Tuesday, September 16, 2008

A day for letters

The August inflation number came out today, and as expected, it was bad. Prices were 4.7 percent higher compared to a year earlier.

Today was also a letter writing day for Mr. King and Mr. Darling. The correspondence started with Mr. King, who had to explain why inflation had drifted away from the Government-mandated 2 percent target. He produced the usual excuses; food prices, the oil bubble and the falling exchange rate.

Mr. Darling wrote back a bland response, confirming everything that Mr. King had said in his original letter. Darling also all those nasty foreign shocks, exacerbating what would otherwise be a wonderfully managed macroeconomic environment.

This whole letter writing business is a real disappointment. Wasn't it originally conceived as a ritual humiliation for the governor of the Bank of England? Supposedly, the governor would be traumatized by experience of admitting to the whole nation that he had failed that he would try really hard to keep inflation down to just 2 percent. Instead, it turned out to be an exchange of pleasantries, where the Bank says "inflation is high, but it is not our fault", to which the Chancellor replies "we know it is high, and we know it is not your fault".

We need a stronger incentive mechanism in place. Perhaps, we should link Mr. King's salary directly to the inflation. If it hits 2 percent for a year, he gets a bonus; if it is between 2-3 percent, he receives his basic salary; if it is between 3-4 percent, he gets his pay reduced; and if it is over 4 percent, he gets fired.

If we had this scheme in place, what do you think the inflation rate would be?


  1. And is RPI even higher?

  2. It is 4.8 I believe, with the RPI-X being well above 5 percent.

  3. Dear Alice,

    Here you have a very good article about the US economy(HAVE FUN READING IT!!):


    The collapse is devastating ever wider layers of the population, including those who have worked on Wall Street and received some of the financial benefits of the speculative boom. Some 26,000 Lehman employees are not only out of a job, with few prospects of finding similar employment elsewhere, but as owners of 25 percent of the company’s stock they have lost a combined $10 billion, wiping out their savings and retirement funds.

    Tens of thousands of employees at Merrill Lynch and Bank of America will lose their jobs in the merger of the two firms, adding to the 110,000 jobs slashed in the US financial services industry over the past year.

    The broader implications of the mounting financial crisis were signaled by Hewlett-Packard’s announcement Monday that it was cutting 25,000 jobs.


  4. Rambo,

    I can't keep up with all this misery. Once, this blog was a lonely voice, warning that the UK housing bubble would unwind. Now it is just one voice among millions.

    I will put the article in the bubble wrap.


  5. I don't think that linking Mervyn's salary to his performance would help much... this year, already, he has turned down a significant pay rise to which he was entitled because he considered it inappropriate in light of the economic situation. In my view, the problem is not the BoE, but the unreasonable targets they've been legally required to pursue since so-called "independence"... and the wilful negligence and/or corruption within the FSA - bolstered by ineptitude/corruption within the treasury.

    I think the letter writing is funny... but if you read between the lines, Mervyn tells you quite a lot. The fact that the replies are so tame speaks volumes... Darling (like the whole Labour party) would love to find someone to blame... but it is hard to blame a 3rd party for your own misdeeds - especially when they're brighter than you are.

    The problem, as I see it, is that raising interest rates would not solve the CPI problem... because it would likely provoke profit-driven Euro denominated banks to further predatory lending. Paradoxically, lowering the Sterling rate to below the Euro rate might have the desired effect... though, in my view, our import prices would suffer less if the ECB raised rates instead.

    8% CPI, it seems, is now plausible.

  6. asteve,

    fair point; I forgot about King's decision to forego a pay increase.


  7. inflation will at least kill the debt problem. We are faced with a likely depression environment now. Money supply is drying up in the market to cover debt, no matter how much is being injected by the central banks it seems.

    Raising rates would attract more capital to help the banks, but also would finish off the consumers who drive 70% of GDP.

    Not really a nice choice.

  8. King has done as well as anyone could expect. Hopefully you'll be coming round to the deflation camp soon and he'll soon be vindicated for his stance. I notice you are now using the term "oil bubble".


  9. Rambo,

    Very true that many blue chips are now downsizing. Just like the dot com bubble.

    ST-Micro-electronics cutting 10%, NXP cutting 15%, etc. European workers have become too expensive and the Euro is now too strong against the dollar. All these factors are working against hi-tech companies and forcing them to now operate in places like India/China.

    So not only do we have rising unemployment, rising living costs, a falling stock/housing market and a stupid government already billions in debt!

    But it's not all doom so long as you did not over indulge yourself during the good times and have saved for the bad times which not many people it seems thought would ever happen.


  10. Deutsche Bank cut all contractor salaries by 10% a month ago, according to an IT contractor friend I have there.