Wednesday:
The latest figures show that unemployment has fallen to 7.4%, the lowest since 2009 (i.e. now lower than Labour left behind), and an email from Mr Danny Alexander arrives to celebrate that there are now thirty million people in work.
Inflation, down to 2.1% is also at a four year low.
So “Yay!”
But there’s also been a huge rise in people getting emergency food from food banks – as highlighted in today’s Opposition Day debate in the House of Commons.
We need to cast some light on this debate; we need some understanding of what’s driving this increase.
At the moment it’s all too easy for the Left to cry “Evil Tory Government” as though that was all the explanation necessary (and for some of them, all too often, it is); while the Right respond with “poor people have made poor decisions”.
(In fairness to Gove, he actually said “…so we need to help them”; that is, he meant to be patronising, not dismissive.)
The Tory responses in the debate – essentially to blame it all on Labour – won’t wash. Worse, they’re a cowardly approach, denying that the Coalition has changed anything.
The actual cold, hard, statistics – employment, inflation, interest rates, or my personal favourite the gini coefficient that shows that for the first time in thirty years, and uniquely among Western nations, inequality in the UK has actually fallen (as a result of the Coalition’s changes to taxes and benefits pushing the tax burden up the income scale) – all point to the UK having worked well together to mitigate the harm of the recession and to be moving into recovery.
But people don’t believe statistics.
Or rather, they’ll believe a statistic that says the use of food banks has trebled, but not ones that say the economy is growing.
And with inflation still running ahead of wages it’s easy to see why: a lot of people still have to live with their pay frozen – yes, including MPs’, despite what you’ve heard; IPSA’s recommendation still only being a recommendation so far, but massively unhelpfully adding to the prevalent (and probably untrue) “them and us” narrative. By spreading the pain so broadly we’ve avoided the horror of huge spikes of unemployment that the recessions of the Eighties saw – unlike the Thatcher governments, the Coalition hasn’t “written anyone off” – but at the expense of a whole lot more people feeling the impact of 2008’s economic disaster.
This is why Labour get traction from their “cost of living crisis” rhetoric. It’s a cunning way of turning the Coalition’s “we’re all in it together” into “we’re all hurting” (particularly when tossing in the odd sly reference to the “1%” who somehow aren’t in it together), while stealthily dropping that “Plan B” that they’ve been banging on about since 2010. (And how has borrowing more and super-taxing the rich worked out for France, by the way, Mr Balls?) What it doesn’t disguise is that Labour still only have one policy and that it won’t work. (Hence Ed’s… er… difficult time responding to the Autumn Statement.)
Hysterical commentary from Labour supporters, cherry-picking this food bank statistic and saying “we haven’t had food parcels since the Second World War so things are worse than they have been since the Second World War” simply is not credible in light of the overall picture. We can’t compare the use of food banks now to how they were used in the recessions of the Eighties (or Seventies) because they simply didn’t exist then. In fact, as an extra-governmental route for the “haves” to help the “have-nots” they’re a perfect example of Mr Balloon’s “Big Society” (though the Conservatories have dropped that as quietly as Labour dropped Plan B).
But we cannot in conscience ignore this evidence either.
It’s no good denying that some of the decisions of the Coalition government have caused genuine hardship, either directly by cutting people’s benefits (through the benefit cap, through the second room bedroom tax, through continuing to employ the evil of ATOS) or indirectly by the increase in decisions to freeze or stop payments (decisions often later overturned).
Actually, Mr Iain Drunken-Swerve’s DWP (the Department of Workhouses and Prayer, a ministry well known for their accurate use of statistics) does deny that decisions to freeze or stop payments have led to more people using food banks. Which comes back to begging the question: what does?
The most urgent question has to be are more people in poverty?
(Let’s not mess about with terms like Food Poverty and Fuel Poverty as though people have a meaningful choice between the two; if you’ve not got enough to meet your basic needs you’re screwed one way or the other so what’s the difference.)
There are a number of fairly hefty policies in place that are supposed to stop this: Labour’s minimum wage and tax credits; the Coalition’s triple lock on pensions; Liberal Democrats also managed to strong-arm the Chancellor into indexing benefits in line with inflation through the difficult years when it was highest.
So are these failing? If so which, and how, and how do we stop them failing?
How much of this increase in food bank use genuinely reflects an increase in poverty? Is it possible that there are other factors? I can think of a couple of alternative, not to “explain away” the rise, but to try to think about there being more to the picture.
