Governor Andrew Bailey’s catastrophe has spiraled out of control

“They have gone over the top in this. I don’t think serious economic analysts believe the Bank of England’s predictions anymore,” said Professor Douglas McWilliams, head of the Center for Economic and Business Research.

“Inflation rates are way too high. [The] Bank was completely wrong when they said there was no problem with inflation building up, so why would we believe them the other way now when the money supply collapses?” he said.

“These inflation forecasts are poppycock,” said Albert Edwards, world strategist at Societe Generale.

“Industrial and agricultural commodities are already 30 percent off their peak, oil is down and global liquidity is being withdrawn. We are heading for zero inflation in 12 months.”

Mr Edwards said the Bank is trying to make an argument to justify more tightening because it feels it needs to do something.

“Next year people will panic about deflation and we will go back to freezing. Bailey can talk as loud as he wants, but everyone has a plan until they get punched in the face,” he said.

The governor says the price spike is almost entirely caused by a shock to imported raw materials and the supply chain, and has nothing to do with the MPC’s decision to implement a second dose of extreme quantitative easing at the end of 2020, helping to fill a wartime budget deficit. money was made. deficit after the economy was already in a V-shaped recovery. UK inflation cannot have been caused by QE, he insists, as there is little sign of rising domestic demand.

To which one can only answer: If the problem is not internal demand-driven inflation, why is the Bank tightening so hard against the backdrop of a severe global downturn and in a UK recession expected to last longer than the Lehman crisis in 2008- 2009 ?

The policy violates a cardinal rule of central banking. A young Ben Bernanke co-wrote the final text in 1997: Systematic monetary policy and the effects of oil price shocks. The reason such events trigger deep recessions is because central banks overreact. They need to see through the shock instead of going for the bait.

The only dissident on the Monetary Policy Committee who refused to participate in this tea party of mad hats was Silvana Tenreyro, who voted for a quarter-point increase. Is it a coincidence that she is an expert on monetary policy during boom-bust commodity cycles?

On a human level, I empathize with Mr Bailey. He has been under enormous political pressure to raise rates even further. He must weigh the risk that the pound could collapse if he remains stubbornly dovish – like Haruhiko Kuroda at the Bank of Japan – while the Fed, the ECB, the Bank of Canada, et al, are furiously tightening.

But I’d sympathize more if the Bank cleared the sins of the past, stopped so dogmatically clinging to its failed Lakatosian DSGE (Dynamic Stochastic General Equilibrium) model, and didn’t try to scare us.

“What’s so shocking is that there’s no humility. They’re still ignoring the money supply, even making fun of it, so they’re going to make the exact same mistake in the next cycle,” said Mr. Edwards.

Changes in the money supply are known to work with “long and variable” delays. The signals are not perfect. But it is certainly malpractice on the part of an institution responsible for money to ignore the quantity theory of money altogether. John Maynard Keynes never went that far.

At the moment, monetary data suggests that the Bank has horribly mistimed the rise in double-decker interest rates, tightening after the inflation cycle is already over. “It’s a fiasco: policy institutions had already reached overkill by mid-year,” said Simon Ward of Janus Henderson.

Mr Ward said money data in both the UK and the G7 is “a screaming recession and deflation risk”. His favorite gauge for the UK – six months real narrow money – shrinks close to 7 pc annually. In June, it started to decline in absolute nominal terms.

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