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Yet another example of this government attempting to buy its way out of the gargantuan hole that they have dug themselves through their callous management and extremely poor foresight.

Gordon Brown has built his reputation on tax and spend policies, it is all that he knows. His answer to crisis is to buy his way out of it. He has done this with the £50billion bank bail out, and is doing it again now with the 10% tax debacle.

Our leader is one dimensional, and is not capable of leading the country through this crisis, but cannot bring himself to do the one thing that will alleviate strain on voters, CUT TAXES...

Reduce fuel duty
Increase the threshold for stamp duty
Increase the 3% threshold for stamp duty
Reduce VAT to 15%
VAT was originally for luxury or nonessential items, what happened to that?

These are the types of actions that I would like to see, as they will make a real difference.

Borrowing money to provide a tax cut is not going to help anyone in the long run. I doubt it will even help Labour in the short-term either.

The fact is that we need a recession in order to put things back to where they were before the bubble, and in preparation for the next boom and bust cycle.

The bad debt has to be written off, house prices and equities have to fall, and jobs have to be lost. This will mean real hardship for people, but there is no avoiding it.

The most useful thing the government can do is to avoid hyperinflation occurring, stimulate manufacturing, and reduce public expenditure.

Brown and Darling seem to be only interested in denying the true state of affairs, and attempting to delay the onset of the inevitable. The sooner they are out of office the better.

Any information from the Tories as to how they would have compensated these so called loosers?
Any information from the Tories as to whether they would have brought the 22% back?
Any information as to whether the Tories would have reinstated the 10%?
Last but not least, any information you might have from the Tories where the money was going to come from?
Very anxious to know Robert. Have a nice day.

Robert,
One thing I'm confused about is that if the 20% threshold has gone up by £600, and the 40% threshold has come down £600 - doesn't that mean that all people currently earning 600 or more over the 40% threshold will now be paying an additional £120 in tax. Ie they gain £120 from the lower rate but pay an additional £240 at the higher rate. I would be interested to know how many people this affects and whether this would partially offset the overall cost. What do you think?
Thanks.

Now that Brown and Darling have done what they criticise the Tories for suggesting - an unfunded tax cut, this must ultimately play in to the Tories hands.

Tax cutting is back on the agenda and the Tories should use the opportunity to put out some clear policies in this area, for no longer will they have to fear Brown and Darling trying to play the 'un-funded' tax pledge card every time they suggest something.

So we are told that interest rate cuts by the Bank of England are now off the agenda because of run away inflation.

And on the very same day, we are told by Brown's Government that the economy is slowing and we are to have a significant fiscal stimulus funded by debt.

Apart from the fact that I don't remember asking to be hocked up to the eyeballs by someone else - the monetary and fiscal policies now seem to be working in direct contradiction to each other.

One can only imagine the tensions now between the Bank of England and Brown's government.

To comment #4 by Vicnbob. Good point.

But I think you'll find that it is all people who earn from £600 less than the current higher rate tax threshhold and above will pay an additional 20% on up to £600 of their earnings.

i.e. an extra £120 per year for all current higher rate tax payers

Note this affects basic rate tax payers who earn less than £600 below the current higher rate threshhold as well.

Funny how these points were not made clear.

From 1997 to 2003, the MPC inflation target was 2.5% RPIX.

RPIX is more tailored to the expenditure patterns of the UK than the EU-defined one-size-fits-all CPI (formerly known as HICP).

RPIX is currently running at 4%

Be afraid, be very afraid . . . . .

OK, that's the mini-budget out of the way; now the Governement can't say they are prudent or they don't borrow to fund current expenditure any more. This may buy the Government the Crewe by-election, but at what a price?

Robert, the story will now surely turn to inflation.

The lies we have been told about inflation and the CPI are now coming home to roost. For lower income taxpayers and pensioners who don't buy iPods and HDD TVs every week real inflation has been at least 5% pa over the last few years - Council Tax, fuel, housing costs, food etc.

I think we can forget any interest rate cut for at least 3 months, probably for the rest of this year. And don't the MPC have to write explaining why even the massaged official inflation rate is now 3%?

Let me get this right?

The capitalist economies have financial difficulties because private banks borrowed billions of dollars and pounds to give to people unable to pay back. This is now being solved by US and UK governments borrowing billions of dollars and pounds to pay to people who won't need to pay back.

Sound easy. The whole world could get rich this way.

It might work but for two economic facts of life: - INFLATION and DEVALUATION.

Both now well in evidence.

#2, wykhamist

As usual, good sense, but I cannot agree with your conclusion.