The most obvious would be people who were previously choosing “eat” over “heat” now have another option: instead of deciding that they must have food and then shivering under a duvet, they can now pay for the heating bill and go to the food bank and get some emergency supplies. What has happened is that an “invisible” poverty has become a visible one.
Another is what you might call the “NHS” effect. If help wasn’t there, people wouldn’t use it. Since its inception, NHS use has grown almost exponentially even as the nation has become fitter and healthier. Similarly, as more food banks are introduced, and more people become aware of food banks, so more food banks are used by more people.
It’s possible that that interpretation is even supported by the authors of that “use of food banks has trebled” statistic: the Trussell Trust, a food bank provider – in fact they describe themselves as “a Christian charity that partners with local communities to provide practical, non-judgemental help to people in crisis”. (Although that’s not an interpretation they would put on it as they’re not as non-judgemental about the Government, whom they blame for the “scandal” of their own success.)
Their accounts (available on the Charity Commission website) say that they’ve demonstrated that their franchise model is “scalable and sustainable”, which suggests that they’re not so much answering an acute need as having found a necessary niche.
(Incidentally, almost all the stories of food banks seem to stem from an October press release of theirs. Though oddly, in researching this, I came across virtually the same story – same source, the Trussell Trust, same number, 350,000 people needing food parcels – but from May relating to 2012.
I’m not saying it’s wrong; it looks a bit weird but it’s probably just a coincidence when the October story compares April to September 2013 with April to September 2012, while the May story is comparing April to March 2012 with April to March 2011. As they say: they helped as many people in six months this year as they did in their whole 2012/13 year. I’m not surprised they have to help more people in Winter when the choice between heat and eat becomes acute.)
Stories about the increase in the use of food banks serve as publicity for food banks; so the Trussell Trust’s press release is not just impartially informing us of the situation, it’s also advertising their product. (Indeed, Tesco, for example, are now encouraging people to donate a shop – at Tesco of course – to the food bank, so turning them into advertising for Tesco!)
You could also say that if people in need are discouraged by shame from looking for “hand outs”, hearing that many more people are using the food bank reduces that disincentive, in a way “permitting” the people who need the food to go and claim it.
Let me emphasise though that just because I can hypothesise alternate explanations for some of the rise in food bank take-up, that doesn’t mean that they’re right. That’s why we need to be asking questions.
I don’t want to rain on the economic parade, but Labour and Labour supporters have latched onto this as “A Big Thing”, and I can’t say that they’re wrong to do so. I know that it’s a big cause for concern, for me and many other Liberal Democrats. We’re concerned for the human tragedy, obviously, but also because it seems to fly in the face of statistics that say the economy is getting both stronger and fairer.
Policy ought to be evidence-based (and unlike Labour I won’t just grab a statistic and say “so there!”), and we need to understand what this piece of evidence is telling us, so these are questions for which we need an answer.
Showing posts with label Inflation. Show all posts
Showing posts with label Inflation. Show all posts
Thursday, December 19, 2013
Monday, October 21, 2013
Day 4677: Ed Davey Throws Himself off Hinkley Point (metaphorically!)
Monday:
In a deal that’s literally radioactive, Her Majesty’s government in the form of Master Gideon and Bojo the Clown and, of course, Liberal Democrat point man Mr Ed Davey, have announced that there will be a new atomic power station (or two) at Hinkley Point in Somerset, built and run by the French, paid for by the Chinese and presumably using South African or Canadian uranium.
So, nice energy security there.
The price for their electricity has been set at £92.50 per kilowatt hour, which is about double the current wholesale price.
Not quite “too cheap to meter” either.
Okay, to be fair, if you bear in mind that the new nuke won’t start generating for at least ten years, that’s a (compound) rate of “only” about 7.5% increases every year.
On the one fluffy foot that almost seems moderate compared to the 8.2%, 9.2% and 10.4% price hikes announced this last week; on the other fluffy foot, it means the government are guessing that energy costs will continue to rise at two to three times the rate of inflation for the next decade.
Brrr!
It says a lot about the immediacy of the threat of global warming that a lot of very decent people who would previously have looked askance at the toxic legacy of the nuclear industry (where we’re still not quite sure where to put all the waste) have been convinced that the power of the atom is a clean green alternative to burning lots of carbon when it comes to facing up to keeping the lights on. Not that Gideon or Bojo believe in climate change, so what’s their excuse?
