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”.
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
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.
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!