Bank of England has admitted interest rate cuts don't cure inflation: gang8

Dear Gang

Honest, Guv, we didn't do nuffin'

The original binding force of Gang8 in 1998 onwards was our near-unanimous agreement that raising interest rates to lower inflation is mistaken : the economic equivalent of trying to extinguish a fire by pouring oil on it. We circulated numerous arguments showing that raising interest rates just makes inflation worse.

At the time, this was all utter economic heresy but we didn't mind about that. A little over a year earlier, after all, the Bank of England had been set free to ‘control inflation' and the only weapon it was given to do so was jiggling the base interest rate up and down.

Now times have moved on. Just yesterday the Governor of the Bank of England admitted, for the first time, that the interest rate "weapon" is quite useless to control whatever inflation is going to be thrust upon us by the combined effects of high oil and other fuel prices, higher commodity prices and China's waning ability to export deflation with its cheap manufactured goods.

Instead, the new British policy will be to let inflation run its natural course and the Governor promises instead to write a succession of open letters to the Chancellor of the Exchequer to explain this new economic policy of sitting on his hands.

Which, I suspect, leaves economic orthodoxy about the setting of interest rates and inflation rates in tatters. One way to cut costs would be to disband the Bank of England's Monetary Policy Committee and leave interest rates around 3 per cent, where they should have been all along - just like Keynes left Bank Rate unchanged for over a decade.

Latest score:

Heretics 1, Central bankers nil.

Chris Meakin

FOMC, Inflation, US economy: Prudent Investor

Fuelling Inflation, FOMC Drops Fed Funds By 75 Basis Points

It appears the Federal Reserve will hold on to its ill-gotten strategy of sacrificing the value Federal Reserve Notes in order to avoid a recession. At least there were two votes against today's rate cut by the Federal Open Market Committee which slashed the Fed Funds rate 75 basis points to 2.25%, bringing it back to a level last seen from December 2004 to February 2005. This was also the last time that a Fed move stabilized FRN's temporarily for several months as inflation was much less a concern then.

Taking it from the FOMC statement the Fed is willing to risk it all as long as it keeps economic growth rates above zero.

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

I highly doubt that more easy credit will solve anything as it is the root of the current problems. All those easy trillions printed by the Fed are nothing else than more layers of paper where frail counterparties promise to pay later.

Never mind the latest correction in commodity prices as neither your gas bill nor your grocery receipts will shower permanently lower figures - ever again. It evades my logical thinking as to how the Fed thinks all that easy money it will continue to flood markets with will not immediately sap through into commodities prices as we have seen it happening in the last 3 years.

Even the FOMC's own inflation expectations make all alarm bells ring.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

I translate this Fedspeak into, "prices will rise further but hopefully the slow US economy will dampen resource demand for a while." So what? More than 6 billion people elsewhere will be happy to gobble up resources as they have been doing for a while now. People will not eat less - unless food prices do really skyrocket - and lacking other transport will not consume less fuel.
Altogether there is no reason to change my strategy.

Banks go bust, central banks lend whatever markets wish for and there is absolutely no chance for a balanced budget in the US. Weaker FRN's may offer a glimmer of hope as it will make US exports cheaper, possibly creating mild economic growth.

As all structural problems only appear to get worse with every day - try to find a paper that does not write on emergency measures in the financial sector on a daily basis - gold below $1,000 looks like the steal of the day to me. Using the markets' irrationality in the face of more inflation to come and buying gold at the current level of $985 at the time of writing this may present a golden opportunity.

I'll eat my hat if gold does not trade above $1,100 before the end of the spring upmove.