Mervyn King: Rebalance or Suffer
“This sobering report shows why David Cameron and George Osborne’s deeply complacent approach to the economy is so misplaced,” said Ed Balls, the shadow chancellor. “Their failing policies have seen two years of almost no growth and the Bank of England is now forecasting lower growth and higher inflation than just a few months ago.
Ah, Mr Balls. You see, Ed, the Bank wasn’t just forecasting lower growth and higher inflation, it was telling us that it was only going to provide lower growth because inflation was higher. Can you remind us who gave the
sociopaths inflation-targeting central bankers control and discretion over UK demand policy? Oh, Mr Balls, you’re blushing!
The divorce between the Bank and the macro policy debate in the rest of the country continues. Mervyn King made his position crystal clear in the press conference:
What is limiting our ability to do more is not on the monetary side, it’s on the real side that the economy has to adjust to a new equilibrium. That is what I think is going to pose the constraint.
What we need now – it’s very clear if you look at the numbers – what the UK economy needs is more demand in the rest of the world to buy goods from the United Kingdom. And that is the key bit that’s missing from our attempt to rebalance and that’s why the challenge is so great.
King says the Bank could provide more demand stimulus, repeatedly insisting that printing money and buying gilts is still an effective policy tool. But they will not do it, because the expected path for demand has inflation above target in the short term and roughly on target in the medium term.
After reading the depressing Inflation Report transcript, to cheer myself up I re-read Bernanke’s classic 1999 paper on the “self-induced paralysis” of Japanese monetary policy. Amongst many obvious parallels, here’s one I enjoyed. Bernanke’s paper is based in large part around debunking this phrase from a Bank of Japan policymaker, which he quotes twice:
“BOJ’s historically unprecedented accommodative monetary policy”
This is King yesterday:
We have an enormous degree of stimulus. I mean I think all central banks in the major industrialised countries are pursuing very similar policies. All of them have their policy rates at very close to zero, this is historically unprecedented.
Straight out of the text book. To be fair, on the metric King is asked to target, the CPI rate, he is doing far better than the BoJ. Bernanke also uses nominal GDP, the GDP deflator, and nominal wages as empirical evidence for deficient aggregate demand in Japan; those indicators send the same signal for the UK data over the last four years.