The ‘independent’ BoE is not so independent after all

The Bank of England (BoE) is effectively tasked with a function that it cannot possibly fulfill..

That is controlling inflation…

Changing interest rates – which is their only ‘tool’ – has, in my view, nothing to do with inflation, unless they wish to increase it…

The system would work only if you wished to prevent everyone borrowing money like crazy in order to make a quick buck – the South Sea Bubble comes to mind…

But in a ‘normal’ everyday capitalist environment why would an increase in interest rates be effective?

It simply makes life more difficult for existing business (and house mortgage) borrowers – and consequently business in general.

And an increase in interest rates is effective for what?

Independent it is supposed to be – but it doesn’t have the facility to prevent inflation. Even if the inflation is domestic, which, currently it is not of course, it is decidedly difficult to imagine how putting up interest rates will result in inflation declining.

‘Not all excess inflation can be attributed to global events” says the Bank of England…also saying that almost all categories of goods and services were showing elevated inflation. And that this is especially case for the UK, where core inflation is 8%, as against 3.8% in euro area, and 6.4% in America.

And the BoE forecast that in October UK inflation is likely to be nearer 11%.

They have a tool that doesn’t work – but, nonetheless, opine sagely…

When they clearly know they have a simple tool that doesn’t work why on earth do we treat the Bank of England with any respect?

Their employees seem simply to be taking the prestige, the money, and of course the p**s.

Comments

  1. Schofield -

    Today a TUC organised march in London is due to take place in protest over the government’s handling of the cost of living crisis:-

    https://www.theguardian.com/business/2022/jun/18/march-protest-london-tuc-cost-of-living-crisis

    We will see if Starmer is at the head of this march and makes a speech setting out what the government should do and more importantly why it has the power to do it. This is a key moment for Starmer to set the tone of what his administration will be like. If there is the usual “radio silence” that will be a very significant “tell”!

    1. Peter May -

      Angela Rayner has said she’s going – we’ll have to see whether Starmer does…

  2. Schofield -

    The major problem amongst politicians as well as voters is not understanding the role of the Bank of England which is as you say circumscribed. The following University College London document makes clear in its analysis that the primary role of the Bank of England is to finance the issue of government reserves:-

    “The core insight of the analysis is that the UK Government spends by issuing reserves, which is directly financed by BoE claims on the CF.”

    https://www.ucl.ac.uk/bartlett/public-purpose/sites/bartlett_public_purpose/files/the_self-financing_state_an_institutional_analysis_of_government_expenditure_revenue_collection_and_debt_issuance_operations_in_the_united_kingdom.pdf

    In the context of the Cost of Living Crisis the majority of UK citizens given that the current high level of inflation is supply driven would not want a recession deliberately engineered. Indeed any properly informed citizen would demand to know where the Bank of England has got its democratic mandate to engineer a recession. The BoE if it was an honest organisation would be telling the citizens the government told us to do it which makes a mockery of the claim it has independence from government. Gordon Brown pulled a fast one here in the name of whom? Certainly not the many he claimed to represent!

  3. Schofield -

    You can tell things are really bad in the UK when you have writing like this:-

    “Seasoned policymakers know how to react in such uncertain times, and that is to do whatever it takes to reassure investors that their money is safe. Western governments have dipped into their reserves, and when that well of cash has run dry, borrowed heavily to maintain a stable outlook for their economies. Vital support has arrived in the form of cheap borrowing from central banks. With low interest rates acting like the cavalry in a John Wayne film, everyone has been able to rest assured the panic will be shortlived.”

    https://www.theguardian.com/business/2022/jun/18/we-face-a-global-economic-crisis-and-no-one-knows-what-to-do-about-it

    No knows what to do about it especially when you don’t understand the first principles of how your country’s monetary system works!

    1. Schofield -

      If Phillip Inman took the trouble to think about it governments already operate like a bank their mints create bank notes and coins then they redeem some of them through taxation leaving the rest as savings for the non-government sector. This is how the Roman Empire operated for nearly 2000 years they never bothered with a central bank. The Romans might not have known it but central banks only confuse people like Phillip Inman who you might have thought as an economics journalist would know better!

