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“…Worrying about inflation at this time seems like fiddling while Rome burns.”

By Andy Shaw | January 23, 2010

Originally Posted 4th February 2008

For those who have followed my comments for the last few months I have often mentioned David Blanchflower as the only person on the Bank of England’s Monetary policy committee that seems to understand and is actually even capable of looking at the economy of this country and reaching the right conclusions.

Popular thinking would say that if eight of the countries so considered greatest minds voted one way, then it is likely they are right and the sole voice saying, ‘no, the way out is this way’, obviously must be wrong. The eight I’m referring to were the ones who voted to keep rates on hold.

The problem is that the MPC have a mandate to control inflation and they are waving that and saying we are doing nothing wrong. However, to quote David from a recent Telegraph article as he hit out at the other members of the team, ‘worrying about inflation at this time seems like fiddling while Rome burns.’ A member of the MPC stepping out in this way, probably means he won’t be there for long which is, unfortunately, very unfortunate for the economy!

I couldn’t have put it better myself. Now David did take a while to reach the same conclusion that I’d reached several months before but its better to turn up to the party late than never show at all. I was silently hoping that Mervyn King was for the chop at the end of his term, but unfortunately as he’s on Gordon Browns leash that wasn’t likely to happen.

I have to admit I said a silent prayer for the British economy that they might just make David the Head of the Bank. I thought at the time, ‘It’s a long shot but it might just work.’ Well that failed as Mervyn King obviously promised to perform more tricks, like doing as he’s told and screwing up the economy just so that he keeps his job and Gordon can have more fake inflation figures. Mervyn is now the worst example of a jobsworth that I have ever seen and I really don’t think I am exaggerating here. Given the fact that this man has an extremely keen intellect, this is very worrying.

A further quote from The Telegraph:

”Acknowledging the threat of inflation, Professor Blanchflower said that nevertheless the immediate priority was to avoid following the US economy and prevent a downward spiral into recession, and added that a downturn in the US would likely lead to a fall in oil prices.

”He was in support of the decision by the US Federal Reserve last week to make an emergency rate cut and said that the Bank of England should be similarly pre-emptive.

‘”It is time for the MPC to lead, rather than follow,” he said.’

Now I’m against a rapid rate cut, and I don’t think that this is what David is saying here. I think what he is saying is exactly what I’ve been saying, that they should be lowering rates in small bites and often. And at the moment ‘often’ means monthly!

Another article comments about how the International Monetary Fund tore up its growth forecast for 2008. And it warned that damage from the credit turmoil has reached the point where governments may need to ignore the rule book and resort to radical measures. I can’t help thinking, finally the people who make the decisions are waking up to the few of us who have been screaming at them, ‘there’s an Iceberg in front!

Dominique Strauss-Kahn, the IMF’s managing director said, ‘What is clear is there will be a serious slowdown,’ and, ‘I don’t think we would get rid of the crisis with just monetary tools. A new fiscal policy is probably an accurate answer to the crisis.’ Is there any chance that Mervyn King or his owner, Gordon Brown, could try listening to this guy. Chances are not as Gordon is now fixated with just trying to come up with a way to regain his air of competence – to say that’s unlikely is at best an understatement.

I thought this next comment said what I’ve been trying to put into words for months:

“The worst blunders in modern economic history have been made by exaggerating the inflation threat. The Bank of Japan over-reacted in 1990 when inflation jumped briefly to 4pc. It proved to be a false alarm. The bank’s tight money policies compounded a downward economic spiral. The US Federal Reserve made similar errors in 1930, mistakenly believing inflation to be a lingering threat.”

Now any reference to mistakes made in 1930 worries me at this time. As even though I can make money out of times like this and plenty of it, I do not like to profit while others are suffering and at the moment that’s where we are headed full throttle.

The BoE are looking at the same or better indicators than I am and yet they are still reaching the wrong conclusions. I don’t know how they are doing this, afterall they have been taught to read them and I’ve have never been but then again I was never taught to buy property well either.

The problem is that inflation is the target, and as always it seems that hitting a target is more important than economic survival. The country has the worst budget deficit by far of all the G7 countries and at 5.6% is well over the EU’s legal limit of 3%, which of course really does leave interest rates to stand alone in the fight to protect the economy from recession. (i.e. 5.6% is nearly double – so why are the Conservative marketing department not making more of this little gem? I think at the moment their marketing department has so many awful stats to choose from that it really is spoilt for choice for what it can hang it’s hat on to win the next election. Either that or it’s just inept!)

Trouble is I get the feeling that Mervyn King and Gordon Brown will cripple the country in an attempt to hold back the tide of normal house price inflation. Maybe that’s me looking at it on too small a level, but it’s just a feeling I get. As I’ve always said they don’t understand the market, never have and never will. But that doesn’t stop people in power thinking they have the power to control the tide, as Margaret Thatcher said, ‘You can’t buck the markets.’ The trouble for them is they are fighting human nature, and human nature when faced with an insurmountable problem finds a way to deal with it on and individual basis. The property market is all about A property, not A market.

Best wishes

Andy

PS Here are the articles if you want to read them in full:

www.telegraph.co.uk/money/main.jhtml;jsessionid=54YMQALOVNU1HQFIQMFCFF4AVCBQYIV0?xml=/money/2008/01/28/bcnmpc128.xml

www.telegraph.co.uk/money/main.jhtml;jsessionid=54YMQALOVNU1HQFIQMFCFF4AVCBQYIV0?xml=/money/2008/01/29/cnmpc129.xml

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