Consumer prices are rising at the fastest rate in more than a decade, an issue that should sound alarm bells at No.10. While Bank of England Governor Andrew Bailey confidently assures us that the rise is “transient,” the spike in prices – which is manifesting itself globally – is not something the Bank had. predicted. If the trend persists or accelerates (both seem likely), the economic challenge for those with the lowest incomes will become extreme. Indeed, an inflationary economy would likely defeat the government’s ârace to the topâ program.
Whether or not the consumer price gains are transitory, the existing monetary policy framework in the UK virtually guarantees a long-term inflationary outcome and requires urgent reform. The Bank, without any constraints on its balance sheet, has used quantitative easing (‘QE’) so aggressively since the 2008 global financial crisis that it has been called “dangerous addictionBy a recent Lords Inquiry. The pound sterling in our pockets is deteriorating at an alarming rate, and as the record rate of depreciation continues, latent inflationary pressure continues to grow. Since the Bank gained independence in 1998, broad money growth has been allowed to exceed consumer price growth by more than 200%. Prices have a lot of catching up to do.
“Transient” is what QE should have been. When huge cash injections were introduced in 2009 in a panic reaction to the collapsing banking system, the intention was to withdraw the money once the big banks had stabilized. However, the lesson of printing money in history is that once it starts, it is so much easier to continue than to stop; predictably, therefore, in a classic “creeping mission”, the Bank extended quantitative easing well beyond the stabilization period. In addition, over the following years, QE evolved into a “persistent part of the monetary policy toolbox(The Bank’s own words) to be used whenever the Bank is concerned that it will not meet its fixed target of 2% CPI. The Bank’s QE tally to date has now reached Â£ 845 billion, exceeding the original program by a factor of almost twelve.
Most of the other major central banks have also adopted quantitative easing as a basic monetary policy instrument over the past decade, in an attempt to prevent the fall in prices, which they have an unreasonable aversion to. (Needless to say, lower prices are It’s okay with consumers). Central bankers are also adamant that QE supports economic growth, although the rationale is largely theoretical and the “transmission mechanism” of QE to the real economy is the subject of much debate, even in the past. central banking circles. And while injecting generous amounts of newly created money into an economy can undoubtedly have a positive impact in the short term (especially on asset prices), historical long-term monetary data has been shown to be insufficient. strongly correlated with inflation, not real growth. at all. (The longer the period, the stronger the result). More importantly, there is also ample evidence, denied by central bankers, that QE produces a number of negative side effects: financial and real estate speculation, reckless government borrowing, and deepening inequality, for example.
The truth about the central bank‘s monetary âstimulusâ is that the early impact always seems positive, so political or economic arguments against it are dismissed out of hand. But (much) later, as printed money penetrates deeper into the economy and the amount of newly printed money inevitably accelerates (as has happened recently), problems arise that become serious, intractable and undeniable – inflation, recession, strikes. and social conflicts.
The surprisingly high level of confidence of Andrew Bailey and other members of the Bank’s Monetary Policy Committee is of particular concern when asked about managing inflation. “If inflation isn’t temporary, we know what to do about itDeputy Governor Sir Dave Ramsden was quoted in an interview with The Guardian. We will see. The US Federal Reserve rocked financial markets in 2013 by simply talking about cutting QE, and no central bank has yet successfully implemented a QE reversal program (“Quantitative Tightening” or “QT”). ). The Bank of England has yet to attempt QT and furthermore, no member of the monetary policy committee, past or present, has ever voted for her! Such a program would undoubtedly be fraught with pitfalls, particularly political ones. Any meaningful monetary squeeze would likely trigger a sharp reversal of the artificial prosperity that has built up as a result of the massive artificial monetary stimulus of recent years. Who in Westminster has the stomach for this?
The Bank is therefore now on a treadmill. Withdraw QE, financial assets plunge, investment and corporate profits fall, recession and unemployment ensue. Print more, financial assets and business activity become even further removed from reality as inflation subsides. There is no easy path, but the harsh reality in the UK today is that the appetite for economic pain is so limited that the Bank can only really follow one path – that of repeated episodes. quantitative easing. The only transitory thing in this inflationary scenario may be the ruling party.
The solution must involve changes in economic thinking but also, crucially, a change in the British monetary policy regime. The Bank’s balance sheet must be constrained, thus removing its most overused âtoolâ, QE. The government should rewrite the Bank of England Act 1998, replacing the inflexible 2% CPI target (which was the rationale for a round after round of quantitative easing) with a new target: healthy money – that is to say, protect the real purchasing power of the pound from one generation to the next. If debasement is reduced, so too will the possibility of runaway inflation that impoverishes a large part of the population.