Personally, I still believe that this is a distraction from serious investment in our own renewable resources.
Having worried for ages about the ability of President Vlad the Bad Putin of Russia turning off the gas taps and freezing us (like he did to Ukraine), we seem remarkably blasé about letting Great Britain’s off switch fall into the hands of the Central Committee of the People’s Republic. Better hope that those notoriously unforgiving Mandarins have forgotten all about the opium wars, eh.
I think we should be making more of our own power and not buying in heavy elements to burn up. I should prefer to see at least one, and preferably three, tidal bores being tapped and a whole lot more offshore wind. And to counter those blowhards who protest that “the wind doesn't blow all the time”, time to dust off the plans for that Exmore pumped-storage hydroelectric scheme, and a few more, so we can store power from when the wind when it’s there and release it when the wind drops.
Because, frankly, I’d rather rely on when the wind blows than risk, er, “When The Wind Blows”.
Having talked about energy prices, though, there was for once a very good point in the weekend’s Grauniad (although heavily disguised as a bizarre attack on Morrisey’s autobiography).
The obsession among media and political types – archbishops and Mr Milipede included – with these 9% hikes in the price of energy is the obsession of people who already own houses and is blotting out the much more serious 9% average rise in the cost of rents for people who do not.
The prospect of a meltdown at a nuclear power station might be the stuff of nightmares, but it’s the meltdown in the housing market that is truly terrifying.
In a deal that’s literally radioactive, Her Majesty’s government in the form of Master Gideon and Bojo the Clown and, of course, Liberal Democrat point man Mr Ed Davey, have announced that there will be a new atomic power station (or two) at Hinkley Point in Somerset, built and run by the French, paid for by the Chinese and presumably using South African or Canadian uranium.
So, nice energy security there.
The price for their electricity has been set at £92.50 per kilowatt hour, which is about double the current wholesale price.
Not quite “too cheap to meter” either.
Okay, to be fair, if you bear in mind that the new nuke won’t start generating for at least ten years, that’s a (compound) rate of “only” about 7.5% increases every year.
On the one fluffy foot that almost seems moderate compared to the 8.2%, 9.2% and 10.4% price hikes announced this last week; on the other fluffy foot, it means the government are guessing that energy costs will continue to rise at two to three times the rate of inflation for the next decade.
Brrr!
It says a lot about the immediacy of the threat of global warming that a lot of very decent people who would previously have looked askance at the toxic legacy of the nuclear industry (where we’re still not quite sure where to put all the waste) have been convinced that the power of the atom is a clean green alternative to burning lots of carbon when it comes to facing up to keeping the lights on. Not that Gideon or Bojo believe in climate change, so what’s their excuse?
Personally, I still believe that this is a distraction from serious investment in our own renewable resources.
Having worried for ages about the ability of President Vlad the Bad Putin of Russia turning off the gas taps and freezing us (like he did to Ukraine), we seem remarkably blasé about letting Great Britain’s off switch fall into the hands of the Central Committee of the People’s Republic. Better hope that those notoriously unforgiving Mandarins have forgotten all about the opium wars, eh.
I think we should be making more of our own power and not buying in heavy elements to burn up. I should prefer to see at least one, and preferably three, tidal bores being tapped and a whole lot more offshore wind. And to counter those blowhards who protest that “the wind doesn't blow all the time”, time to dust off the plans for that Exmore pumped-storage hydroelectric scheme, and a few more, so we can store power from when the wind when it’s there and release it when the wind drops.
Because, frankly, I’d rather rely on when the wind blows than risk, er, “When The Wind Blows”.
Having talked about energy prices, though, there was for once a very good point in the weekend’s Grauniad (although heavily disguised as a bizarre attack on Morrisey’s autobiography).
The obsession among media and political types – archbishops and Mr Milipede included – with these 9% hikes in the price of energy is the obsession of people who already own houses and is blotting out the much more serious 9% average rise in the cost of rents for people who do not.
British Gas customers – that is eight million households – face an average increase of £123 a year. Bad, but nothing compared with the £835 increase a year for the 8.3 million households in rented accommodation – £835!In this context, the second phase of Master Gideon’s Help-to-Buy scheme might as well be called Help-to-Buy-to-Let and is likely to drive up house prices and therefore rents even more, trapping millions of people even further below the first rung of the housing ladder.
