The MPC’s not so happy 15th Birthday

The main statutory objective of the Bank of England’s Monetary Policy Committee, set up on 6th May 1997, is monetary stability.

Over the decade-and-a-half life of the MPC, the Retail Price Index has risen 53%. Many of us scratch our heads when we see the price level statistics, instinctively feeling that the prices of many staples of everyday life are rising faster than that. When we examined this recently, we discovered that many staples of everyday life had more than doubled.

Sir Mervyn King professes no responsibility for the financial crisis or for the fact that this is now the longest-lasting recession in the UK’s history, lasting even longer than that of the 1930s. Yet it was the MPC that persisted in its loose monetary policy in advance of the crisis and did nothing to rein in the excesses that led to credit-fuelled disasters such as the Northern Rock collapse.

QE is doing nothing but inflate prices

The current policy of rock bottom interest rates combined with £325 billion of quantitative easing is failing to produce growth, … Continue Reading

Is Steve Webb leading millions of savers into futile pension schemes?

Steve Webb, the Minister for Pensions, freely admits that many people have experienced awful results from defined contribution pension schemes. Yet he is preparing the path for ten million of the country’s lowest earners to be auto-enrolled into these schemes over the next few years. In the meantime those savers who have been let down by the current system have been abandoned.

Even before the credit crunch, the returns on pension savings were heading downwards. The Government’s monetary policy has, however, now knocked for six what little credibility was left in defined contribution pension schemes.

It speaks volumes that the closest anyone in parliament has come to acknowledging any responsibility for this is the Treasury Select Committee who, after three years of low interest rates and £325 billion of Quantitative Easing, last month finally recommended that there should be an investigation into the effect monetary policy is having on savers and pensioners.

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Treasury Select Committee calls for investigation into mitigating the effects of quantitative easing

Save Our Savers congratulates the members of the Treasury Select Committee for suggesting an investigation into the effect the Bank of England’s monetary policies – including Quantitative Easing – are having on savers and pensioners, who have borne the financial brunt of the Bank’s response to the financial crisis.

It is a bitter irony of the current situation that, had savings been properly encouraged in the past, the effects of the financial crisis would have been considerably less severe.

On one hand, the government is trying to encourage people to save into pensions – a matter of urgency, according to the IMF. Yet, at the same time, savings are being confiscated through the Bank of England’s policy of negative real interest rates and Quantitative Easing, which has had an appalling effect for those who are retiring.

Even though easy credit and a lax monetary policy is responsible for our current financial plight, its continuation over the past three years has, we calculate, seen a confiscation of almost £100 billion from savers and pensioners, enough to pay for the Olympics 10 times over. … Continue Reading

The reality of inflation

In February, when the Bank of England launched its quarterly Inflation Report, Governor Sir Mervyn King said: “We said that inflation would come down. It is coming down.” Unfortunately for him, and everybody else in the country, it has just gone back up again, with CPI rising from 3.4% to 3.5%.

In itself, it is not a big rise, but the “experts” all told us that inflation would, by now, be headed down towards the government’s 2% target. No doubt we’ll soon hear the usual barrages of excuses claiming that this month’s figure is in some way abnormal and that, if we just wait long enough, that much-delayed inflation figure will finally be reached. How much longer before they admit that we’re as likely to see pigs in flying goggles soaring through the skies above us?

Next month sees the 15th anniversary of the establishment of the Bank of England’s Monetary Policy Committee. It was, of course, charged with setting base rates to keep inflation at the Government’s announced target. Initially it fulfilled its role successfully, though admittedly in a period of modest UK growth rates, a strong pound and flat world commodity prices. … Continue Reading

Why inflation is headed up, not down

The general perception seems to be that inflation has peaked and is finally headed downwards. The MPC and the Governor of the Bank of England continue to claim that inflation will soon be below target. The Office of Budget Responsibility seem to go along with this, suggesting CPI of 1.9% in 2013 and 2014 and 2.0% in 2015.

However, we have just discovered the extraordinary fact that the Chancellor and the Treasury do NOT believe the Bank of England’s pronouncements or the OBR figures any more than we do. On the contrary, the official view is that inflation is headed upwards over the next few years, not down.

It was John Redwood who ferreted this out. He appears to read financial data the way most of us read novels and has been poring through the Financial Statement and Budget Report. In a recent blog, he highlighted that current public spending (which has risen in both real and cash terms in 2010, 2011 and 2012), is now set to fall in real terms, dropping 1.1% in 2013, 2.1% in 2014 and 2.8% in 2015.

Elsewhere, though, the so-called Red Book says that in cash terms, current public spending will rise each year, up 1.3% in 2013-14, 1.9% in 2014-15 and 1.6% in 2015-16.