The Tories really seem to have been doing some capacity building during their outcast years, yet they still need more time. Capacity building has been the right move at the right time. It will be sorely needed in a couple of years.

Their forwards are starting to mesh, while the range and depth of their back line is also looking impressive.

Cameron is learning to dance, or jump, should I say, to the appropriate height for the electorate. Give him some time, because he will need to become consummate by the time he hits office.

We need at least two years for this lot to take the bulk of the flak from the problems in the economy, as these surface in droves over the next few months. I absolutely agree with your policy views. Avoid hyperinflation, stimulate manufacturing and reduce public expenditure. For the rest of it, we, and the policy-makers who blather on, will be as helpless as a bobbing cork in a raging storm.

But I look at the greying faces of the politicians in power, as they duck, dive and squirm, and hold thumbs that they do not do too much damage on the way down and out.

How long before be get the pound in your pocket speech?

IT's interesting to note that the aspects of Inflation causing the trouble: the Oil Price and Prices of wheat and rice etc.

Cannot actually be controlled by UK interest rates.

These Prices pushing up global inflation are beyond any Governments control (Labour or Conservative or other).

But they are only a part of the Inflation statistic.

Other goods aren't necessarily rising in price any where near as much.

The best policy any Government could follow is one that helps in the Wealth creation process within their own economy ie manufacturing etc.

More Manufactured goods or other exports will help cushion any Global Price rises in Commodities...........

Unfortunately, much of our manufacturing is done abroad (a mistake long term).

It's a two edged sword. If inflation and interest rates are high, then surely the pound is less likely to slide against other currencies. I'd prefer interest rates to be kept high so inflation isn't a bad thing for me.

I don’t know about anyone else, but having heard the Government's solution to this issue, I am left bemused - not by its cynicism, but pure lack of logic.

The object of the exercise yesterday was presumably to reinstate the ratios between tax paid by those who lost out when the 10p rate was abandoned and those who gained when their taxes were lowered from 22p to 20p.

As far as I can see, this is just another (and very costly to all of us) kick in the teeth to the lower paid: yes, the Government has made up the previous deficit for the lower paid, BUT in so doing they have created a new one by giving exactly the same amount of cash to the standard rate tax payers.

It seems to me, therefore, that the lower rate payers are at almost exactly the same disadvantage to everyone else as they were before the Chancellor's announcement. What was the point of the exercise? It has simply cost the country £2.7 billion that we can ill afford.

Tax needn't be taxing! Look forward to a way of raising revenues using National Insurance contributions and pensions set out in the National Insurance Contributions Bill 2007.

Isn't the government making a huge windfall tax as a result of the huge increase in car fuel costs? This must dwarf the extra cost of funding the 10p tax band abolition?

Gifted Gordon Strikes Again!

Those guys need urgently to start thinking about initiatives to help Britain produce money, I mean income from export, not just burning OUR (!) hard-earned fiscal revenue on, what is it this time? Ah, schools, hospitals, public services - again!

If this extra £120 a year is to help people pay for the increase in food and fuel prices, then presumably the government will be extending the same gesture to those on state pensions?

This pig's ear of a compromise wont do...

1.1 million low paid will not benefit at all.

For those that do, the £120 being offered is just under half that which is being lost.

There is no guarantee that these measures will be carried over into future years.

And remember folks those are amoungst the lowest paid in our society.

Frank Field and the other Labour MPs seem happy ... I would guess that 5.3 million low paid workers will still not be... they shouldn't be ....I'm one of them and I am definitely not H.A.P.P.Y!

Frank Field conned again.

You are absolutely right. If there was any doubt as to whether it's going to be inflation or deflation, now we know.

And borrowing to fund tax cuts

Brown has completely lost his grip.

The analogy of 'stormy weather' is a good one but I fear we are talking more about the 'Perfect Storm', (in the worst sense), in respect of global events, both within the global economy with spiralling food prices and in commodities markets where oil, to name but one, is ascending faster in price than the last shuttle mission.
It feels to me that with respect to being able to coherently manage our national economy against such a backdrop, all bets are off. UK plc, as a long-standing player in the global economy, cannot hope to escape the global economys current nasty dose of lurgy! The world economy, as compared to recent years is acutely ill. But acute conditions can become hyper-acute, chronic or simply resolve. Which would you bet on?

Robert,

Set aside the statistics of 3%, it is a joke, for the average family of four it is more like 10% and likely to rise as fuel prices work thru.

Why is there no discussion of a Wilson and Callaghan styled Prices and Incomes policy ?

Employers and government departments are screaming increased labour and materials costs and Mr Family4 is hurting badly as inflation gathers pace.