The prospect of a meltdown at a nuclear power station might be the stuff of nightmares, but it’s the meltdown in the housing market that is truly terrifying.
Saturday, February 19, 2011
Day 3702: An Interest in Inflation
Saturday:
This week, we learned that the headline rate of inflation is 4% (with the rate including mortgage costs an even higher 5.1%) and we were warned that higher interest rates are on the way, pinching our purses even tighter.
For lots of people, particularly those on public sector pay freezes, this is VERY BAD NEWS. Inflation turns a pay FREEZE into a pay CUT: you get the same money, but it doesn't go as far. In fact, inflation does this even if you do have a pay rise.
So why risk the EXTRA pain of higher mortgage repayments now?
Well, for starters, interest rates are like exoplanets – you really want to find them in the GOLDILOCKS ZONE.
(No, that's NOT like Dr Woo's "Medusa Cascade"; it means not too hot and not too cold but just right.)
It's fairly obvious what the problems are if your interest rates are too HOT or rather too high: anyone with any borrowing – which is most businesses, on top of everyone one who bought a house using a mortgage – they get squished flat under the cost of repayments.
If all your money is going in interest repayments then you have no extra cash to put into savings or to employ new workers.
So, HIGH interest rates are HARMFUL to prospects for GROWTH.
BUT, there are problems if your interest rates are too LOW as well.
Although it is much cheaper for businesses to borrow, it's much harder to find anyone to borrow FROM, because almost no one wants to lend money when the rate they'll get back is so low.
Think about this as a SAVER: people who have money in the bank are seeing it LOSE value at the moment because the interest rate is LESS than the inflation rate.
If I had £100 today, I could buy £100 worth of sticky buns with it. But put it in the bank and in a year I might have £100 and 50p, but to buy the same number of sticky buns would cost me £104!
Or to put it another way: I could buy sticky buns today for £96.63; in a year's time those buns will cost £96.63 PLUS £96.63 x 4% inflation, which is £96.63 PLUS £3.87 or £100.50, which is what I get from putting my imaginary £100 in a bank.
So what we call the "REAL" value of putting £100 in the bank is that it LOSES £3.37 (or 3.37%) in value!
(Of course real savers can get better interest than the ½% base rate, but it makes the point.)
So for starters, very low interest rates discourage saving, which is a bad thing anyway. But more than that, they mean banks have no reason lend money out, even if there were any savers putting it in, which perpetuates the CREDIT CRUNCH.
So, LOW interest rates are actually HARMFUL to prospects for GROWTH too.
SAVERS want to make a PROFIT on their savings, so they need higher interest rates to encourage them to put their money into banks.
BANKS – and this is going to be unpopular – need to make a profit too. So THEY need higher interest rates both to tempt in savers AND to make money when they loan it out to businesses.
BUSINESSES need more lending, so that they can buy new machines or factories to grow their businesses and take on more workers who in turn will then have money to save.
Okay, but I'm sure you can spot the problem at once. You don't need to be a genius to work out that you DO need to be a genius to know WHERE the Goldilocks Zone IS.
A rise in interest rates will inevitably (and in fact AUTOMATICALLY) cause a rise in that measure of inflation that includes the cost of mortgages. (It's called the "RPI" if you want the technical language.)
Put up interest rates and you MIGHT stimulate growth – but you WILL stimulate inflation, which cuts into people's budgets and makes it harder for them to save or invest… which might REDUCE growth.
Worse still, an increase in the interest cost that businesses have to pay might stop them from expanding or, worst of all, mean they can't cover their other costs and put them out of business altogether!
(And you very well KNOW that just as SOON as interest rates start to go up Hard Labour will be putting on their sad puppy faces and saying how AWFUL it is that Coalition policies are making things WORSE for "hard pressed" families with mortgages and business with borrowings.
Which is a bit like someone who's just driven a TRUCK through the front of your HOUSE saying how AWFUL it is that the builders are going to have to knock down your garden wall to get it back out again.)
Sticky, isn't it. And not in a bun way.
So, you might very well ask, if low interest rates are so BAD, how come the Bank of England let them get this low in the first place?
Well, the Bank lowered interest rates during the recession in order to protect EXISTING BORROWERS. By reducing the amount that people and businesses had to spend on interest, the Bank gave them more to spend on other things, reducing the effect of higher prices and protecting jobs.
