Ben Bernanke looks in the mirror and sees Mervyn King [updated twice]

[Update at the bottom of the post]

Just a few minutes after publishing the previous post on Bernanke, Fed says they will keeping on printing, irrelevant of the economy, I realized how much what the Fed was doing reminded me of what the BoE was doing in the UK.

There are quite a few differences between the state of the two economies though, that I would like to remind:

  1. The GBP has collapsed by about 20% against the USD or the EUR from its mid-2007 levels
  2. The Credit Bubble and real estate bubble are still very much inflated, due the destructive actions of the BoE and the former UK government
  3. The new UK government has started reducing the size of its labor and spending.
But nonetheless, you will see that when the central bankers are put in a position where they have to chose between two conflicting policies, they will always go for the politically easy one: money printing. It also shows that even if Bernanke is 100% sure that he will be able to control things, there will always be a good reason for more inflation and for keeping the "stimulus" on: not enough jobs, or not enough inflation, or enough jobs and inflation, but lower forecasts for any of the two, or any other Monetarist or Keynesian nonsense.

Additionally, you will notice that:
  • The GBP collapse does not prevent price deflation in the retail market. As recently as last month, I've seen never before seen discounts in my superstores in the UK: "buy one, get two free" offers. I was quite astonished.
  • Journalists and economists, two groups of people who are living in an ivory tower, believe that governments create growth, and take a very critical approach to Cameron's government decisions to cut spending and government workforce. The message is transmitted in comments such as budget austerity measures clouds the prospects for the economy or Mervyn King is setting aside his inflation target to protect the economy from the biggest budget cuts. These comments are stated as simple truths which does not require any justifications, and and provided without any explanations. They are extremely insidious.
Here are a quotes from a few Bloomberg reports published back in August 2010.
Aug. 11 (Bloomberg) -- Bank of England Governor Mervyn King said inflation will probably slow below the bank’s target in 2012 and growth will be weaker than previously forecast, signaling the U.K. economy may need more emergency stimulus.

Inflation will be about 1.5 percent in two years, below the 2 percent goal, the central bank said in its quarterly Inflation Report today. Inflation will undershoot the target even if the bank keeps its benchmark interest rate at the current 0.5 percent, the forecasts show.
U.K. policy makers have split on the outlook for inflation even as the biggest round of budget austerity measures since World War II clouds the prospects for the economy.
“They still look more likely to loosen policy than to tighten,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “The Monetary Policy Committee continues to believe that spare capacity in the economy will pull inflation down sharply in the next couple of years.”
The Bank of England held its bond-purchase plan at 200 billion pounds ($315 billion) and kept the main rate at a record low on Aug. 5. Minutes of the June and July meetings show Andrew Sentance called for higher rates to curb inflation. His colleague David Miles has since argued that the recovery may falter and the bank should be ready to increase stimulus. The minutes of the most recent meeting will be published on Aug. 18.

“If it is necessary to respond, then we are quite prepared to do that,” said King. “It’s much too soon to say that we’re struggling to see a recovery.”

Recent data has painted a mixed picture of the U.K. economy. While a report today showed employers added jobs in the second quarter at the fastest rate since 1989, it also said that jobless claims dropped less than economists forecast in July. Measures of manufacturing, services and construction fell last month and Nationwide Building Society said today that consumer confidence dropped to the lowest in 15 months. The housing market is also showing signs of faltering.

At the same time, economic growth accelerated to 1.1 percent in the second quarter, the most in four years.

While inflation will be faster than previously forecast next year because of higher sales tax, it is “likely to fall below the target as persistent spare capacity weighs on companies’ costs and prices,” the Bank of England said. “There is a range of views among committee members” on the risks.

Aug. 5 (Bloomberg) -- Bank of England Governor Mervyn King is setting aside his inflation target to protect the economy from the biggest budget cuts since World War II.
King is tolerating faster inflation just as Prime Minister David Cameron’s push to ax the Group of 20’s largest budget deficit threatens to hurt the economic recovery. Policy maker Andrew Sentance, for now the only advocate of higher rates, counters that growth is solid enough for the bank to withdraw emergency stimulus. Inflation has exceeded the bank’s 2 percent target since December.

“King is willing to take risks with inflation,” Steven Bell, chief economist at London-based hedge fund GLC Ltd. and a former U.K. Treasury official, said in a telephone interview. “He has become the man most determined to get a decent recovery.”
The combination of persistent inflation and budget cuts has widened the debate about when to raise rates. Sentance voted for higher rates at the last two meetings and Chief Economist Spencer Dale, who favors keeping rates unchanged for now, has said the central bank must be “incredibly vigilant” on prices. On the other side of the debate, David Miles said last month that the BOE must be ready to buy more bonds to help growth.

Inflation was 3.2 percent in June and has exceeded the government’s 3 percent limit since March. King said last week the rate is likely to stay above the bank’s target “for much of next year” because of higher sales tax, though weakness in the economy then risks pushing it “significantly below” the goal.

King “sees no need to try and offset what is likely to be rather a temporary continuing overshoot,” former Bank of England policy maker Charles Goodhart said in an interview.
The danger of a renewed recession justifies a further expansion of the Bank of England’s bond-purchase plan, according to Alan Clarke, an economist at BNP Paribas in London. He provided the only forecast in the Bloomberg survey for a 25 billion-pound increase in the program today, and predicts another move of the same size in November.

Aug. 4 (Bloomberg) -- U.K. store prices of non-food items fell at the fastest monthly pace in 1 1/2 years in July as shops offered bigger discounts, the British Retail Consortium said.

The cost of goods such as clothing and furniture dropped 0.6 percent from June, the biggest decline since January 2009, the group, which represents about 80 percent of the nation’s retailers, said in an e-mailed statement today in London. The drop offset an increase in food costs, leaving the pace of overall annual price gains at 1.5 percent, unchanged from June.