Anyone with half a brain knows the cycle has gone too far this time round and in this serious global downturn the effect of a UK Prices and Incomes policy will be minimal. But as a political gesture from a doomed government, (with a brand name speciality in alleged economic success), don't rule out the prospect of an ideas marketing exercise being pushed out by Brown's favorite acedemics.

Modern political history tells us that in desperate times desperate politicians will do anything to pump up their oversized egos, and for example, this shower of incompetents will be promulgating their 12 years of office as the 'golden age' of UK economic policy in 20 years times.

Going to war was on the agenda years ago in this situation, but we are already in two wars with no identifyable gain line, so that's out.

Mr Paxman's easy- easy slaughtering of the incompetent Mr Darling on Newsnight gives me fears that the worst is a long time away.

Is not this Government the worse cause of inflation, they are blaming the cost of fuel for too many things, yes I agree that fuel has gone up in price, but in real terms fuel is still cheap, its the tax and vat this government put on the cost that creates high prices. All transportation requires fuel, food, goods to and from factories, transportation of exports, almost everything. When the cost of the fuel goes up then so does the ultra high tax and VAT, in fact it amounts to tax on tax VAT on VAT. so there is a way of reducing the costs, on food and essentials and this goverment can do something about it. (Apart from resigning of course). It may be we are so deep in the mire that this is a guaranteed income for this government that will go towards everything excluding road building, mind you thats what road tax is for isn't it another cause of rising prices for the same reason as fuel. Neither of the above items are green related they are just money making, nflation busting,guaranteed gimmiky ways of taxing the life out of people. So when it comes to rising fuel costs I see it as no excuse for inflation, its just covering up the high taxes imposed by this Government. Why does Diesel cost more than petrol when it is not refined to the same degree, answer, drivers do more miles to the gallon so do not require so much, and haulage companies use horrendous amounts, see what I am getting at?

I have to echo the comments in #11 and take issue with the last line of #2.

The last thing we need right now is a general election. A steady stream of Gordon Brown's chickens are coming home to roost and there are several reasons why it is best that he be Prime Minister while this happens.

Most obviously it is just fair. He created this mess (Excessive Government borrowing, excessive personal debt, the vast balance of trade deficit, tax and waste, concealing inflation ... good grief, where does it end?) so it is only fair that he should stand there and take the blame.

We also don't want a newly elected (and potentially competent) government tainted by association with the unfolding of the Brown economic slump. It is much better to let him appear to be in charge while the worst of it happens.

On a more practical note, I suspect that the recent local elections are not quite as positive as they appear. Many people probably took the opportunity to poke the government with a sharp stick but still secretly cling to the idea that if only Gordon would buck up we could get back to rising house prices, personal debt that never has to be re-paid and government hand-outs financed by yet more borrowing or tax rises for someone else. People who think like that will need another year or two with Gordon in charge to have some realism beaten into them.

Finally, as others have pointed out, the Conservative party is not obviously any great improvement. Another year or two will give them time to face up to the reality of what needs to be done, and perhaps more importantly, the electorate time to face that too.

My feeling is that Gordon should follow his natural instincts and cling to office until the last possible second, while the rest of us enjoy the spectacle of Gordon-as-political-punch-bag. Ironically, in the long term, his selfish obsession with clinging to office may be in the best long term interests of the country - albeit not in quite the way he would fantasise.

That forthcoming Queen's Speech in full: *

'You went out and LOST ME MONEY! You're FIRED!'


* well, probably...

My own impression is much less that this is a reaction to a downturn in the economy but the knee-jerk reaction to the realisation that the treasury has made a huge and awful gaffe.
The essential deal is that Brown and Darling arranged for the poor to pay more tax and the better paid to pay less tax.
At BEST this is complete incompetence and at WORST it's a complete disregard for the Labour Party's principles and for the needs of the poorer people in the community. Either way it's a major blunder.
This piffle about it being a generous helping hand for the people who need it in the current financial turmoil is just so much shash. It's nothing to do with being generous or panicking and turning in the wind.
It's more like a ram-raid on the poor and reversing out saying "well at least you'll get a new window, that draft was terrible!"
More metaphors:
HUGE own goal
Shot selves in foot, try the head next time

Post #2 - If the Tories had suggested borrowing money Labour would have accused them of wreckless borrowing.
It should be pointed out that under this scheme those earning over £6035 and under £10000 are still worse off. And yet the Labour backbenches don't seem to have picked up on this.
Darling will have to claw back this £2.7 billion, most likely by not raising next years tax threshold by as much as inflation meaning we all lose out as well as through other measures.
The government can't afford to give us tax breaks by borrowing money in the long run.