As I explained above, low interest rates DON'T help savers and they DON'T help NEW borrowers (because there's nothing for them to borrow). So it's hard to invest in new projects. But in a recession, the economy is shrinking and defending what you have is prioritised over starting new stuff.
You DO have to start investing in new stuff EVENTUALLY. (Real investment, I mean: people starting or growing businesses; not Hard Labour's idea of more public spending.) But WHEN you start investing is a whole 'nother sticky bun!
Anyway, when dead low interest rates didn't look like working, the Bank went one step further and started printing money, so-called Quantum of Easing, which meant that there was more actual money washing about in the economy.
The low interest rates contained the problem of the huge debts that Hard Labour had run up; printing money allowed them to go on spending like there was no tomorrow. And as it happened, for Mr Frown's government there WAS no tomorrow.
One way of looking at this is to say that the extra money soaked up the effects of inflation, allowing the economy to keep going through the downturn.
But the flip side is to suggest that the extra money actually CAUSED the inflation because it meant that prices COULD rise, stuff could cost MORE, even though there was LESS economic activity because of the recession.
Monetarists will tell you that if there is more money about and the same amount of stuff to buy, then the price of the stuff will go up to match the available money. If you believe that – and I'm not entirely sure that I do – then RAISING interest rates will REDUCE the amount of money in the economy and so reduce inflation.
What I do believe is that by printing money we have undermined the value of the POUND. Printing new pound notes does NOT magically create new VALUE out of nowhere. It takes the EXISTING value and just spreads it out a bit more thinly.
So, low interest rates means there is little return for FOREIGN investors to put their money into Great Britain, and printing money means that they think (correctly) that our pounds are now worth LESS than they used to be. So our pounds can buy less of their goods.
In other words, the pound goes DOWN and imports become MORE EXPENSIVE, which is INFLATION.
Raising the interest rates – and, possibly even more importantly, starting to reverse the Quantitative Easing – will strengthen the pound and ease the inflationary pressures of higher import costs.
I only say EASE, not ELIMINATE, because there are GENUINE reasons beyond the weakness of the currency that mean imports are getting more expensive. And will KEEP ON getting more expensive.
In fact, looking back I see that I already wrote a diary about this… back in 2007!
Yes, it is a bit SCARY to think that the economic crisis has been going on for MORE THAN THREE YEARS!
And those forces have not gone away. The pressures on food and energy resources will continue to grow as China and India and Brazil and all the others continue to expand their economies and populations.
In spite of this, it has been clear for quite a while – from signs like the weak pound and the rising inflation rate – that interest rates are definitely too LOW at the moment. A carefully planned and MODERATE increase (or rather a gentle series of cautious increases) might provide some comfort to savers and maybe, just maybe, do better than Project Merlin in convincing the banks to start lending again.
.
This week, we learned that the headline rate of inflation is 4% (with the rate including mortgage costs an even higher 5.1%) and we were warned that higher interest rates are on the way, pinching our purses even tighter.
For lots of people, particularly those on public sector pay freezes, this is VERY BAD NEWS. Inflation turns a pay FREEZE into a pay CUT: you get the same money, but it doesn't go as far. In fact, inflation does this even if you do have a pay rise.
So why risk the EXTRA pain of higher mortgage repayments now?
Well, for starters, interest rates are like exoplanets – you really want to find them in the GOLDILOCKS ZONE.
(No, that's NOT like Dr Woo's "Medusa Cascade"; it means not too hot and not too cold but just right.)
It's fairly obvious what the problems are if your interest rates are too HOT or rather too high: anyone with any borrowing – which is most businesses, on top of everyone one who bought a house using a mortgage – they get squished flat under the cost of repayments.
If all your money is going in interest repayments then you have no extra cash to put into savings or to employ new workers.
So, HIGH interest rates are HARMFUL to prospects for GROWTH.
BUT, there are problems if your interest rates are too LOW as well.
Although it is much cheaper for businesses to borrow, it's much harder to find anyone to borrow FROM, because almost no one wants to lend money when the rate they'll get back is so low.
Think about this as a SAVER: people who have money in the bank are seeing it LOSE value at the moment because the interest rate is LESS than the inflation rate.
If I had £100 today, I could buy £100 worth of sticky buns with it. But put it in the bank and in a year I might have £100 and 50p, but to buy the same number of sticky buns would cost me £104!
