The MPC’s not so happy 15th Birthday

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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, yet the MPC refuses to change policy. According to the Bank of England website, the purpose of QE – a wholly experimental policy – was to boost lending and thus spending. Neither has happened. Net bank lending has been negative virtually every month since the crash.

Banks have also widened their margins. While savers contend with rock bottom rates that cannot match inflation, overdraft rates are the highest since records began, a massive 40 times the 0.4% base rate.

QE may have helped bankers pay themselves handsome bonuses but there is no evidence it has had any beneficial effect on the real economy. When the banks do finally release the money, it will prove highly inflationary.

In spite of all the evidence, the Bank’s website disingenuously says: “the extra money has worked its way through the economy, resulting in higher spending and therefore growth.”

Inflation is depressing the economy – and everyone in it

Inflation remains well above the government’s 2% target and, while Sir Mervyn King and the MPC keep telling us inflation is just about to fall, it remains stubbornly high. They admit this surprises them yet, over the past four years, the Bank of England’s inflation forecasts a year ahead have been consistently out by a massive 1.5 percentage points. Theoretical economists seem to have no understanding of the real world. Perhaps the MPC should have its ranks swollen by a psychologist who can explain how human beings without economics degrees actually behave.

The poorest sections of society are hit the hardest by inflation. But with wage levels lagging inflation, we are all feeling worse off. Inflation is a stealth tax, creating a massive disincentive to spend at a time when the economy desperately needs consumer spending, the engine for two-thirds of our economy.

The MPC’s policies have hit those who are retiring particularly hard. Members of the MPC have denied that this has anything to do with QE depressing gilt yields but pensions specialists including the National Association of Pension Funds disagree vehemently.

The MPC must change – or be changed

Although the Treasury Select Committee recently called for an investigation into the effect of the Bank of England’s monetary policies, the unelected members of the MPC have been given a surprisingly free rein, despite the importance of their decisions. Successive Chancellors, overseeing massive borrowings – no doubt delighted interest rates remain low – have been unwilling to hold the MPC to task.

You do not grow an economy by cutting interest rates to the bone or by creating magic money from thin air. Yet the policies remain unchanged. Growth remains negligible or negative. Spending remains moribund. The banks sit on the money from QE. The economy remains stagnant. According to Fathom Consulting, this is down to “negative supply shock”, a feature of the 1970s recession. They say that low interest rates and quantitative easing have made the problem worse by exacerbating inflation and conclude that “the right response to a negative supply shock is a modest tightening of real interest rates”.

Given that the Bank of England’s role is about to expand considerably, the time has come to ask if its policies are the right ones for these difficult time. The MPC’s repeated mistakes and refusal to admit that they have got anything wrong is costing the country dear.

In the meantime, by way of light relief, we produced a small animation to “commemorate” 15 years of the MPC. Do feel free to pass it on to others.

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6 Comments

1. drrdf

   May 11, 2012 at 11:00 am

   “QE is doing nothing but inflate prices”. I do not believe that is true! What it has done is to fund continued government profligacy which could not have been funded in any other way (and as a direct result has funded banker’s bonuses) . The policy of artificially low base rate held at a forced level for so many years plus QE was designed deliberately to generate inflation by debasement, fund Gilt sales at artificially low rates and thus to gradually write off a large portion of the public debt. This was to avoid having to reduce government spending with the political annihilation which that would have produced for any party in government doing the right thing, i.e. reducing public spending to what the country could now afford!

   This was all accomplished largely because of a clause included by Brown in the remit which set up the MPC, allowing the Chancellor to secretly take back control at any time from the MPC. I believe Brown had used this clause and done this before he was thrown out of power, and it has suited the present government to continue this charade rather than having to reduce public spending. Despite all the TALK of cuts they do not walk the walk, and government spending is and has been increasing by millions of pounds each and every day. Their hope evidently is that if they continue to put off the evil day of facing reality things might meantime happen to get better, and as time passes the debasement they are enforcing will write off much of the debt. (The MPC was never given any power in its remit to undertake anything other than setting base rate, and certainly not implementing QE. The fact that it was “allowed” without any government sanction to undertake QE thus shows that the decision was not in reality taken by the MPC but by the Chancellor. Several political statements have been made making this clear – that it was a Treasury and government decision to debase, not an MPC one.) This is known as Crisis management or Seat of the Pants management which is what all amateur managers and politicians indulge in, because they do not know how to manage professionally or competently. In this policy it is Pensioners and savers who have been mainly hit, but the government see them as being cash cows because they have been mostly provident over their working lifetimes and have amassed significant resources for their old age. The government has also demonstrated their true attitude towards pensioners with the Granny Tax, minimum pricing on alcohol, intent to tax the state pension at source and other similar policies. They see the retired as a source of wealth to be plundered. Any society which has practiced such vendettas against the elderly and retired amongst its citizens, who can no longer replenish their stolen resources, has always eventually suffered its due desert, and the UK will be no exception.

   Of course the present government policies will not work and what we are going to end up with is an even more severe depression accompanied by hyperinflation. In the way that politicians see these things this does not matter because by then they will be out of office with their pensions guaranteed and unelected EU appointments; and another government will have to sort out the mess which they, like Brown, will have left behind them!