There's also another little cloud on the horizon - China's earthquake. Sooner or later the rebuilding will begin in earnest and China's already voracious appetite for concrete, steel and oil is going to massively increase.

The prices of these commodities (along with copper, zinc, plastics etc) is going to go up through the roof.

Once upon a time there was a nice man called Denis Healey who became Chancellor of the Exchequer in difficult times and had a tough experience. He expounded a Theory of Holes: namely. when in one, stop digging.

Now we have another Chancellor trying to manage an economy that has not been well managed by his predecessor.

One could say that Mr.Darling has pulled his party out of a nasty hole by stopping the excavation of the 10p tax. But by doing so he has immediately dug another hole that suggests fiscal imprudence on a large scale.

Perhaps we are going to have to redefine the Healey Theory of Holes in the light of the Darling experience so that it means when in one hole go and dig another and another and another.

It's interesting at PM question time (and usually at any other opportunity he gets) that Brown does his best to 'remind' everyone of the time when interest rates were 15% (only for 1 day if I remember correctly) under the Tories.
Somehow, 15 years or so later, it doesn't have the same (or much) impact and shows, after 11 years, how little NuLab have to crow about.

On the point about inflation, it looks likely that we're heading for the worst of all options - stagflation. This dogged the Japanesse economy for most of the 90's and could do a lot of damage here.

The issue also underlines that the BofE is not truely independant but instead has only interest rates at its disposal for meeting economic demands. Maybe the BofE should also be responsible for setting inflation rate targets, with the govenment setting growth targets, then it could balance the needs of the economy easier at times like this.

I agree with a lot of what's been said above. We definitely need lower taxes and raising tax thresholds is probably one of the best things to do; take lots of people out of the tax system altogether. The present tax system is ridiculously overcomplicated and Gordon Brown is responsible for a lot of that; the whole tax credit system could and should be scrapped. Instead increase tax allowances and lower direct and indirect taxes. Pension credits, winter fuel allowances etc are just so much waffle or are they ways of keeping unemployment down as there are whole government departments devoted to them?

It has been said that the average worker works until May or June to pay their tax bill ie approx one third of the average pay goes in taxes each year. This is just too much and especially when so much of that money is wasted by government departments. As a proportion of their pay, the poor pay much more than their fair share in tax at the moment.

By the way, it looks as if the wider effects of the credit crunch are beginning to feed into the wider economy with the unemployment figures starting to rise.

Several points:

UK Interest Rates will be unable to remain significantly above the USA's for any length of time. USA about 2% now?

The Bank of England has absolutely no influence over the Global Commodity markets.

Overseas investors confidence will continue to fall whilst negative stories are wall to wall in the media. Bad for jobs, no matter what interest rate is on offer.

UK standards of living WILL become far far worse for everyone.

Every imported item will become much more expensive.

The current situation would be bad whoever was in power be they labour, conservative or communist.

Three of those parties would be quite happy to squeeze the poor as much as needed.

Based on previous history.

Mr. King talks of a difficult balancing act between the economy and inflation.
I thought that the BoE only had one priority and that was inflation.
In fact, this has been a point that the Government has been crowing on about - that control of interest rates is down to the BoE and not them.

Somebody is telling porkies.

I remember hearing the following phrase a lot a few years ago - intoned in a joyless Scots brogue accent. "Noo return tae boom and bust!"

Does anyone else remember this? I think it might be extinct, possibly as a result of global warming.

To posts #4 and #7, Brown (sorry, I mean Darling) has actually reduced the basic-rate limit by twice the £600, ie £1,200.
If the basic-rate limit had been left unchanged, then higher-rate taxpayers would have saved £240 since their marginal rate of tax is 40% and the personal allowance change removes £600 of income from tax.
If the basic-rate limit had been reduced by just the £600, then higher-rate taxpayers would have saved £120 as the amount of their income falling into the higher-rate band would have been unchanged and they would have benefited from the same reduction in income subject to basic-rate as everyone else.
Having decided that he didn't want higher-rate taxpayers to benefit at all, Darling had to reduce the basic-rate limit further. When you do the maths you discover that it has to be reduced by £600 x HR / (HR-BR), where HR=40% and BR=20%. So you get the factor of 2.
One consequence is that not all basic-rate taxpayers will receive the £120, as those currently in the top £600 of the band will receive less.
Another nasty little side-effect is to increase further the proportion of taxpayers in the higher-rate band. It may not matter this year in terms of total tax paid, but next year may be a different story …

If inflation is the question then interest rates are the answer! No if and no buts. The Bank is charged exclusively with controlling inflation - and nothing else (in written exchanges with the BoE over the years I have had this mantra repeated again and again.)