Or to put it another way: I could buy sticky buns today for £96.63; in a year's time those buns will cost £96.63 PLUS £96.63 x 4% inflation, which is £96.63 PLUS £3.87 or £100.50, which is what I get from putting my imaginary £100 in a bank.
So what we call the "REAL" value of putting £100 in the bank is that it LOSES £3.37 (or 3.37%) in value!
(Of course real savers can get better interest than the ½% base rate, but it makes the point.)
So for starters, very low interest rates discourage saving, which is a bad thing anyway. But more than that, they mean banks have no reason lend money out, even if there were any savers putting it in, which perpetuates the CREDIT CRUNCH.
So, LOW interest rates are actually HARMFUL to prospects for GROWTH too.
SAVERS want to make a PROFIT on their savings, so they need higher interest rates to encourage them to put their money into banks.
BANKS – and this is going to be unpopular – need to make a profit too. So THEY need higher interest rates both to tempt in savers AND to make money when they loan it out to businesses.
BUSINESSES need more lending, so that they can buy new machines or factories to grow their businesses and take on more workers who in turn will then have money to save.
Okay, but I'm sure you can spot the problem at once. You don't need to be a genius to work out that you DO need to be a genius to know WHERE the Goldilocks Zone IS.
A rise in interest rates will inevitably (and in fact AUTOMATICALLY) cause a rise in that measure of inflation that includes the cost of mortgages. (It's called the "RPI" if you want the technical language.)
Put up interest rates and you MIGHT stimulate growth – but you WILL stimulate inflation, which cuts into people's budgets and makes it harder for them to save or invest… which might REDUCE growth.
Worse still, an increase in the interest cost that businesses have to pay might stop them from expanding or, worst of all, mean they can't cover their other costs and put them out of business altogether!
(And you very well KNOW that just as SOON as interest rates start to go up Hard Labour will be putting on their sad puppy faces and saying how AWFUL it is that Coalition policies are making things WORSE for "hard pressed" families with mortgages and business with borrowings.
Which is a bit like someone who's just driven a TRUCK through the front of your HOUSE saying how AWFUL it is that the builders are going to have to knock down your garden wall to get it back out again.)
Sticky, isn't it. And not in a bun way.
So, you might very well ask, if low interest rates are so BAD, how come the Bank of England let them get this low in the first place?
Well, the Bank lowered interest rates during the recession in order to protect EXISTING BORROWERS. By reducing the amount that people and businesses had to spend on interest, the Bank gave them more to spend on other things, reducing the effect of higher prices and protecting jobs.
As I explained above, low interest rates DON'T help savers and they DON'T help NEW borrowers (because there's nothing for them to borrow). So it's hard to invest in new projects. But in a recession, the economy is shrinking and defending what you have is prioritised over starting new stuff.
You DO have to start investing in new stuff EVENTUALLY. (Real investment, I mean: people starting or growing businesses; not Hard Labour's idea of more public spending.) But WHEN you start investing is a whole 'nother sticky bun!
Anyway, when dead low interest rates didn't look like working, the Bank went one step further and started printing money, so-called Quantum of Easing, which meant that there was more actual money washing about in the economy.
The low interest rates contained the problem of the huge debts that Hard Labour had run up; printing money allowed them to go on spending like there was no tomorrow. And as it happened, for Mr Frown's government there WAS no tomorrow.
One way of looking at this is to say that the extra money soaked up the effects of inflation, allowing the economy to keep going through the downturn.
But the flip side is to suggest that the extra money actually CAUSED the inflation because it meant that prices COULD rise, stuff could cost MORE, even though there was LESS economic activity because of the recession.
Monetarists will tell you that if there is more money about and the same amount of stuff to buy, then the price of the stuff will go up to match the available money. If you believe that – and I'm not entirely sure that I do – then RAISING interest rates will REDUCE the amount of money in the economy and so reduce inflation.
What I do believe is that by printing money we have undermined the value of the POUND. Printing new pound notes does NOT magically create new VALUE out of nowhere. It takes the EXISTING value and just spreads it out a bit more thinly.
So, low interest rates means there is little return for FOREIGN investors to put their money into Great Britain, and printing money means that they think (correctly) that our pounds are now worth LESS than they used to be. So our pounds can buy less of their goods.
