evidence from US retail sales is of a slowing economy and that has occurred for the past three months now.

  2. Well, if BoE reduce the bank rate further surely this will encourage more personal debt, not less as they say they would prefer! That’s perverse.
    Carney’s statement that Sterling has appreciated is quite wrong. The Euro has fallen, as it must under the current manipulation, and that means an improved exchange rate for those holding Sterling, but in reality Sterlings value has fallen against the all important USD compared with 2 years ago and has fallen sharply recently which is inflationary for UK.
    Therefore on both counts an increase in base rate is still very much justified.

    • Hi Mike and welcome to my corner of the blogosphere

      As to your point it seems to have come as a “surprise” to the authorities in Denmark who are now thinking of intervening in their housing market to offset the effect of reducing interest-rates to -0.75%. Sometimes you really couldn’t make it up!

      The Bank of England rule of thumb (showing a 1.5% increase in Base Rate equivalent over the past 12 months) does not distinguish between currencies but I agree that we also have to factor in moves against the US Dollar because oil and commodities are priced in it.

  3. Hi Shaun

    I’m afraid your comments about Mark Carney would apply to almost all central bankers these days; all they do is talk band one suspects (with I think very good reason) that they have no idea what they are doing and what is going on.

    I believe there will be no voluntary rate rises, either here or in the US; the bankers will have to be forced into raising rates and all this talk about unemployment rates et al triggering changes in rates is just smoke and mirrors. My view is that if they tried to raise rates they would either have to reverse it directly after a short period or restart QE, which I think would be the preferred option (less embarrassment).

    Re the low interest rates I think the main problem that will emerge, and which is rarely talked about, is the total trashing of pensions, mentioned on this blog before; those people paying off a mortgage may be smug now; they won’t be in a few years when they see the value of their DC pension plan. This of course affects everyone, not just those who have a mortgage;ironically it will affect renters even more as they have no chance of countervailing capital gains on property.

    Re the delayed consumption aspect I believe it is, as you say, a myth raised to scare the horses. I think there is at least a grain of truth in Milton Friedman’s consumption function which sees us consuming regardless of fluctuating circumstances.

    • Further, since it has been Govt,/Bank of England policy to enveigle as many as possible into (housing) debt which they can only afford to service at such low interest rates, I knew, and indeed said on here, that the next wheeze was to blame the need for ZIRP on households for the interest rates needed by the banks.

      The means that Carney’s competence is no longer the issue, it is that he is a duplicitous bastard.

    • Hi Bob J

      I just wanted to add that some are suggesting that an interest-rate increase should be combined with more Quantitative Easing (QE). I would say that I thought it was crackpot except for the fact that I think that it is more crack than pot!

  4. Pound down at 1.48 to the greenback as I write this, scary stuff. Imagine if the Fed stun all the skeptics on rates this summer – myself included, I’ll eat my beret if they raise – it could be an icepick in the forehead for sterling. Add to this GDP slipping back towards zero as the Govt-pumped housing boom is slowly reined in, with shock UK construction stats today, and Sorrell opining that all possible election outcomes are bad for business, the politicos’ claims that we’re in a happy recovery are beginning to sound more than somewhat bizarre.

    p.s. thanks for the Iraqi information minister link. It brings to mind other famous denialists, all very at home with life in Carney’s new normal. I’ll have to dig out the Aitken ‘sword of truth’ speech…

    • Hi Peter

      The problem for the Fed is twofold. Firstly virtually everywhere else is easing policy,even the Russian cut interest-rates yesterday! Secondly for 3 months in a row retail sales have disappointed and PPI was weak too yesterday. This contradicts some of the labour market data but even there wage growth is not much and may be fading. Not much of an environment for the interest-rate rise they keep promising is it?

  5. I don’t follow Mark Carney’s logic:

    If your debt repayments are fixed then lower prices will still be beneficial as the debtor can still service their debt and will have more disposable income. The main concern for the debtor should be the ability to service the debt and have sufficient cash for living.

    With higher inflation the debt payments are still the same but other outgoings are more expensive so in this respect inflation leads to reduced consumption (with pyschology also playing an important aspect as higher inflation expectations are more likely to make peope price conscious and adjust purchasing behaviours)

    • the logic is simple

      keep ’em baffled until I cash in and join the IMF !

      another example of Rip of Britain !

      He’s ripping us off !

      Dire straits – money for nothing !

      Dire straits = state of UK ofcourse…….

      What a show !

      pass the popcorn !!


