Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Dear Chancellor: Inflationary Facts

Economics / Inflation Mar 26, 2009 - 12:29 AM GMT

By: Adrian_Ash

Economics Best Financial Markets Analysis ArticleA draft of this week's open letter – from Bank of England governor Mervyn King to UK chancellor Alistair Darling – which BullionVault found blowing down Threadneedle Street early Tuesday...


Dear Chancellor, 

The Office for National Statistics ( ONS ) just published data showing that Consumer Price inflation in the United Kingdom rose to 3.2% in February from a year earlier.

Not only was that rate of inflation far ahead of analyst forecasts. Nor did it merely rip up a dozen newspaper front-pages, all trying to explain "deflation" to a nation paying nothing but rising prices since 1960.

And nor could the latest data fail to conceal the sharpest month-on-month jump of the last 19 years. (It was only just shy, in fact, of the worst monthly jump since the wipe-out inflation of spring 1980.)

No, the CPI inflation figure also rose more than one whole percentage point above our 2.0% target, as mandated by you. And that requires me to explain, in this open letter, why the cost of living is rising so quickly, rather than tumbling as everyone guessed.

"Oh bugger," as I believe Gordon of Khartoum said when the Mahdi army broke through.

The reason for this letter

Yes, so it's the fourth such letter of the last 10 months. But it's still only the fourth such letter since the Bank was given independence to set interest rates almost 12 years ago.

Only four letters after 142 inflation headlines since May 1997...? That's a far better goal difference than we should have expected. Not least because, since I became Governor, the UK money supply has swelled at an average 11.3% rate per annum.

Just last month, indeed, growth in the broad money supply hit almost 19% year-on-year – the fastest rate of expansion since the late 1970s. And "Few empirical regularities in economics are so well documented as the co-movement of money and inflation ," as I used to enjoy pointing out.

Across the final three decades of the last century, in fact, the rate of growth in the money supply and the rate of price-inflation were virtually identical – not only here in the UK (on the Bank's own analysis), but across 116 countries in a detailed study of 1995.

Inflating the money supply only stopped inflating the cost of inflating in the first part of this decade – a period I previously said was all very N.I.C.E. (non-inflationary, constant expansion) but unlikely to last. Most especially with me running the Bank's policy team!

Even so, anyone at the Treasury hoping for a mea culpa today will have to accept this nostrum culpum instead I'm afraid.

Why has inflation moved away from the target?

In reviewing the current data, Chancellor...oh who are we kidding? You and I both know why deflation has failed to appear and why I'm having to write this letter once more.

  • Cutting Bank Rate below its 300-year floor of 2.0%;
  • Creating £10 billion out of thin air to buy up long-dated government bonds, with a further £140bn now at the printers;
  • Announcing £148bn of new gilts to be issued this year to cover your own spending deficit.

Inflate money, devalue debt in short. And with such a very great deal of debt to devalue, that rare empirical regularity of economics would dictate a very great deal of monetary inflation.

It's happening much faster and far more dramatically than I had expected, however. Indeed, the inflation in prices is coming even as money-supply growth for private households has sunk to a four-decade low. That's quite the reverse of what I claimed would happen when this recession began, because I'd missed the plain fact that people spend – and don't save – when interest rates sink.

Debtors merely pay down their debts, and savers flee cash because they're much wiser than our policy models accept. Just recently, for instance, £2.3 billion was withdrawn – net, inside one month – from household bank accounts. We can't account for all of it, but very nearly one pound in every £100 went to Buy Gold at BullionVault.

Returning to Target in the Medium Term

Howsoever it's working, the "pass through" from our forced devaluation of Sterling – the devaluation we've so clearly wrought between us, now running to 28% on the foreign exchanges, and greater still against Gold Prices than both the IMF crisis of 1976 and the post-Gold Standard drop of the Great Depression – cannot be ignored for much longer.

Not with the Easter break looming, but air fares up 12% from April last year. Not with everyone planning their summer holidays, but finding package deals nearly 7% dearer. And most certainly not with the cost of food here at home more expensive by one-eighth in the last 12 months alone.

What to do? Frankly, I'm stumped – which is why I should most likely consider resigning today. The alternative, here in this letter, would be to lambast you and your administration for nurturing the very inflation that's now exploded, forcing you to take such desperate remedies as issuing public debt worth 11% of GDP over the next year, while forcing us here at the Bank to start monetizing that debt quantitative easing.

A buyers' strike at forthcoming gilt auctions cannot be far off, however, and now that everyone involved in this mess fears the public roasting (if not physical violence) threatened against our senior commercial bank chiefs, I shall opt instead to snipe and snip at your policies during this week's Parliamentary Committee hearing.

Sincerely,

Governor &c.

P.S: Hoping that at somehow, at some point, a withdrawal of this extraordinary stimulus will be both achievable and politically tenable is, quite frankly, absurd. You know it, I know it, and clearly the know-it-all continentals at the European Central Bank have guessed it as well. We mustn't expect the G20 summit to achieve anything like a consensus for any policies we propose. I suggest the PR team get to work selling that failure immediately.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
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 2009

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.

Adrian Ash Archive

© 2005-2019 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