mercredi 12 novembre 2008


There's an excellent, and quite scary, timeline of the American economic fiasco at marketoracle. We're still in the phoney war of the economic slump at the moment. This morning, the Bank of England warned of 'plunging inflation'. I had to read that twice. If the BoE is warning against too low inflation, what the fck is going on? The Bank's whole raison d'etre, was to control and combat inflation. That's what all the wage restraint was all about. Now, reading what the chairman of the bank says, it's pretty clear that they don't know wtf is going on, "The world has changed since August, and so we have changed our forecasts. We have seen the biggest banking crisis since the outbreak of the first world war, and arguably bigger than that." He also denied that the Bank had lost touch with reality."

Even the kindest commentator would have to query what King is doing in such an elevated position if he couldn't have foreseen "the biggest banking crisis" in 90 years, despite all the signs and warnings since 2005. His most revealing comments, though, are about future inflation projections. "There's obviously a risk that [deflation] could happen, as there's always a risk that inflation will be high or low," [?!] King said, when asked about the risk of deflation. "It's highly likely that the retail prices index will go negative next year, but that's because we cut rates this year."

Now I'm really confused. Deflation is a problem, THE problem, and deflation is a bad thing, since we read early on in the article that there "was a risk of the economy suffering deflation during the next two years." Deflation means a contraction in demand, a fall off in economic activity and rising unemployment. All the grim things that we are starting to see.

So, in the terms of the BoE's remit - which naively put, is to guide the economy as best as it can for the best of everyone...ho - retail prices will go negative this year (deflation) because "we cut rates this year." The BoE creates deflation by cutting interest rates in order to stimulate the economy and get inflation back to 2%. King says that he is willing to "to move interest rates to "whatever level is necessary" to ensure that consumer price inflation returned to the 2% target in the medium term. "It will take time to get it back there, but we will do that in the medium term." Especially since what the bank has just done will actually cause retail prices to go negative. (This was from the Guardian, so it could be a typo. . .?)

That 'whatever level is necessary' is an admission, really, that the whole BoE's policy since 1997 at least has been a facade and/or a failure. They don't know what they're doing or what's on the horizon. But, hey, Gordon Brown gave them carte blanche to do it all and help bring all this trouble down on our heads. The ruse, though, was all about keeping wages in the public sector down of course, and to restrain index linked State payments. Now, if there is a 'threat' of deflation, who is going to be doing the suffering? No prizes, of course. So when inflation is higher than the two percent limit (a fraudulent figure anyway in lots of ways) or living essentials rise quicker than wages, people have to accept it. Yet when prices fall, they may well have to accept pay cuts. It's win-win all round.

Further "Sterling has now fallen by almost a quarter against the US dollar since July. King said that the sharp fall in the value of the pound, if it continues, will be "a concern" and will have an effect on inflation."

Can we believe him here though? When interest rates are cut, the value of the home currency falls. The costs of imports go up and so, inflation rises - that's what the 'will have an effect on inflation' means. But that is a 'concern'. It's either too hot or too cold, but whatever the bath temperature is, it's not going to be perfect, the water's awful but you're going to have to get in.

So the pilots haven't a bearing or a clue as to what is even going, let alone what to do about it. They can't get their story straight but as long as the political and social parametres are all calm, they'll be alright.

As for the rest of us, is degrowth all that bad? Yes and no. Another post for those considerations.