  6. Great blog, Shaun, as usual. For once I had actually watched Carney deliver his speech before I had read your account of it.
    The contention in Governor Carney’s speech that “[c]ore inflation rates in the euro area, the US and the UK have declined by between ¾ and 1 percentage points since 2012” cannot be taken seriously with regard to the US, and only seems to hold in Chart 6 of his speech because the deflator for personal consumption expenditure (PCE) ex energy is used as the core inflation measure for the US, rather than the PCEPI ex food and energy. The former tracks much lower than the latter. From the Chart (I couldn’t find the series on the web myself) its January 2015 inflation rate was -0.8%, as opposed to 1.3% for the PCEPI ex food and energy, a difference of more than two percentage points.
    I couldn’t find an annual inflation rate for the PCEPI ex food and energy series, and since it is a chain Fisher series, one can’t calculate it based on simple annual averages of its monthly indexes. However, the average of its annual inflation rates for the 12 months of 2012 is 1.8%, so it seems that core PCE inflation has only declined by about half a percent in the US since 2012, if that.
    The US BEA website, as part of its answers to frequently asked questions:
    notes that “The ‘core’ PCE price index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices.” While for the CPI, CPI ex energy has been occasionally used as a core CPI measure, the PCE ex energy deflator has not enjoyed the same kind of popularity as a core measure for PCE inflation. Since both the euro area and UK core measures used exclude both food and energy prices it is hard to see why Governor Carney would choose a core measure that only excluded energy prices.

  7. Sorry Shaun. Please disregard my previous comment: “From the Chart… its January 2015 inflation rate was -0.8%, as opposed to 1.3% for the PCEPI ex food and energy, a difference of more than two percentage points.” After closer examination, I see that Chart 6 is showing the difference between the actual annual core inflation rate and the rate for January 2012. It may be that the US series is simply mislabelled as these differences for the US PCEPI ex food and energy don’t seem to differ much from what is shown in Chart 6.

    It shows how quickly Mark Carney forgets where he comes from that he treats core inflation measures as synonymous with inflation measures that strip out volatile measures. The core CPI measure for Canada always stripped out both volatile measures and changes in indirect taxes. Other central banks, including the original inflation-targeting central bank, the Reserve Bank of New Zealand, have also sought to take tax changes out of their core measures.

  8. Sorry, Shaun. Taking a closer look at Chart 6, it seems that it is just plotting the difference between the annual core inflation rate and what it was in January 2012. I am not sure that the US core inflation measure shown isn’t the US PCEPI ex food and energy and it is just mislabelled. That series certainly would have shown 0.8% less inflation in January 2015 than in January 2012, as the series in Chart 6 does.
    Governor Carney seems to have forgotten where came from. Core CPI measures may exclude other things besides volatile items. The Bank of Canada’s official core CPI measure has always excluded changes in indirect taxes, and other central banks, including the Reserve Bank of New Zealand, have done the same.

    • Hi Andrew

      Don’t worry about it . Central bankers always run around for an inflation measure which tells them what they want to read/hear! Back in 2010/12/12 I recounted the story of how another foreign import to the Bank of England MPC Adam Posen used pretty much every inflation measure the UK had at one time or another. However he ended up not applying for a 2nd term because he was wrong and in the end none of them backed him up.

      Now he his head of the Peterson Institute under the rewards for failure world in which we live.

      “From September 2009, by appointment of the UK Chancellor of the Exchequer, Dr. Posen served for three years as an external member of the Bank of England’s rate-setting Monetary Policy Committee. During this critical period for the world economy, he was a prominent advocate of activist policy response to the financial crisis, successfully led the MPC into quantitative easing, brought innovative efforts to stimulate business investment to the top of the UK economic agenda, and accurately forecast global inflation developments.”

  9. Shaun, all very timely really as currency wars continue Blighty is getting trapped and Carney is needing to make excuses for anticipated and continuing flip flops. I can see both interest rate falls and Q.E. later in 2015. They are an addiction where the cold turkey option equals end of the world (as we know it) so best to keep the snowball rolling and to hell with the consequences, as your other respondents mention:

    True Innovation and entrepreneurship strangled
    Inter-generational war
    Pensions shriveled
    The property ownership pre-occupation becomes 90% of national wealth regardless of the physical state of the assets

    At least when Farage gets in the end will be quick.

    Paul C

    • Hi Paul C

      I think that we are likely as in so many things to adopt a type of Swedish model. In spite of annual GDP growth of 2.7% and optimistic forecasts they have cut interest-rates to -0.1%. On Friday we were told this.

      “GDP growth was 2.1 percent during 2014, which is the highest since 2011. Last year’s first three quarters were mainly marked by domestic demand, but towards the end of the year, growth was on a broader basis when exports also took off.”

      There was a time that such numbers hinted at an interest-rate rise…..

  10. Great stuff Shaun; but I have a hard time getting my head around a topsy-turvy financial world where inflation becomes negative and the value of cash rises in terms of its purchasing power.
    I’m also beginning to lose track of how we got here.
    Was the trigger the Nixon Shock, the US Sub-Prime crisis, the Greenspan put, or Northern Rock (and the bust banks in general) ? Whatever it was TPTB seem to be making heavy weather of the whole thing, where expansionary words and deeds (words, mostly!) seem to result in the opposite of what was intended.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.