In other words, the pound goes DOWN and imports become MORE EXPENSIVE, which is INFLATION.
Raising the interest rates – and, possibly even more importantly, starting to reverse the Quantitative Easing – will strengthen the pound and ease the inflationary pressures of higher import costs.
I only say EASE, not ELIMINATE, because there are GENUINE reasons beyond the weakness of the currency that mean imports are getting more expensive. And will KEEP ON getting more expensive.
In fact, looking back I see that I already wrote a diary about this… back in 2007!
Yes, it is a bit SCARY to think that the economic crisis has been going on for MORE THAN THREE YEARS!
And those forces have not gone away. The pressures on food and energy resources will continue to grow as China and India and Brazil and all the others continue to expand their economies and populations.
In spite of this, it has been clear for quite a while – from signs like the weak pound and the rising inflation rate – that interest rates are definitely too LOW at the moment. A carefully planned and MODERATE increase (or rather a gentle series of cautious increases) might provide some comfort to savers and maybe, just maybe, do better than Project Merlin in convincing the banks to start lending again.
.
Wednesday, January 09, 2008
Day 2561: Mr Frown, the Bettabuys Prime Monster
Sunday
Well, that is what he told Mr Andy Marmite:
"We can do Bettabuys Police; and we can do Bettabuys Nurses!"
"What about the Army?"
"We can do Bettabuys soldiers too!"
It's about the people working in our public services. Typically, the Prime Monster is trying to cut corners as he cuts costs, by nipping off to the made-up, lo-cost supermarket from Consternation Street!
Of course, he was BUTTERING them up with JAM tomorrow because he was also telling them that they weren't getting any jam TODAY.
Or in fact TOMORROW either under Mr Frown's new Three Year Plan plan.
Chancellor Sooty has been doing the colouring in on Mr Frown's new plan to fix public services pay rises in advance, and HE was on the The Today Programme trying to sell this as "a good thing".
Sooty's justification was that people will get: "certainty as to what the pay increase will be, not just this year, but next year and the year after".
But the thing is that fixing people's salaries like this actually increases their UN-certainty. You see, as it stands, people are ONLY uncertain about how inflation will affect the DIFFERENCE between prices and their salaries.
Costs can vary quite a bit – look at the large jumps in train fares and energy costs already this month. And on top of that there is the surge in mortgage and loan interest because of the Credit Crunch. (Which is why for most people, the relevant inflation rate is the RPI that INCLUDES interest rates, rather than the CPI, the one that Mr Frown quotes all the time, that does not.)
But they will ALSO have a pay rise which will, probably, reflect the inflation at the time. So even if prices are unexpectedly higher, there's a good chance that wages will be unexpectedly higher too.
In effect, the uncertainty about your salary CANCELS OUT some of the uncertainty about prices.
So if you FIX the salary rises in advance, then you are actually MORE uncertain, because unexpected changes in what things cost you will not be compensated for.
This is obviously similar to the problems facing people like pensioners who are on a fixed income (though of course THEY know that they will get a fixed increase of 0% each year for the next three years).
Or you could compare it to fixing your mortgage costs with a fixed rate loan.
You MIGHT think about taking out a fixed rate mortgage for a few years – but you know that that is a GAMBLE: you COULD save money if interest rates go up, but you will lose if they stay the same or go down, but then you might also think that the certainty about the payments is worth the risk of losing a bit of money on the interest. The thing is, it is YOUR gamble to take.
Here, Mr Frown is the one who is gambling – he bets that he can keep inflation DOWN – but he is expecting the public service employees to put their salaries on "32 Red" for him.
Or, to put it another way, over the last couple of years, inflation got a bit (a little bit) out of Mr Frown's preferred band. How happy would YOU be, taking him at his word that he has gotten inflation back under control and isn't going to lose it again?
Let us have a quick look at the NUMBERS.
Three years ago, January 2005, the Retail Price Index is 188.9 (compare with 2004: 183.1) and inflation is about 3.2%.
Mr Frown – who was Chancellor then (as he still is, now) – might offer you a, let us say, generous-seeming 3.3% pay rise every year for three years. (Generous when you bear in mind that TODAY he is currently only giving up a 1.9% rise for anyone he is responsible for paying.)
However, by November 2007 (the latest month for which the Office of National Statistics have figures) the RPI has increased to 209.7. That is an increase of about 14.5% in (nearly) three years, equivalent to about 4.7-and-a-half% a year each year.