The BoE has no other mechanism other than interest rates, but as so many of the previous contributors rightly point out the inflation is not just home grown! Interesting times!

OK, just to comment quickly on yetserday's actions by Ali D: having finally admitted that it was a mistake to scrap the 10p tax rate, rather than take the obvious course and re-introduce it, they compound the problem with a botch-job fix. Presumably they considered this would be politically advantageous becase so many of the electorate would benefit while also placating their rebelling backbenchers, but they would have achieved much greater kudos if they had simply reversed their previous wrong decision. But, alas, our Great Leader's psychological flaws seem to have prevented this.


So, to move on to the real issue: inflation. I've been warning that inflation was going to be the biggest long term economic problem since last year, but everyone still insisted on focusing on house prices and economic growth. There is an inherent problem in using CPI as the yardstick because it does not contain a property element. What is needed is the inclusion of PROPERTY PRICES (not mortgage payments or rental payments) in the inflation measure - if they had been included we would not have seen the rampant property price inflation of the last 10 years because interest rates would have been raised more quickly. And it was inflation. And ALL inflation IS BAD. But there you go.

So, what to do about the inflationary environment? Some claim that it cannot be combatted, that the cause of the inflation is global in nature. By that argument, the Bank of England cannot protect the value of our currency. This is not true. The inflation we are witnessing is in US dollar-priced commodities. Therefore, these inflationary effects can be mitigated by a strengthening Sterling. And how do you strengthen a currency? BY raising interest rates. We are having to compete for everything with huge developing population bases (China and India), and our only real weapon is a strong currency (or a considerable reduction in consumption).

And then there are those on the MPC who are trying to stimulate the property and mortgage markets by LOWERING interest rates. This will not work. The reason that money markets are stagnant (and hence we have a mortgage drought) is because it is not possible to get a decent rate of return - why bother risking your capital for a measly 5% return? The US sub-prime debacle has served as an excellent object lesson in this respect. Better to keep hold of the cash rather than lose all of it, even if that means some devaluation due to inflation! If interest rates were higher, funds would become available as the return became more attractive to the lenders (inclusing savers). And the Chancellor bemoans the fact that mortgage rates aren't coming down - how can they? The BofE is lowering the base rate, so institutions are making losses from the lower returns on the huge amounts of existing mortages which are linked to the base rate. The result? They have to charge MORE for NEW mortgages to offset the losses from the existing ones...

The MPC has a duty to protect the value of our currency by controlling inflation. They are and have been failing to do so, excusing their malfeasance by betting the farm on a slowing economy lowering inflation. This will not happen: Sterling will continue to weaken, which will only exacerbate the inflationary problem. The market knows where real interest rates should be, and it's time the MPC emerged from their state of denial. This will of course have a major impact, but a short, sharp recession and a housing market crash are far preferable to a decade or two of stagflation. These are the sacrifices that must be made.

I largely agree with YummyCarolKirkwood (post 38).

Partly as a result of increase in commodity prices and partly resulting from increasing prices from China (see below) the main causes of inflation are linked to the US dollar. To keep inflation out we need to strengthen the currency. That means higher interest rates. It will hurt people with variable rate mortgages and so won't happen for political reasons, but needs to. Once inflation takes hold it proves very difficult to shift.

While high commodity prices may not last, especially if they are speculator driven, increasing costs of manufactured goods from China are with us for sometime - even if raw material costs fall. The Treasury, MPC and Bof E are hopefully studying current Chinese economics as these do effect inflation here. In particular they need to note that China is coming to the end of its supply of cheap labour that is prepared to work in sweatshops and shadow factories for next to nothing so wage pressure is upwards.

The Chinese government has noticed that the drift of 15 to 25 year olds from the land to the factories in the mega cities of coastal China is drying up and have been trying to move the factories inland to where the people are. Its having limited success and inland wages are rising too.

Anyone who has been visiting Southern China regularly for the last 5 years may have noticed the growth of 'hiring labour' boards outside factories recently. Factories that do not improve wages and conditions (i.e. increase their costs) have huge staff turnovers (20% per month plus). It all points to that 'China price' has reached the bottom and is on the way up. 'China price' is of course linked to the US Dollar. So China is, and will continue to, export inflation in US dollar terms in the same way it has been exporting deflation in the last 5 years.

Unfortunately rising costs in China does not give us the opportunity to rebuild manufacturing here, as Chinese costs are still only 5 to 10% of UK ones.

I'm not sure about the real risk of inflation.

