Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Vote, vote, vote for central banking!

Politics / Inflation May 03, 2007 - 09:44 AM GMT

By: Adrian_Ash

Politics

"...What if the 'first win' of globalization didn't go to China ? What if it went to central bank policy wonks instead – free to keep real interest rates low despite oil prices trebling...?"

TAX PAYERS in Britain were invited to vote early and often in today's local council elections. The French will get to choose between one bone-head and another this weekend, too.


But amid the door-stepping and live TV wrangling in Europe right now, it's a poor central bank drudge who seems to want victory most.

Mervyn King, governor of the Bank of England, celebrated its first decade of political independence with a speech in the City last night. No one lobbed bread rolls or fruit at the governor, not according to this morning's press reports at least. It's only polite to allow a guest speaker his views, after all.

But even a room full of "dismal scientists" must have gasped at the cheek of the man. To quote:

"Inflation expectations [in the United Kingdom] have been anchored," he said, "because the Monetary Policy Committee has responded to events that have pushed the outlook for inflation away from target – and households, businesses and financial markets have understood and anticipated our responses."

Oh yeah? The money supply has been growing at double-digits for two years running. But "the crucial achievement of the MPC is to have anchored inflation expectations," said King. "It is not, I believe, credible to dismiss that solely as the result of luck."

Bravo...encore!

"On that sunny Bank Holiday morning in 1997, we knew [the government] had given us an opportunity to change monetary policy for the better. We had to grab it with both hands. That is exactly what the Bank has done."

Vote, vote, vote for Mervyn King!

"The average deviation of inflation from target has been just minus 0.08 percentage points," the Trimmer went on. But he was big enough to mention – alongside his lack of good fortune – a couple of "downside" shocks to general price levels. First the Pound Sterling rose by 25%, he noted, squashing import prices by one fifth. Then we experienced the largest inflow of migrant labor since Harold Macmillan was prime minister in the early 1950s.

What Mervyn King failed to do, however, was add them together.

Sterling 's rise – plus the flood of cheap migrant workers, now reckoned at around 1% of the population every two years – has helped keep a lid on both wages and import prices. Not a word from Dr. King on this, however. More shocking still, he also failed to mention China , India , Asia , globalization, outsourcing, the global labour arbitrage, and the internet.

No kidding! Britain 's chief economist...talking about inflation...didn't mention the big win he's enjoyed from globalization. Not once. So let's mention it for him.

Take East Asian wage rates, for instance. What have they got to do with the price of fish, you might wonder. Well, the price of fish for British consumers rose 12.6% in the last 12 months, as it happens. But the cost of new clothes, mostly produced in East Asia today, fell more than 8% in the last two years alone. The price of a new television has sunk by one fifth. New cameras are 34% cheaper; furniture's unchanged; carpets and drapes are 7% cheaper; games and toys are more than 5% lower from Jan. 2005.

Worth a mention, Dr. King?

"Ricardian comparative advantage tells us that the first win [of globalization] goes to low-wage workers in developing economies," noted Stephen Roach, chief economist at Morgan Stanley, recently. "[They] enter the global economy initially through their involvement in export production and eventually as a new class of consumers."

"The second win [of globalization] is presumed to benefit the rich nations of the developed world," Roach went on – "where consumers can expand their standard of living by buying low-cost, high-quality goods from poor countries and where workers can ultimately gain from being involved in the production of more sophisticated products exported to increasingly prosperous developing economies."

This much seems true at first glance. "But it's not working as advertised," said the Morgan Stanley man. "The first win is hard to dispute. China has led the way, with more than a quadrupling of its per capita GDP since the early 1990s...[But] in recent years, the benefits of the second win have accrued primarily to the owners of capital at the expense of the providers of labor."

In short – and as in all inflationary periods – the returns to labor have been way outstripped by the returns to capital. But what if we go a step further, too? What if the "first win" didn't go to China ? What if it went to Western central bankers instead?

The shock disinflation enjoyed by the developed world since 1997 – in clothing, footwear, computers, TVs, DVDs, mobile phones, year-round fruit and vegetables – did it not give the "first win" of globalization straight to central bankers? Despite a tripling of oil prices, they've been able to keep real interest rates static...pushing property values up to all-time record levels...creating the biggest credit bubble in history...and reflating the world's stock markets as though spring 2000 never happened.

A central banker looking to take credit for "anchoring" inflation in the early 21st century might want, you would guess, to acknowledge this fact at least. He'd certainly nod towards globalization itself. But no.

In praising that sunny day in May 1997 when the Old Ladies were set free to make policy over tea and biscuits once a month, Mervyn King failed to mention the single biggest influence on consumer prices of the last decade – the sinking price of consumer goods.

Ten years on from winning his freedom, Mervyn King would do well to remember it. An end to this "first win" might let UK inflation – already rising at a 17-year record – slip anchor.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Gold prices live | Latest gold market news
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

 


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in