This is Not What “Recovery” Looks Like, Sir Mervyn
Mervyn King phoned tonight’s speech in from his alternate universe, telling us in no uncertain terms that UK demand policy is just fine, and therefore our problems must be purely supply-side.
Maybe he took the hint from the nice Canadian chap that UK demand policy is totally wrong?
Maybe he can see the way the wind is blowing, that his best friend, the “flexible inflation target”, is being left for dead? And his legacy, the “independent” Bank of England, will be stripped of discretionary control over demand policy, after it abused this power and caused such great harm?
“It must be supply-side!”… is this Merv-the-swerve’s final swerve? Roll the speech:
Second, the inflation target is not an impediment to achieving recovery today. It has not prevented the MPC from taking measures to combat the downward momentum in the economy following the shock of 2008. It is precisely because inflation expectations have so far remained firmly anchored that the MPC has been able to respond flexibly to weak demand. So the challenge we face is not the inadequacy of the framework, but the fact that there is no easy route to recovery after a major banking crisis. Recovery is inevitably slow and protracted. The healing process will take time, and patience is not a quality associated with our political debate.
Patience and a sense of realism are sometimes mistaken for fatalism. Our economy is recovering, more slowly than we might wish, but we are moving in the right direction. The Bank has not been, and will not be, inactive. Low interest rates will not be withdrawn prematurely, but we should not rely solely on general stimulus to aggregate demand. If we embark on the type of [supply-side reform] programme I have outlined tonight, I believe we can roll back the black cloud of uncertainty darkening the outlook for demand, allow the rays of supply optimism to peer through, and sustain a recovery based on a successful rebalancing of the UK economy.
When you keep saying things like “our economy is recovering”, “we are moving in the right direction”, it is best if they are least vaguely true.
It is best if you do not say things like when the economy is probably going through a “triple-dip”, a minor event you predict yet choose to ignore.
It is best if you do not say things like that after you advise Her Majesty’s Government to tighten the fiscal stance on the promise of an offsetting loose monetary policy which you fail to provide.
It is best if you do not say things like that when you are the Governor of the Bank of England who has presided over five years of the slowest nominal demand growth on record.