It seems to me that, yes, we have a temporary rise but more on the back of speculative flows of money from the banks into commodities and oil. (Nicely provided by the central banks!)

The credit crisis started affecting banks, and made great headlines, but for the individual citizen it has seemed like business as usual. Now it is really starting to bite for all of us. Mortgages, credit cards and other forms of personal borrowings are hurting and the spectre of negative home equity, growing unemployment and reduced disposable incomes is showing, and will continue to show, in the statistics month after month.

As the recession in North America and Europe builds there are going to be real deflationary pressures on just about everything. When the speculators dump oil and the price of crude comes back to, say, 70USD a barrel, stories of inflation will fade away. The BRIC countries can't create sufficient demand on their own to produce global price inflation.

The REAL risk is deflation, in my humble opinion. Not immediately but perhaps sooner than realised.

Is anyone else seeing Alistair Darling (and a few others for that matter) slowly morphing into a Corporal Jones-esq parodies of themselves?

I'd feel sorry for them if I weren't more concerned that these are the people supposedly tasked with taking decisions for the long term prosperity of everyone in the country.

It's becoming increasingly obvious that whilst they were fine to look after things in a period of unprecedented global calm and prosperity (but who wouldn't be?), that they are perhaps NOT the people you would want to guide you through the current rather choppy conditions and possibly stormy waters to come.

There are some very big storm clouds on the horizon.
It appears that inflation is above the 3% maximum as defined by some very poor statistical formulae that bears little relationship to what people in our society are actually experiencing.
The only tool to combat this is to reduce government spending, and to reduce demand for goods by increasing the cost of borrowing. Neither of these are very tasty little morsels. The Government is borrowing like never before, shooting its' self regulated fiscal rules in the foot and sending them from the battle front.
The Bank of England is loath to raise rates (as by any measure this action is needed) as it knows the damage this will do to the U.K economy may be worth significantly less than the pain of excessive inflation.
So, the way out of this dilemma is for the U.K to export its' way out. Since our biggest export these non-manufacturing days is financial services, it does seem odd that at a time when the financial markets are stagnant and in turmoil, our biggest earner is the only thing that can turn this around.
Seems to me the U.K economy is about to hit rock bottom, it has been re-mortgaged too many times.
If the MPC does not raise interest rates, then its' credibility is shot. It has trumpetted its rules now for some considerable time as being inflation one eyed, now is the time to be strong and allow the economy to find its' own level.
As a final point to Mr Brown, Darling, and all at the Treasury. Drop CPI and have something (more volatile I know) that actually reflects increasing costs in society and commerce. The affects of doubling of Council Tax inside 3 years (due to poor government funding), and Gas, Electricity, and Water bills doubling in the same period, are real impacts to peoples lives and society at large, these can not be offset by a one of discretionary spending item like a flat screen T.V being 50% cheaper this year than last year. When Bread and Milk increase by 20% inside a year and this is purchased daily, how does it compare to a Flat Screen T.V you might buy once in 5 years and only then when you can afford it.
If the economy is not sorted now using standard economic prinicples, then those gathering dark skies will turn into a veritable storm the likes of which we have never seen before.

Re: #40 PHandover

It seems to me that, yes, we have a temporary rise but more on the back of speculative flows of money from the banks into commodities and oil. (Nicely provided by the central banks!)

This argument is made repeatedly, but the fact remains that global demand for oil is increasing while it is becoming increasingly more difficult and expensive to produce (supply) it. We had a good couple of decades of cheap oil, during which the global economy developed based almost entirely on the ready availability of this finite resource. As that availability reduces, its cost must increase. Barring some truly miraculous technological advance, do not expect any prolonged drop in the oil price unless we see a pretty severe global recession.

(As an aside, there have been enormous increases in money supply in the US over the last decade, and fundamentally inflation is simply the natural consequence: inflation = reduction in value of currency - printing more money simply makes that money worth less!)

The BRIC countries can't create sufficient demand on their own to produce global price inflation.

Are you sure??? Don't the populations of the BRIC countries amount to in excess of A THIRD OF THE WORLD'S ENTIRE POPULATION??? Was it not just a couple of days ago that the ³ÉÈË¿ìÊÖ reported that China's domestic retail sales and inflation were both rising strongly??? (see . The development of India and especially China is a tidal wave of resource-price inflation that shows little sign of ebbing any time soon. We have not seen serious inflation in the UK for so long that we have become very blasé about it: the danger of such an attitude really cannot be overstated.

I'm going to let you into a secret. The fundamental cause of the business cycle that cannot be stopped.

The lending at interest.

Just 3% of our money is printed notes and coins. The other 97% is created when a bank makes a loan. All this money bears interest all the time once in existence.

