"The MPC's chosen approach has been to accept a temporary period of above-target inflation, rather than seeking to hold inflation as close to the 2 per cent target as possible at all times."
Charlie Bean, Member of the BoE Committee
News it may be to many, but for readers here this is not news. This is how Governments work. Goalposts move. Targets change. Inflation is always present. People looking for action on Inflation from Central Banks are looking in the wrong direction. These people create inflation, not control it. With private and public debt out of control they are 'secretly' creating inflation.
When I have mentioned previously of interest rates going to double digits during the decade this may seem scary in the current time-frame. But by that time debts will have been drastically erroded by the damaging effects of inflation over the years to come. Negative interest rates, where inflation out paces the savings rate is here to stay for some time. When interest rates hit 10%, expect inflation to be at least twice that rate.
The central banks primary function is not to fight inflation, or to sustain economic growth. Its job is to prop up the whole fragile fractional reserve banking system. Its aim is to ensure financial collapse does not occur. This means re-leveraging the system back up and and trying to inflate their troubles away. It takes a while for people to become sick of inflation. Britain had terrible inflation for over a decade during the seventies. No one did anything as the public didn't feel strongly enough over the issue for some time. Its going to be the same again. Inflation is here, 4.5%, double the targeted rate, but no one in the public wants to do anything about it. Most people are so heavily in debt, they want it.
The Bank of England's comments will worry no one. The words may even reassure people. The deflationists are wrong, as they have always been since the post war era. With Central Bankers running a monopoly on the printing press, how can we ever have deflation?
Fractional reserve is a naturally occurring free market phenomenon. It existed before central banks existed, or made any effort to prop it up.
ReplyDeleteAnd if central bank’s attempts to underpin fractional reserve inevitably lead to inflation, how come we’ve been free of serious inflation in the West for the last century for 95% of the time? The only serious inflationary bouts were the Weimar one, caused not by a central bank propping up FR, but by political factors (post war reparations, mostly). And then there was the 1970s episode. But no economist I’ve heard of attributes the latter to central banks propping up FR. The most common explanation was the huge oil price increase in the 1970s.
Also, it’s not so much central banks that prop up dodgy financial institutions in a credit crunch. It’s politicians twisting central banks’ arms. Politicians prefer to paper over cracks in the system during their term of office, rather than do a proper repair job and make a bit of mess in the process.
Thanks for the comments, however there are a number of inaccuracies with the above.
ReplyDeleteFractional reserve banking was created during the Renaissance from suspect Gold Vaults issuing more certificates for Gold then they held. A lucrative but inherently unstable system that was illegal. Kings saw the power of such a system so rather than clipping coins themselves they now had a scapegoat and could inflate the currency through a third party to increases revenues for themselves.
Money came from the free market. But fractional reserve banking was encouraged from successive governments. They also monopolised currencies so they could as they please.
The term Central Bank is a smokescreen to the public and it works. They are supposed to be monetary experts detached from the aspects of politics but in reality they have no more idea what to do than Communist central planners and thats all they are.
Free from inflation? Where do you shop? Devices such as Tvs fall in price despite monetary inflation as the free market does wonders. However fixed assets rise perpetually in value. Buying a home, filling up your petrol tank - all cost a lot more than 10 years ago. This is pure monetary inflation. My Granddad bought his first house for under a £1,000. Inflation has raised that price, as in terms of ounces of gold the price has gone no where.
Don't confuse Inflation with Hyperinflation. Inflation is the price level rising all the time. CPI has always been positive in the UK during 50 years - meaning we always have had inflation.
During the 1970's the oil price didn't magically rise on its own accord. It rose because the government spent more than it took in revenues so inflated the difference.
Central Bankers are appointed by politicians so they are not independent. The BoE has a remit from the government to keep CPI inflation at 1-3% but for months now it has been above that. No politician is telling them what to do. They just know that if they raise interest rates the system will implode once more. Hence why Central Banks are there to prop up the fractional reserve system.