      1. Schofield -

        Even further you might ask what Cost of Living Crisis when a government can impose a windfall tax or Good Samaritan tax on companies and maybe their dividend recipients above a certain value then the government can create more money to give to those hardest hit by the crisis. Can you hear the howls of anguish by the better off?

      2. Peter May -

        Agreed. I think it is indicative that Inman seems to have written a book on household debt for Which?
        He’s treating the government as no different. he rally is in the wrong job.

  4. Schofield -

    If the British bothered to ask themselves why right-wing parties exist a good part of the answer has to revolve around money both its creation and redemption through taxation. In the first instance there’s always the attempt by the wealthy to ensure redemption is minimised upon themselves and placed on the less wealthy. In the second case those who make themselves wealthy through “manufacturing” money, the bankers, constantly strive to make borrowing money expensive which of course is an additional form of taxation albeit a private sector one. So for example making money expensive accompanies everyone must tighten their belts to balance the government’s books to defeat inflation. It should be obvious that creating a central bank is one of the means the wealthy control taxation in both forms and therefore why right-wing parties exist including Labour Tory-Lite.

    1. Peter May -

      In short, our political system has been bought – and all with money that ‘our’ government first created.

      1. Schofield -

        Yes but it’s been deliberately obfuscated how the country’s monetary system really works with the introduction of an unnecessary central bank in the 17th century. It’s understandable why the obfuscation took place trade with other countries relied upon the bullion value in gold and silver not so much in the UK domestic economy because Parliament was now supreme in law making. There was also the need to allow private banks to create money supply from thin air to boost economic growth rather than rely on what a monarch saw as necessary money supply (often to fight wars or defend from attack). The combination of continuing to see money as a “bullion thing” and the need to grow the economy resulted in the setting up of the Bank of England. Parliament simply couldn’t trust monarchs anymore after Charles II hence the Glorious Revolution which was only partial the monarch still having some power (See George III and the American Revolution).

  5. Graham -

    Very interesting discussion. One slightly off-topic point: it has been remarked that the Glorious Revolution was neither Glorious nor a revolution. In brief, the aristocratic power brokers (and others) were worried that Charles’s brother, James II and VII, was bringing back “Popery” – he was himself a Catholic – and was bringing some fellow Catholics back into prominent positions, instead of keeping them firmly victimised. James’ daughter had married the Protestant William of Orange who immediately leapt at the chance to swan around a richer and more powerful country from where he could pursue his various wars.

    Has much changed? The aristos don’t have the influence they once had, having to make do with the HoL, but the wealthy still control the government and the country, through the banks and media, with their useful idiot installed in the Independent (lol) BoE.

    An old Jacobite toast, probably still in use, is to the “Little Gentleman in Velvet”, in recognition of the mole whose molehill caused William’s horse to stumble leading to him breaking his collar bone and subsequently to his death.

      1. Schofield -

        If you want to follow this line Calvinists believed in Pre-Destination and so did Scottish Presbyterians and Adam Smith was raised as one! Pre-Destination was a sort of crackpot version of the National Lottery where God only saved some souls but gave no criteria for his picking. Obviously this didn’t stop criteria curiousity amongst mere mortals and given the human struggle for well-being many would regard wealthy entrepreneurs including bankers as having the “right stuff”!

  6. Schofield -

    Back to the present where’s the Bank of England let alone this Conservative government on crypto-currencies – where’s their ban or even regulation? Sitting on the fence is your answer just like it was before the GFC of 2008 – securitised mortgage bonds not a problem!

    https://www.theguardian.com/technology/commentisfree/2022/jun/19/the-crypto-crash-all-ponzi-schemes-topple-eventually

    https://www.bankofengland.co.uk/financial-stability-in-focus/2022/march-2022

  7. Peter May -

    🙂 I do like the right stuff comment!
    At least the BoE calls them crypto assets, which is all they are, but they seem to me to be treating them far too seriously…
    Crypto can go down as well as up – and don’t be last out – is pretty much all that is required. mind you that might not stop some bankers investing heavily if they’re convinced of a quick return…

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