The report highlights a divergence between global cost pressures and the weakness of domestic pricing power at a time when Bank of England policy makers are split on whether the economy faces bigger risks from inflation or budget cuts. Economists predict officials will keep emergency stimulus in place at their monthly policy meeting tomorrow.

“Shop prices have remained stable largely due to aggressive discounting,” Stephen Robertson, director general of the BRC, said in the statement. “It’s clear the high street is not the main source of inflation.”
The pound has declined by about a fifth on a trade-weighted basis since the start of 2007, making imports more expensive, and the government’s planned increase in value-added tax in January will automatically raise the inflation rate. Wheat jumped to a 22-month high earlier this week after the hottest July in Russia in 130 years withered crops.

U.K. annual food-price inflation accelerated to 2.5 percent in July from 1.7 percent the previous month, BRC said. On the month, food prices gained 0.9 percent, the most since January.
A U.K. index of hiring for permanent jobs fell in June to a nine-month low, KPMG LLP and the Recruitment and Employment Confederation said today in a separate report. The gauge of full-time job placements dropped to 60.2 from 60.7 in June, the groups said in the e-mailed report. A gauge of demand for temporary staff dropped to 54.3 from 57.

Nov. 16 (Bloomberg) -- Bank of England Governor Mervyn King said the risks of inflation slowing below the central bank’s 2 percent goal in two years is “significant” and policy makers can increase stimulus if necessary.

“As we see things at present, there are significant risks to inflation undershooting the target,” King told lawmakers in London today. “At present, the committee would feel that given what is happening to broad money growth, given what is happening in the labor market, given what is happening to the amount of spare capacity in the economy, all of those things make us feel that in the medium term inflation will come down.”

Inflation unexpectedly accelerated in October, forcing King to write to the Treasury explaining how he will bring it back under the government’s 3 percent limit to the goal. Officials have split three ways on whether to raise interest rates to curb consumer prices or add stimulus to aid the economic recovery.

“We could do further quantitative easing if that turned out to be necessary,” King said. “We have a difficult balancing act,” and if the bank’s judgment is wrong, then “we will find ourselves in the position two years from now where we will have seriously undershot the inflation target.”

Inflation accelerated because of increases in costs of gasoline and diesel, overdraft charges and mortgage arrangement fees, and computer games, the Office for National Statistics said today. The result of 3.2 percent exceeded the 3.1 percent median forecast of 28 economists in a Bloomberg News survey. On the month, prices increased by 0.3 percent.

The inflation rate has exceeded 3 percent this year in every month apart from February.[...]“Let me make it absolutely clear that we are focused entirely on the outlook for inflation,” King told lawmakers on the House of Lords Economic Affairs Committee. “On the upside, the major risk is on inflation expectations,” though “given the amount of spare capacity and the other medium term indicators I have described, there is also a risk inflation could fall below the target and that could be just as damaging.”

The governor must write to the chancellor every three months when the inflation rate deviates more than a point from the central target in either direction. King said in the letter that the inflation rate “is likely to remain elevated throughout 2011” and “might rise further” in coming months.

Nov. 17 (Bloomberg) -- Bank of England Governor Mervyn King said officials can expand economic stimulus if necessary as the risk of inflation slowing below the bank’s 2 percent goal in two years remains “significant.”
The nine-member Monetary Policy Committee this month kept its bond-purchase plan at 200 billion pounds ($320 billion) and its interest rate at a record low of 0.5 percent. In October, Andrew Sentance called for higher interest rates to combat inflation, while Adam Posen pushed for more stimulus to sustain the recovery.

“There are some differences on the committee,” King said. “I don’t think, given the scale of the shocks that we’re confronting, it’s particularly surprising or very large. When the minutes come out tomorrow you’ll see the distribution of views on the committee.”
Just a couple of hours after I made this post did this report got published on Bloomberg. It just confirms everything that I stated, and also teaches us another very important feature of the monetary policy and the Grand Experiment: inflation above the so called target is not issue, but inflation below the so called target is very dangerous. For example, it's worth printing 2 trillion dollars if inflation is at 1% below of the so called target of 2%. But, if inflation is 1% above the target, then it's not very important to do anything, because of "underlying inflation". Yet another ridiculous excuse to keep on printing, printing and printing.

Note that I do not believe this will cause further inflation, but just lead to the debt and/or currency crisis sooner, forcing into deflation the culprits.
Dec. 16 (Bloomberg) -- Bank of England policy maker Adam Posen said policy makers shouldn’t “overreact” to inflation, which may slow below 1 percent in two years.

The bank’s Monetary Policy Committee “would only make things worse by making policy looking in the rear-view mirror, trying to make up for past mistakes,” Posen said in a speech today in Billericay, England. “If we allow for even just some exchange-rate pressure upwards on prices over this period as well, underlying U.K. inflation has stayed well below target.”

U.K. inflation has exceeded the government’s 3 percent limit for nine months, and an increase in value-added tax on sales in January may add to prices in 2011. Posen said Britain’s economy still has a “large” amount of slack in the aftermath of the recession and the largest government budget squeeze since World War II will slow inflation.
Consumer prices rose 3.3 percent from a year earlier in November, the highest since May. Consumers’ inflation expectations reached a two-year high in November in a GfK NOP Ltd. survey for the Bank of England released today.
The bank’s nine-member committee kept its bond-purchase plan unchanged at 200 billion pounds ($312 billion) this month and held its benchmark interest rate at a record low of 0.5 percent. Minutes of the central bank’s Nov. 4 decision showed policy makers split three ways, with Andrew Sentance calling for higher rates to combat inflation and Posen pushing for more stimulus to sustain the recovery. The rest voted for no change.

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