As you can see, Mr Frown's hypothetical offer of 3.3% would have left you substantially worse off.
And that's just picking the figures for three years ago TODAY.
(Because it's not like Mr Frown has a record of picking the inflation figures from their lowest point in the year to base his GENEROSITY upon – ask any pensioner who got the INFAMOUS 75p rise! Ooh, look: it's Sooty!)
I may just be being a very fluffy elephant, but I am not certain that MY certainty is improved by the prospect of being a part of our Glorious Leader's plan to triple tractor production. Is yours?
Well, that is what he told Mr Andy Marmite:
"We can do Bettabuys Police; and we can do Bettabuys Nurses!"
"What about the Army?"
"We can do Bettabuys soldiers too!"
It's about the people working in our public services. Typically, the Prime Monster is trying to cut corners as he cuts costs, by nipping off to the made-up, lo-cost supermarket from Consternation Street!
Of course, he was BUTTERING them up with JAM tomorrow because he was also telling them that they weren't getting any jam TODAY.
Or in fact TOMORROW either under Mr Frown's new Three Year Plan plan.
Chancellor Sooty has been doing the colouring in on Mr Frown's new plan to fix public services pay rises in advance, and HE was on the The Today Programme trying to sell this as "a good thing".
Sooty's justification was that people will get: "certainty as to what the pay increase will be, not just this year, but next year and the year after".
But the thing is that fixing people's salaries like this actually increases their UN-certainty. You see, as it stands, people are ONLY uncertain about how inflation will affect the DIFFERENCE between prices and their salaries.
Costs can vary quite a bit – look at the large jumps in train fares and energy costs already this month. And on top of that there is the surge in mortgage and loan interest because of the Credit Crunch. (Which is why for most people, the relevant inflation rate is the RPI that INCLUDES interest rates, rather than the CPI, the one that Mr Frown quotes all the time, that does not.)
But they will ALSO have a pay rise which will, probably, reflect the inflation at the time. So even if prices are unexpectedly higher, there's a good chance that wages will be unexpectedly higher too.
In effect, the uncertainty about your salary CANCELS OUT some of the uncertainty about prices.
So if you FIX the salary rises in advance, then you are actually MORE uncertain, because unexpected changes in what things cost you will not be compensated for.
This is obviously similar to the problems facing people like pensioners who are on a fixed income (though of course THEY know that they will get a fixed increase of 0% each year for the next three years).
Or you could compare it to fixing your mortgage costs with a fixed rate loan.
You MIGHT think about taking out a fixed rate mortgage for a few years – but you know that that is a GAMBLE: you COULD save money if interest rates go up, but you will lose if they stay the same or go down, but then you might also think that the certainty about the payments is worth the risk of losing a bit of money on the interest. The thing is, it is YOUR gamble to take.
Here, Mr Frown is the one who is gambling – he bets that he can keep inflation DOWN – but he is expecting the public service employees to put their salaries on "32 Red" for him.
Or, to put it another way, over the last couple of years, inflation got a bit (a little bit) out of Mr Frown's preferred band. How happy would YOU be, taking him at his word that he has gotten inflation back under control and isn't going to lose it again?
Let us have a quick look at the NUMBERS.
Three years ago, January 2005, the Retail Price Index is 188.9 (compare with 2004: 183.1) and inflation is about 3.2%.
Mr Frown – who was Chancellor then (as he still is, now) – might offer you a, let us say, generous-seeming 3.3% pay rise every year for three years. (Generous when you bear in mind that TODAY he is currently only giving up a 1.9% rise for anyone he is responsible for paying.)
However, by November 2007 (the latest month for which the Office of National Statistics have figures) the RPI has increased to 209.7. That is an increase of about 14.5% in (nearly) three years, equivalent to about 4.7-and-a-half% a year each year.
As you can see, Mr Frown's hypothetical offer of 3.3% would have left you substantially worse off.
And that's just picking the figures for three years ago TODAY.
(Because it's not like Mr Frown has a record of picking the inflation figures from their lowest point in the year to base his GENEROSITY upon – ask any pensioner who got the INFAMOUS 75p rise! Ooh, look: it's Sooty!)
I may just be being a very fluffy elephant, but I am not certain that MY certainty is improved by the prospect of being a part of our Glorious Leader's plan to triple tractor production. Is yours?
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