The difference between the real and cash terms is the assumed rate of inflation. … Continue Reading

Saving Not Easing

Amidst all the talk of austerity, it is sobering to think that the Government still plans to spend £91 billion more this year than it will receive in income. The Treasury forecasts expenditure for 2012-13 to total £683 billion with total income at £592 billion.

This means the Government must continue to borrow; at the end of February public sector net debt stood at £955 billion. The Office of Budget Responsibility (OBR) forecast that public sector net debt will reach £1.04 Trillion by April 2013 and will continue to increase until 2016-17 when it will stand at £1.48 Trillion. This – the equivalent of £22,500 for every man, woman and child in the UK– is the point at which it expects the Government will finally balance its budget.

Skewing the economy in pursuit of low interest rates

The one thing a Government with such a high level of public debt wants above all else is a low interest rate. … Continue Reading

Where has all the magic money gone?

The Bank of England’s policy of quantitative easing will soon have introduced £325 billion of electronically-created money into the system, keeping interest rates low. According to the Bank’s own booklet on QE, the effects should have been to “boost growth…reduce the cost of borrowing for businesses and households…boost (bank) lending to consumers and businesses.” It concludes that the result is that “the extra money has worked its way through the economy, resulting in higher spending and therefore growth.” Cue hollow laughter from all directions.

The real result is that the banks have sat on the money, rebuilding their balance sheets. With QE reducing the cost of banks’ inputs, their profits have risen, enabling bankers to continue to pay themselves enormous bonuses, even if their incompetence led to their banks being bailed out by the taxpayer.

Courtesy of James Bianco at Bianco Research, it is instructive to see just how the Bank of England’s balance sheet has exploded in recent years. Even before QE, the Bank not only cut interest rates to the bare bone but, in 2008, heavily bought short-term gilts. As a result, the bank’s assets as a proportion of UK Gross Domestic Product have climbed from 7% at the end of 2007 to 21%, alarmingly similar to what happened in the highly inflation decade of the 1970s.

Of itself – so the economists tell us – QE will not produce inflation. Due in large part to the banks’ desire to rebuild their balance sheets, the money created by QE does not appear to be flowing around the economy. But if we do see growth and the banks increase their lending, the money created by QE will suddenly have an effect and the Bank would have to be extraordinarily fleet of foot to mop up the cash.

Andrew Sentance supported the initial bout of QE when a member of the MPC. Now, however, he thinks that what was, after all, an emergency measure, should be unwound: “It is far from clear that an economy which has been suffering from persistent high inflation needs a policy which is designed to push up inflation further. Yet that is precisely what the MPC expects QE to achieve.”

Click on graph to see an enlarged version

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Bank of England wakes up to fact we need to save more

We are well used to the Bank of England treating savers with disdain, the worst offender being our bête noire, Deputy Governor Charlie Bean, who has attacked savers more than once for daring to put money by instead of squandering it immediately.

So imagine our surprise at reading the latest Bank of England Quarterly Bulletin. Pointing out that UK net worth is negative and that our current economic behaviour is unsustainable, it says that the economy must be rebalanced. And why? Because our current consumption is unsustainably high and “the United Kingdom has been saving too little for some time”. Hallelujah! Somebody at the Bank of England has finally got it. … Continue Reading

The two-faced Chancellor

Commentators are poring over the Chancellor’s Budget speech, trying to calculate who wins and loses. The Chancellor claimed it was a “Budget for business”. His own family’s business, of course, is Osborne and Little; how appropriate, because there was little in it for savers. The speech did not mention savers once, nor how the country has been kept afloat for the past three years by the near-£100 billion theft from savers. As so often with cannon-fodder, the sacrifice goes unrecognised.

Looking behind the actual measures, there was a strange, contradictory tone to the Chancellor’s remarks. He concluded by saying: “This country borrowed its way into trouble. Now we’re going to earn our way out.” But what caused that surge in borrowing? As the Chancellor told us. “This country became seduced by… the illusion of cheap finance.”

Cheap finance is bad. Cheap finance is good.

Yet what was that same Chancellor’s proudest boast throughout his speech? Cheap finance. “Mr Deputy Speaker, our commitment to reduce the deficit is keeping interest rates low. … Continue Reading

Inflation – the savings killer

At a time of negative real interest rates, it is perhaps no wonder that we concentrate so much attention on the current predicament of savers. However, it is worth reminding ourselves that inflation – the kiss of death to savings – is constantly with us. Prices have tended to rise throughout history. A Parliamentary research paper on inflation found that, from 1750 to 2005, prices rose nearly 150-fold. As a result, one (decimal) penny in 1750 would have had the purchasing power of more than a pound in 2005.

The real acceleration in the decline in the purchasing power of the pound, however, came during the 20th century. If you feel ever poorer, the graph below amply demonstrates why. … Continue Reading