   Recommend (25)
2. John.

   May 11, 2012 at 5:21 pm

   I agree with the sentiment entirely, this is just the start. The bottom line in all this is that the government are completely and utterly bankrupt, their monetary policy and maneuvering reflects that fact in the way they are brazenly facilitating the theft of the nations wealth from taxpayers and savers in order to bribe yoters and continue spending beyond UK means. The MPC demonstrates quite adequately all that is wrong with government, they are ineffective, unaccountable and expensive – ultimately just another unnecessary burden on an already overburdened population.

   The problem is that any proper auditing and legal requirement to cease the theft and deception would threaten to bring down the whole criminal establishment and their fractional reserve money laundering enterprise, but at this rate no one in the country (who isn’t exploiting the system) is going to have anything of much value left anyway. We still haven’t seen the massive house price adjustment that is required to stabilise the economy, as most banks are still unregulated to any meaningful degree and still holding vast toxic assets – hoping the central banking cartel and their government stooges can stop the bubble bursting by deflating it with inflation, handing them eye watering wads of pretend money and continuing the theft of real wealth from shoppers, savers and taxpayers.

   I think it’s time the paid for politicians and the companies they are in cahoots with are all held personally responsible within a legal and binding framework for government spending and the financial decisions they make. That should focus a few of the multi millionaire political minds and wake them up to the fact that they’re acting like thieves and not fit for purpose.

   One thing for certain is that until people begin to voice their concern in volumes that cannot be ignored or dismissed as fringe the theft will simply continue and the next generation will find themselves shouldering the ever increasing burden of government stupidity in the form of horrendous debt and an increasingly impoverished nation.

   Recommend (11)
3. Nick

   May 18, 2012 at 2:56 pm

   House prices are influenced by the MPC interest rate decisions.

   Do we have any stats/number which show:

   -How many of the members in the BoE MPC commitee are property owners (themselves or their wives/family/companies)?
   -How many of the members in the BoE MPC commitee have a mortgage/any other loan (themselves or their wives/family/companies)?

   -How many of the members in the MPs are property owners (themselves or their wives/family/companies)?
   -How many of the members of the MPs have a mortgage/any other loan (themselves or their wives/family/companies)?

   Recommend (7)
4. frances

   May 20, 2012 at 12:24 am

   At least Adam Posen has resigned as he promised to do if inflation did not fall as he predicted but no doubt the truth is he was offered more perks in his new job

   Not one single member of the MPC or the Treasury has a shred of integrity or decency and they are all only in it to line their own pockets by fleecing savers

   Recommend (6)
5. Really Annoyed Now

   May 20, 2012 at 1:29 am

   Posen possibly would have left his post anyway so it was nothing for him to state that he would resign if inflation didn’t drop. A non UK MPC member pursuing highly inflational policies seemed to be raising a few voices.

   What I hate most about all of this is the lies and deception from the MPC and the Treasury. Why are the MPC and the Treasury lying to us all the time? I now hear more talk of QE “stimulus” again from King and that inflation may remain higher than the “target” for “another year or two”. It’s NOT stimulus at all, it’s all being handed to the banks, nothing more.

   Why did Osborne mislead us too? When in opposition he stated that the previous administrations actions were unfair on pensioners and savers and yet he is continuing letting the MPC destroy peoples hard earned wealth. I bet he inflation proofed his wealth as well before he gave the go ahead to lie and deceive.

   I don’t believe Kings reasoning that “QE works because if we didn’t do it things would be worse for savers.” I’ve never heard such stupid reasoning. There is no way of knowing so it’s another lie. He really does take us all for mugs doesn’t he. He states that inflation at 5-6% would be destructive. What about a rate in between then to counteract inflation to some degree? The truth is it’s more lies and deception and I hate being lied to and taken for a mug.

   King now has 94.7% of his pension directly protected from inflation. I trusted people who are given a knighthood such as King not to tell lies and to deceive like he is doing. I trusted Osborne too. King has disgraced the position of knighthood with his actions and I really hope that he suffers for it.

   I know it’s not a nice thing to say but I really hope that something nasty happens to the MPC members and the UK Treasury members and their families. That’s how much anger and hatred they’ve generated within me with their continuous lies, deception and theft of my hard earned wealth with their destructive policies.

   Recommend (10)
6. frances

   May 20, 2012 at 12:50 pm

   Cameron
   Osbourne
   Clegg

   ALL OF THEM nade speeches saying they would help Pensioners and savers

   But instead they have ripped us off wholesale and then boast that low interest rates are good for the country

   I like so many others have lost 25% of our income and the result is we simply cannot dare spend on anything miore than bare essentials

   and the Government wonder why theres no growth in the economy .!!!!!!!!!!!!!!!!!!!!!!!!

   even when growth does occur theres no way it will ever restore what we have lost and theres no way we will receive any benefit whatever

   The MPC and the Treasury deserve every ounce of anger and hatred going ………..they are blatant THIEVES

   Recommend (9)