If interest is charged, it suddenly means there are more liabilities in existence than there is money and those excess liabilities grow by a factor of the interest rate each and every year.

To counteract the possible negative effects of this, the money supply has to keep growing. Clearly, this cannot go on forever and inevitably slows. Once this happens, the problem of excess liabilities shows itself and can only be purged by default.

Ask yourself what would happen if there were no default. You can see that liabilities would grow until there was not enough money to service those liabilities. Don't blame poor lending nor poor borrowers - they are merely the weakest link where this issue becomes apparent and saves the rest of us from a similar fate.

The Jews, Muslims and Christians of old understood the issue of lending at interest because the problems it causes are much easier to see when you are dealing with small city states and their currencies. Think about it.

Worrying about inflation in the middle of an international monetary crisis is like worrying about the length of your grass whilst your house is on fire.

Comment 42 'soabboxjoe' said; "If the MPC does not raise interest rates, then its' credibility is shot. It has trumpetted its rules now for some considerable time as being inflation one eyed, now is the time to be strong and allow the economy to find its' own level."

I agree with this sentiment - the economy is re-adjusting after a period of sustained boom. Estate agents are crying out for rates to be cut for the 'good times' to return to the housing market but this is not desirable or possible. Inflation must be controlled otherwise we'll all start asking for higher pay rises, fuelling inflation and on.

House prices have risen by 200% in the last 7-8 years, a 10-20% fall is not the end of the world. Once we get back to a normalised property market where houses become homes again, pressure on lenders will recede and a more sustainable view on spending will emerge which has been at least 2 years overdue in my view

Re: #45 fireyshandy

Worrying about inflation in the middle of an international monetary crisis is like worrying about the length of your grass whilst your house is on fire.

Try telling that to the people of Zimbabwe. Or to the people of Asian countries like India, where the recent rises in the global price of rice has led to huge swathes of people simply being unable to afford to feed themselves (see www.bbc.co.uk/costoffood). INFLATION IS BAD. End of. No doubt your opinion is coloured by the fact that you haven't really experienced much of it in recent years - a global phenomenon from which practically all countries have benefitted.

Your so-called "international monetary crisis" is principally affecting America, and to lesser extents the UK and western Europe, countries which, I would suggest, are more than capable of getting through the troubles created by their own financial incompetence. I would also suggest that destroying their own currencies is not the best (or indeed any) solution to said problem.

post 8. At 09:38 am on 14 May 2008, AZLewes is absolutely correct, I would however add that it has been in excess of the target 2.5% since November 2005 and in excess of the "open letter" criteria of 3.5% since September 2006.
Had Gordon Brown not conveniently changed the goalposts the Governor would have been running out of ink.
On the basis of the RPI, inflation in the UK is higher and has been higher for the last 18 months than at any time since January 1992. This does not stop "our blessed leader" from claiming that inflation was low under Labour because he confuses RPI with CPI. I am surprised that such a basic error is made by someone who claims that he was a brilliant chancellor.
Further false claims made are that tax is lower under Labour. The wheeze is achieved by the substitution of Tax Credit for welfare benefits. The single mother now no longer receives benefit, she works for 18hrs a week (and not a minute longer) and then receives a paycheck of somewhere in excess of £400 a week made up of salary and a tax rebate. Good trick if you can get away with it Mr Brown.

The next brilliant wheeze is the government deficit. It is apparently "down" under Labour and so it should be with 15 years of growth, but should it now be in surplus? It isn't but even worse in the last 10 years they have "off balance sheet assets" about £35bn in PFI debt. Something that should be shown under new Accountancy Standards as debt. He was quick to blame the credit crunch on "off balance sheet assets" held by the banks but failed to acknowledge that his situation was the same.

So what do we have after 10 years of Prudence Brown? A increase in inflation, net taxation, government debt and personal debt. And he says let him sort it out because he knows what he is doing.
He can't be serious can he? The great sub prime socialist experiment has failed.

It is a mistake to believe Interest rates alone can raise the exchange Rate value of Sterling.

Sterling's value is based on confidence (see Japanese Yen for a confident currency)

Dollar Base Rate 2%

Sterling Base rate 5%

Result : Sterling still falls against Dollar

Therefore high interest rates are not a protection for value of Sterling (pound)

Only by restoring International confidence in UK economy will the Pound have a stable future.

The best way to help this is to support manufacturing and exports.

Exports are the best way to support the Pound.

An economy in Turmoil (run down in the Media) will not get inward investment - see Zimbabwe for worse case scenario

Britain needs to roll up its sleeves and get to work to EARN its way out of this situation.

