July 17, 2018 - Latest: What has happened to markets this year? by Darius McDermott
1st January 1999
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“Some statistical manipulation” Absolutely, but the problem is that it is not only “some”. It is now continuous, and the ONS is forever finding gambits to distort and manipulate the numbers in the most favourable direction!
What I find so surprising is that most people and even most of the supposed experts do not see through this fraudulent manipulation, and do not comment on it or condemn it at all. This must mean that the majority are fooled by it and believe the political claims? They clearly thus do not understand the progressive creep and its effect on their purchasing power.
I agree entirely. I believe that we are in a mass delusion as to what the problems are. It is simply incredible that there is absolutely no point in saving when you look at the impact of inflation (and then tax) on savings rates.
If you listened to the radio this morning, you would have heard two stories:
1. About making increased foreign aid a permanent legal requirement;
2. About reforming the house of Lords.
I would suggest that this just about sums up the politicians’ position, which may be summed up as:
1. let’s be poular abroad by giving tax money away; and
2. Let’s do a bit of navel gazing about some absurd constitutional nicety.
Both are much easier than addressing the economic basics at home.
I have pursued some of these matters but the sad truth is that the economics profession does not appear to be interested. I mean as a generic group as I am sure there are some out there who are…..
The other problem I think is that so many economists love a consensus- no danger of being wrong on your own- andso they have been happy to pursue the Bank of England output gap/there is no inflation mantra.
‘It becomes plainer with each passing month that the UK does have an inflation problem and that the body which is supposed to be our guardian is asleep.’Yes, but I don’t think sleep comes into the equation, Shaun, but I guess you don’t either. This is the longest exercise in political can kicking I can remember, with the BoE wilfully ignoring a pretty disastrous situation caused for one sector of the community to the benefit of another. Obviously they are desperately worried about the housing sector’s effect on the solvency of the banks and the potential for mass ‘inability to pay’ mortgages on properties that are well into negative equity already. It has come to something when the BoE feels it has to subsidise mortgages of every borrower in the land at enormous expense to those not involved at all rather than focus support on the minority that really require help (though even they should have known better, and many probably did).
The UK’s economy is presently a total shambles and Cameron needs to re-establish overt political control of the BoE before it does any more damage, and especially before it indulges in any more ‘QE’.
Surely the BOE must act to raise rates a little next month. Once inflation gets a substantial hold as it has now done according to all the ways of measuring it which Shaun has outlined, there is a danger of a sort of feedback loop so that the rate of increase will actually accelerate. We are in danger of this happening now. Never mind about the people who will undoubtedly lose out ie banks and people with mortgages which are “underwater”. Inflation going out of control is the greater of the two evils. Surely the BOE sees this unless they really are completely useless.
” Surely the BOE sees this unless they really are completely useless.”
That just about sums it up. They really are completely useless.
I think you are winning the argument on monetary policy being too loose. Can I ask your view on the consequences of tightening. Bank marginal funding costs are elevated – eg a rise of base rate to 1% could move banks’ marginal funding costs to 3% allowing for CDS premia when banks need to raise large amounts of private funding. Banks are buying HMG gilts instead of lending to businesses. How would you head off a damaging negative feedback loop from a tightening
Thank you although it would have been far better if I had better listened too back in November 2009 when I first argued for an interest-rate rise! Actually one could go further back as I think the rush to cut below 2% was a policy error too….
Would there be elements of a negative feedback for banks? Yes there would be as the rise in interest-rates would be likely to raise funding costs for them. As we are in what Keynes called a liquidity trap I doubt whether the overall impact would be the same as the interest-rate rise but there would be one..
However as I know you are aware but newer readers may not be I have long argued that we also need major reform of our banking system and this move would to my mind be part of it.
1. Raising interest-rates would stop banks being in effect “round-tripping” the taxpayer where the taxpayer lets them have money at 0.5% which they in effect punt on world markets accrue large bonuses for themselves if it works and give the bank to the taxpayer if it fails.
The effect of this has been to tilt banks further into the world of investment banking which is what got us into this current mess.
Also we as taxpayers effectively own banks where we still permit this to go on.
2. Not mentioned in the interest-rate debate but just as important to my mind would be to do a thorough audit of our banks. I have concerns that they still have losses in off-balance sheet units that they have concealed and that these losses may be substantial. I worked through a period where Japan let zombie banks survive and in my opinion 20 years later she is still suffering from that decision.
It ,may be necessary to ring-fence whole areas, to make bondholders share losses or even to create a bad bank but we must this time get to the bottom of it.
Then I hope that our banks can return to banking and lending to businesses and others. I think that at this time their unwillingness to do so as evidenced by the disappointing figures so far for Project Merlin is more of a problem than a relatively small rise in interest-rates.
So in conclusion I think that quantity (availability of finance) is more important than price or interest-rate as compared to the past any interest-rate rise would be small.
As ever I would like to add that I would be withdrawing some of the stimulus rather than tightening as the neutral level of interest-rates for the UK is around 4.5%.
Thanks for your comments I’ve used some of them in my story here http://www.mindfulmoney.co.uk/4275/investing-strategy/inflation-rpi-travel-pushes-cost-of-living-higher.html
By the way I’m editor of Mindful Money
This, inflation, has been going on for so long now that no-one can seriously suggest that it is a surprise. It can only be an intentional policy outcome – but one which dare not speak its name. (Presumably, if the bank said, “we’re going to inflate away the problem at 5%pa” things would get even worse.)
The bigger question, is whether they can really hold things steady at about 5% or whether, as Janchild suggests it will start to accelerate in a feedback loop. That will depend on whether people start to demand wage increases to protect their standard of living: and whether they are sufficiently organised/unionised to be able to do so. Given where we are, it looks likely to be the public sector that takes the lead.
Maybe someone can explain why a small rise in interest rates would cause house prices to collapse. As far as i understand, anyone on a variable rate taken out before the crash is now paying around 2% for their mortgage rather than 5% before. If it rises to 2.5%, I’m not sure how it would cause prices to crash?
As for inflation, it has been obvious for the last 18 months that the central banks are lying and their objective is inflation. there is too much debt to be serviced so the choice is to pass the cost to the debtor or the creditor. They have chosen the creditor as they have done everytime since the 1930’s depression. I await interest rates to react to the added risk.
“What inflation index will you be using next Mr.Posen?”
How about the Tax and Price Index (TPI) which they have been calculating since 1979. If you dig it out of the BofE reports you can see that the last number was 5.8%. BofE explains TPI as follows;
“The RPI measures the change in the amount of money required to purchase a given basket of goods and services. The TPI measures how much the average person’s gross income needs to change to purchase the basket, allowing for the average amount of income tax and national insurance paid on earnings…The TPI is almost unaffected by a shift between direct and indirect taxation, which can distort the RPI”
Welcome to my blog and thank you for reminding of the tax and price index which doesnt get mentioned much these days and has fallen into disuse! It is amazing isnt it that those fertile minds who can think of all sorts of lower inflation concepts have ignored this one which measures a real impact on people.
I am sure it has nothing to do with the fact that this index produces a higher number….
Thanks for your reply, Shaun. It distinguishes your blog from others that you take the time to answer queries.Much appreciated.
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