Mervyn King and "Inflation"
When Prices Go Up, It has Nothing to do with the Central Bank …
In his most recent quarterly inflation report – in which the Bank of England is trying to explain why it has or hasn't managed to stick to its target regarding the rate of change of the general price level as allegedly 'measured' by a price index – Mervyn King pulled a Mercedes Marco Del Pont by asserting that rising prices had nothing to do with the central bank's monetary pumping.
“The UK inflation rate will remain stubbornly high for longer than previously thought, the governor of the Bank of England has said.
Sir Mervyn King now expects inflation, currently 2.7%, to rise to at least 3% by the summer and to remain above the Bank's 2% target for two years.
In November he had said that inflation would fall back towards its target in the second half of this year. But the governor also said that "a recovery is in sight". Sir Mervyn King, presenting the Bank's latest Quarterly Inflation Report, 20 years after it issued its first one, said the economy had "cause for optimism".
Sir Mervyn said that factors outside of the Bank's control – increases in university tuition fees and utility bills – had added to inflation recently.
"If you like, it is a bit of a self-inflicted goal in terms of the damage done to real take-home pay, perhaps another way of trying to implement fiscal consolidation through moving up the price level," he said. "This is not the result of easy monetary policy and nor does it reflect what's going on in the economy."
Maybe someone should remind King that prices overall simply cannot rise unless someone pumps up the money supply. If the money supply were perfectly stable, then an 'increase in tuition fees' would lead to a decrease in prices somewhere else in the economy. If it is true, as he says, that the rate of change of the 'price level target' will continue to remain stubbornly high, then it will most definitely be the 'result of monetary policy'. Of course the growth rate of the money supply is not the only component determining the purchasing power of money. However, a growing money supply is a sine qua non precondition for a decline in money's purchasing power in a progressing economy. After all, economic progress is all about increasing productivity: doing more with less. It is the only way to create wealth. In a progressing economy with a stable money supply, prices would therefore tend to decline over time and people's increasing wealth would be reflected in rising real incomes (instead of rising nominal incomes that either stay flat or decline in real terms).
Getting Wealthier by Printing Money
Apparently though, rising incomes are off the table entirely in the UK anyway, as the government tries to “implement fiscal consolidation through moving up the price level”. In other words, the central bank is inflating. He contradicts himself almost immediately (it's like 'let me quickly draw a breath, then I will contradict what I just said').
He continues:
“Growth is likely to be weak in the near term but further out a continued easing in domestic credit conditions, supported by the Bank's asset purchase programme and the Funding for Lending Scheme, together with the stronger global backdrop, underpin a slow but steady recovery in output," the governor said.
Attempting to bring inflation back to target sooner would risk "derailing the recovery", he added.
Joshua Raymond, chief market strategist at City Index, said the report showed "a continuing divorce of priorities at the Bank of England from inflation targeting to supporting the economic recovery".
And once again we have the erroneous belief on display that pumping up the supply of credit and money from thin air will somehow create 'growth' and 'aid the economic recovery'. In reality, new money from thin air undermines true wealth creation, as those with first dibs on the newly created money can bid for resources without there being an offsetting contribution to the economy's pool of real funding (in the form of genuine savings). The BoE's repeated attempts to 'aid recovery' in the past by such means have produced the following result:
“The Office for National Statistics said on Wednesday that UK workers were earning no more than they were 10 years ago, while a report from the Resolution Foundation think tank warned that it could be another 10 years before living standards return to the levels they were at before the recession.”
This is what monetary pumping by the central bank has brought about – a palpable decline in living standards that will in the end have thrown away 20 years of potential economic progress. Therefore, so Mervyn King declares, the BoE must definitely do more of the same.
A recent Elliott Wave count of cable, by our friend PN – click for better resolution.
As we have pointed out several times recently, the UK appears to be a veritable breeding ground for monetary crackpots. Mervyn King is one of them.
Mervyn King, sporting the 'seriously worried' mien into which his face has perpetually congealed about 5 years ago. He feels for his fellow citizens and wants to increase their happiness by showering the banks with more free money.
(Photo credit: Nick Ray / The Times)
Charts by: PN / StockCharts