You don't get something for nothing in this World.

Hard work may sound scary to some Bloggers !

In response to 43, I think you need to apply some evidence to your supposition that we are consuming more oil on this planet and that it is more difficult to extract.

Whilst it is fair to say that new economies come on stream and increase consumption, more mature economies are being weened off the drug through the slow but steady adoption of more efficient domestic and industrial consumption behaviours (how many cars could do 70mpg in 1980?). We should also remember that as manufacturing moves from west to east, so too will the energy needs of manufacturing, such that alot of the perceived growth in demand could well be only a redistribution of point of need.

Whilst it is plain that we need to consume less for the health of the planet, this is nothing to do with current prices. In order to apply a demand and supply argument it is neccesary to understand what the figures for both actually are, these are not available to the wider world (China doesn't publish their consumption figures for example) and so the economics of oil are open to speculation (try reading a book called, The prize).

This is further compounded by the rather sterotypical way we view fossil fuels, many perceived supply shortages(most notably in the US) are actually petrol shortages caused by a shortage in refining capacity to manufacture fuels to modern Summer / winter forecourt legislative standards. The speculation which results from this is nothing to do with the range of raw fossil fuels which sit in the ground.

If an increased stamp duty were applied to the trade of each barrel of oil or appropriate derivative (to fund say global environment initiatives), then the impact on speculation would be immense and the commodity bubble would bust and a more normal economy would ensue.

If something like this doesn't happen, then eventually the oil price will collapse just as it has done previously only in the meantime no benefit will have been served to this planet or the people on it. It is a shame this subject doesn't get more of an airing.

Re: #49 supercalmdown

Only by restoring International confidence in UK economy will the Pound have a stable future.

Indeed, and failing to protect the value of the currency (aka failing to combat inflation) will severely damage confidence in the UK economy. The fact that the UK economy has been one big pyramid scheme over the last decade certainly doesn't help.

The recent weakness of Sterling is directly attributable to the MPC's dereliction of duty by caving in to calls to support our pyramid-scheme economy: trying to support property prices and economic growth through a 75bp cut in the base rate over the last 6 months in the face of surging domestic inflation is completely contrary to the committee's mandate and has seriously affected their credibility on the international economic stage. The sooner David Blanchflower is removed, the better. Contrast this with the strength of the Euro given the very hawkish comments coming out of the ECB over the last 12 months despite the outlook for weakening economic growth in the Euro bloc. Now there's economic credibility.

In short, it is the expectation for the future direction of interest rates and subsequent control of inflation that determines a currency's strength, rather than comparitive interest rate differentials. Mervyn King's comments this week certainly had an effect on LIBOR, so perhaps we will see some strengthening of Sterling in the currency markets. In a parallel to the US sub-prime debacle, there will come a time when the scales will fall from the eyes of the world and they will realise that the US dollar really has little of the value currently placed on it (the price inflation in the commodity markets shows that they have already started to reflect this), eventually forcing the Fed to raise rates considerably.



Re: #50 notverygoodatmaths

In response to 43, I think you need to apply some evidence to your supposition that we are consuming more oil on this planet and that it is more difficult to extract.

Are you seriously suggesting that the world is consuming less oil every year??? The price of oil has risen ~5-fold since the beginning of the decade, and yet according to the EIA's website (see , global production during that period has increased noticeably. Are you therefore also suggesting that the price rises over the last 5 years are due purely to market speculation rather than a significant change in the supply-demand balance??? Please...

Re 51, I think you misinterpreted my comment, I said provide evidence which you now have - thank you.

From the evidence you have provided, the US quote for the early release of 2008 energy consumption trends (Table A20) that global consumption is projected to rise by 1.2% per annum. In addtion, global energy production is projected to grow at 1.2% per annum, this being the case then the economics are in balance.

So on to prices, your reference highlights that fuel and energy price indices are up from 1982 levels (at 1) to 1.67 at 2006, then 1.88 at 2010. This suggests an oil price inflation of 12.5% for the 4 year period which would equate to 3.2% per annum. (table A19 of the 2008 data)

Clearly, this is based upon that 1.2% figure demand growth figure, but at the moment we are seeing that level of annual price growth every week - hence the view that something is a miss. It is either the figures for supply and demand or it is the way that the commodity is sold on the market. That is why I think we have a commodity bubble.

The real shame in the data you have referenced is the fact that it highlights a real failure of the US market to tap into renewables - table A17.

Well, it would appear that yesterday M. Trichet came out in support of my views:

He warned that if central banks were tempted to cut interest rates now, more serious problems could follow.

(see